Participants in a Johnson and Johnson retirement plan have sued the company’s pension and benefits committee, leveling classic stock-drop allegations against plan fiduciaries.

The lead plaintiffs filed their complaint in the U.S. District Court for the District of New Jersey, on behalf of themselves and similarly situated current and former employees of Johnson and Johnson who were participants in and beneficiaries of the Johnson and Johnson Savings Plan and who were invested in the Johnson and Johnson Common Stock Fund during the period of February 22, 2013, through January 25, 2019.

Details in the text of the complaint explain that the stock price drop that plaintiffs say unduly harmed participants is tied to revelations that certain Johnson and Johnson products contained asbestos. Plaintiffs say the firm long knew that its talc products contained asbestos but worked to hide the fact from regulators, investors and consumers. 

“As fiduciaries, defendants had responsibility for the plan’s management, operations and investments,” the complaint states. “They breached their fiduciary duties to the plan and its participants when, as, upon information and belief, high-level corporate insiders, they knew (or should have known) as that J&J’s stock price had become artificially inflated due to undisclosed misrepresentation and fraud, yet they took no action whatsoever to protect the plan or plan participants from foreseeable resulting harm.”

The plaintiffs claim the committee members “knowingly permitted plan participants to purchase and hold an imprudent investment that was disqualified under ERISA [the Employee Retirement Income Security Act] as well as damaging to the plan.”

Under the framework established by the influential Supreme Court decision known as Fifth-Third vs. Dudenhoeffer, plaintiffs making such claims must outline plausible alternative actions that plan fiduciaries could have taken which would not have violated securities laws and which would not have potentially resulted in more harm than good to the plan and participants. In practice this has proven to be a high bar for plaintiffs to jump, and many (but not all) similarly structured complaints have been defeated in district or appellate courts.

According to plaintiffs, defendants “could have mitigated the harm to plan participants by trying to effectuate, through personnel with disclosure responsibilities, corrective public disclosures to cure the fraud consistent with the requirements of the federal securities laws, thereby making J&J stock an accurately priced, prudent investment again.”

Plaintiffs says defendants could not reasonably have believed that taking this action would do more harm than good to the plan or to plan participants. 

“J&J stock traded in an efficient market,” the complaint states. “As, upon information and belief, experienced senior executives, defendants were—or should have been—familiar with the rudimentary principles of how securities trade in efficient markets. Thus, they would have known that correcting the company’s fraud would reduce J&J’s stock price only by the amount by which it was artificially inflated to begin with. They had no basis to believe that any factor was distorting the market for J&J stock at the time—such as widespread short-selling or liquidity problems or the like—and thus no reason to fear that public correction of the company’s fraud would reduce J&J’s stock price to anything but its true, accurate value. Moreover, defendants should have known that, the longer the artificial inflation of the company’s stock persisted, the greater the risk of reputational harm that would inure to J&J upon revelation of the truth.”

“These false and misleading statements, and J&J’s failure to disclose critical, material information to the public, caused the market to improperly value J&J’s stock price,” the complaint says. “As a result, defendants, who knew that false and misleading statements were continuously made, also knew that the company’s misrepresentations had artificially inflated the price of J&J stock throughout the class period. When media reports published during the September to December 2017 period finally revealed, according to documents J&J produced pursuant to a court order, that J&J had known for decades that its talc products contained asbestos fibers, its stock price plummeted to its true value, having dropped almost 17% from its class period high.”

The full text of the lawsuit runs to more than 50 pages and goes into significant detail about Johnson and Johnson’s talc business. The plaintiffs cite years’ worth of SEC 10-K form filings from the company to support their allegations that fraud occurred and that plan fiduciaries were aware of it.