Author: Shaylor Steele and Joe Yonadi

BP sponsored an investment and savings plan which contained an ESOP component comprised of BP stock as an investment option for participants.  On June 24, 2010, plaintiff-investors sued BP due to the sharp decline in BP stock after the Deepwater Horizon drilling rig explosion that caused a massive oil spill.  Plaintiffs alleged the following:  (1) that the plan fiduciaries breached their duties of prudence and loyalty by allowing the plans to acquire and hold overvalued BP stock; (2) breached their duty to provide adequate investment information to plan participants; and (3) breached their duty to monitor those responsible for managing the BP Stock Fund.

The District Court held plaintiffs failed to overcome the Moench presumption and dismissed their claims; however, plaintiffs appealed and while their appeal was pending, the Supreme Court issued Dudenhoeffer which discarded the Moench presumption stating that such a presumption of prudence is not set forth under ERISA, and further creating a much more difficult standard that “to state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”  After Dudenhoeffer, the BP 5th Circuit remanded the case for reconsideration.

Subsequently, the BP plaintiffs filed an amended complaint alleging that the company fiduciaries possessed unfavorable inside information which should have allowed them to have taken alternative actions that would have not done more harm than good to the BP stock fund.  The district court granted the motion to amend stating the plaintiffs had plausibly alleged the BP fiduciaries had inside information and the they could have taken the alternative actions of restricting further sale of BP stock and disclosed the unfavorable information to the public.

The 5th circuit disagreed and reversed the district court’s decision.  In reversing the district court, the 5th Circuit reasoned that under the Dudenhoeffer standard, the plaintiffs had a significant burden to propose an alternative that a prudent fiduciary could not conclude would do more harm than good.  The Plaintiffs did not meet their burden because their amended complaint only included conclusory statements, and did not contain specific facts supporting an alternative investment that satisfied the Dudenhoeffer standard.

The 5th Circuit’s decision is also notable in that it did not follow positions taken by DOL and SEC in amicus briefs filed by both agencies, respectively.  In their amicus briefs, DOL and SEC asked the 5th Circuit to adopt a more lenient pleading standard in stock drop cases.  While the 5th Circuit did not specifically mention either amicus brief in its opinion, it adopted a far more burdensome standard, and in doing so, rejected the agencies’ positions.

This BP case is now a part of a litany of cases that proves that Dudenhoeffer was far more favorable for company-defendants than originally portrayed, and established a much higher pleading standard for plaintiffs.