Sanofi Defeats ERISA Stock-Drop Challenge

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.

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.