Compliance October 10, 2016

Mixed Ruling in Wawa Stock-Drop Complaint Partial Dismissal

The judge noted that the “right to a particular form of investment (e.g., investment in employer stock or securities)” is not a protected benefit under the IRC anti-cutback provision.
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Judge Paul S. Diamond of the U.S. District Court for the Eastern District of Pennsylvania has moved forward several complaints in a suit alleging terminated employee stock ownership plan (ESOP) participants’ were forced to liquidate company stock holdings at an unfair price.

Plaintiffs Greg Pfeifer and Andrew Dorley, on behalf of a putative class of terminated Wawa employees, allege that Wawa Inc., its ESOP trustees, and its plan administrators violated the Employee Retirement Income Security Act (ERISA) by amending the plan to eliminate plaintiffs’ right to own Wawa stock, forcing liquidation of plaintiffs’ Wawa stock at an unfair price, and misrepresenting plaintiffs’ rights under the plan.

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Before the challenged amendment, the plan provided terminated employee participants (including plaintiffs) the same benefits as participants who retired from Wawa at their designated retirement date. Participants holding more than $5,000 in their plan accounts could receive their benefits in either a single lump-sum payment or in installment payments over ten years. The plan also provided both terminated and retired employees with a put option (which they could execute before age 68) to sell their shares back to Wawa at an appraised price.

In August 2015, however, defendants amended the plan to divest terminated employees—but not retired employees—of their shares in Wawa stock. On September 11, 2015, defendants effectuated the forced sale at $6,940 per share (below fair market value) and charged a distribution fee. According to the complaint, the price of Wawa shares has increased since the September 2015 forced sale, and reached $7,652 per share on December 30, 2015.

NEXT: Anti-cutback claims and improper plan amendment

Plaintiffs alleged that the plan amendment violated ERISA’s anti-cutback provision. But, Diamond noted in his opinion that the U.S. Treasury has determined that the “right to a particular form of investment (e.g., investment in employer stock or securities)” is not a protected benefit under the IRC anti-cutback provision. “Plaintiffs offer no good reason for me to reject this interpretation. Accordingly, Defendants did not violate the anti-cutback rule by eliminating Plaintiffs’ rights to own Wawa shares through the Plan,” he wrote.

However, Diamond said the allegation that defendants unlawfully liquidated plaintiffs’ accounts and forced their transfer “is quite another matter,” noting that distributions are allowed without account holder’s consent only when the account contains less than $5,000. He rejected Wawa defendants’ motion to dismiss this claim.

The plaintiffs allege that their ownership of Wawa shares must be reinstated because the terms of the plan, including the right to hold Wawa shares through age 68, became fixed when plaintiffs completed performance in 2009, restricting defendants’ ability to amend the plan. Accordingly, “when a participant leaves the employ of the company, the trustee is ‘required to determine benefits in accordance with the plan then in effect,’” and any subsequent amendment that diminishes a participant’s benefits is ineffective. The plan in effect when plaintiffs completed performance in 2009 granted them a valuable option to hold or sell Wawa stock and the plan amendment deprived plaintiffs of that value. Diamond found that Wawa’s reservation of a right to amend the plan “at any time” did not necessarily give it the authority to reduce plaintiffs’ benefits under the plan after plaintiffs completed performance. “At a minimum, the Plan is ambiguous as to whether Wawa could amend the Plan ‘after the participants’ performance.’ Accordingly, I will deny Defendants’ Motion to Dismiss Count VI,” he wrote.

NEXT: Misrepresentations in SPDs and unfair share price

Diamond also found that the plaintiffs plausibly alleged that the defendants made two misrepresentations in the summary plan descriptions (SPDs): “[N]o amendment to the Plan will reduce the benefit you have already earned, or divest you of any entitlement to a benefit;” and terminated employees would be paid their vested benefits “in the same form and manner as retirement benefits.”

The plaintiffs contend in part that defendants improperly failed to disclose that the plan amendment was intended to restore the Wood family’s majority ownership of Wawa. But, Diamond noted that to state a claim for breach of fiduciary duty by omission, the plaintiffs must show that “the misrepresentation or inadequate disclosure was material”—that it would “mislead a reasonable employee in making an adequately informed retirement decision, or a decision regarding his benefits under the ERISA plan.” He concluded that plaintiffs have not alleged how defendants’ failure to disclose the motivation underlying the plan amendment affected their retirement planning in any way, nor have they offered authority permitting a misrepresentation claim to proceed in remotely comparable circumstances, so he dismissed this claim.

Diamond disagreed with defendants move to dismiss claims regarding unfair share price. As pled, in 2014, defendants’ financial adviser, Duff & Phelps, valued Wawa stock at $7,000 to $7,900 per share, above the forced sale price of $6,940, even though it did not include the anticipated tax benefits from Wawa’s 2014 reorganization. Defendants offered outside shareholders and dissenters $7,000 per share as part of the reorganization, also above the forced sale price. Defendants purportedly charged an unjustified $50.00 distribution fee. The forced sale price, which was derived from a June 2015 appraisal, was stale by the time the forced sale occurred. The share price has continued to rise since the sale. “These allegations are sufficient to make out plausible claims that Plaintiffs did not receive adequate consideration for their stock. Accordingly, I will deny Defendants’ Motion to Dismiss these claims,” Diamond wrote.

Compliance October 10, 2016

Sanofi Defeats ERISA Stock-Drop Challenge

A federal judge ruled the lead plaintiff does not have standing to bring his claim because he never purchased or sold ADRs of Sanofi during the alleged period of artificial price inflation.
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The U.S. District Court for the Southern District of New York has dismissed a complaint that fiduciaries of Sanofi’s defined contribution (DC) retirement plan violated their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by continuing to offer a company stock fund in the plan during an investigation into an illegal marketing scheme and not disclosing the investigation to participants.

In his opinion, U.S. District Judge P. Kevin Castel noted that the court previously granted a motion to dismiss a purported securities class action brought by holders of American Depository Receipts (ADRs) of Sanofi. The plaintiffs had alleged that Sanofi engaged in an illegal marketing scheme to artificially boost sales of its diabetes product line and hid the scheme from investors while extolling the product line’s dramatic sales growth and Sanofi’s commitment to corporate integrity. One of the grounds on which the court dismissed the complaint was the failure to plausibly allege that the undisclosed “illegal kickback scheme had a significant impact on the market for Sanofi’s drugs in the first instance,” or how ending the alleged scheme impacted Sanofi’s stock price.

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In the ERISA suit, Castel granted Sanofi’s motion to dismiss the complaint and denied the motion to amend on the grounds that lead plaintiff Joseph D. Forte does not have standing to bring his claim because he never purchased or sold ADRs of Sanofi during the alleged period of artificial price inflation. According to Castel’s opinion, the plan provides several investment options from which participants may choose, including the stock fund, which provides for investments in ADRs of Sanofi.

Forte alleged that Sanofi never disclosed the whistleblower’s allegations about an illegal marketing scheme or that an internal investigation was conducted into those allegations. He also alleges that during the class period, Sanofi terminated its CEO and that the price of Sanofi’s shares fell “almost 20%.” The complaint said, “In short, Sanofi concealed facts material to investors from which they could infer that the company had a systematic problem or insufficient internal controls, and this concealment artificially inflated Sanofi’s stock price.”

NEXT: Claims in the case

In keeping with the U.S. Supreme Court’s new pleading standards for stock drop suits set forth inFifth Third v. Dudenhoeffer, Forte alleged that defendants “could not have reasonably believed that restricting new purchases of the Stock Fund would likely do more harm than good” to the plan or its participants. Nor would restricting new purchases of the fund run afoul of any securities regulations as preventing new purchases would not disclose any inside information.

In addition, Forte claimed that defendants “could not have reasonably believed that effectuating truthful, corrective disclosure would do more harm than good” to the plan or its participants. Not only would such disclosures be consistent with the federal securities laws, defendants had an obligation under ERISA to be truthful and accurate in communicating with the plan participants. In his complaint, Forte claimed that “[e]very stock fraud in history, when corrected, has resulted in a temporary drop in the stock price . . . [b]ut in virtually every fraud case, the longer the fraud persists, the harsher the correction tends to be.” Therefore, he alleged that if the defendants were concerned about doing more harm than good, “they should have sought to minimize the harm that correcting the fraud would temporarily cause” by disclosing what they knew about the illegal marketing scheme allegations and the internal investigation that followed, earlier.

Forte also claimed that plan participants like himself, who did not purchase new shares of the stock fund during the class period but simply held their stock fund shares, were also harmed by the defendants’ failure to disclose what they knew about the scheme. “[B]y holding Stock Fund shares over a period of time when Sanofi stock was artificially appreciating in value, [Plan participants like Forte] were deprived the option of transferring their shares into a different, prudent investment and thus sparing themselves greater losses when the correction ultimately took place.”

NEXT: Forte lacks standing

Citing prior case law, Castel noted that, as Forte’s claims are effectively a request for restitution or disgorgement under ERISA, he must still “satisfy the strictures of constitutional standing by demonstrating individual loss, to wit, that [he has] suffered an injury-in-fact.”

Forte does not allege that he overpaid for his Sanofi stock. Instead, he claims he was injured by the defendants’ alleged breach of fiduciary duties because when the illegal marketing scheme allegations did eventually come to light in December 2014, the stock price fell more than it would have had the defendants disclosed what they knew about the scheme earlier. However, Castel cited Dura Pharm., Inc. v. Broudo, in which the Supreme Court held that “an inflated purchase price will not itself constitute . . . economic loss.” Instead, “stock must be purchased at an inflated price and sold at a loss for an economic injury to occur.”

While Forte cannot claim that he overpaid for artificially inflated stock fund shares, he claims that he was nevertheless injured when he was deprived of the opportunity to transfer his investment in the stock fund to a different, more prudent, investment. But, Castel referred to an amicus brief filed in the case by the Securities and Exchange Commission (SEC) that Forte attached to his proposed amended class action complaint. “If the Court were to accept the theories advanced by the SEC in their amicus brief, had the defendants learned of the alleged kickback scheme and decided to restrict transactions in the Stock Fund in response, they would have been obligated to close the Stock Fund to both purchases and sales, to avoid violating federal securities laws. Therefore, had the defendants taken the action urged by Forte himself, he would not have been allowed to sell his shares in the Stock Fund and invest that money elsewhere. Forte cannot plausibly claim he was injured by a lost opportunity he never could have had,” Castel concluded.

Castel added that Forte does not plead any facts to support his broad contention that “in virtually every fraud case, the longer the fraud persists, the harsher the [price] correction tends to be,” nor does he plead facts to show that this kind of extreme price correction happened in this instance. “In fact, the price of Sanofi stock actually increased on the day the whistleblower’s allegations were made public, making Forte’s claims of injury even less plausible,” he wrote in his opinion.

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