Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Recently the U.S. District Court for the Southern District of New York dismissed an ERISA “stock drop” litigation case against Nokia, Inc., its Board of Directors and its eligible individual account plan (“EIAP”) committee stemming from a dramatic drop in the value of the stock of Nokia Corp. – Nokia, Inc.’s parent company – in which 401(k) plan participants invested. The court in In re Nokia ERISA Litigation, S.D.N.Y., No. 1:10-cv-03306-GBD (Sept. 6, 2011), concluded, among other things, that the plaintiffs failed to allege sufficient facts to demonstrate that any of the defendants had knowledge of the alleged fraudulent omissions and misrepresentations engaged in by Nokia Corp., which allegedly caused the value of the stock to be artificially inflated.
Granting defendants’ motion to dismiss, the court ruled, as a preliminary matter, that plaintiffs could not establish, based on the facts alleged in the complaint (which repeated those advanced in a related securities fraud litigation), that the parent company’s stock was artificially inflated – and thus imprudent – by virtue of fraudulent omissions and misrepresentations constituting securities violations. But, even if they could, the court stated, that “the Complaint is utterly devoid of any factual allegations demonstrating that the Defendants in this ERISA action knew or should have known of such fraudulent misrepresentations in order to conclude that Nokia Corp. stock constituted an imprudent investment.” The court rejected the plaintiffs’ argument that it was enough at the pleading stage to allege that the corporate parent had engaged in fraudulent conduct, and that the subsidiary company and plan fiduciaries “must have known” of the alleged fraudulent conduct, stating, “[t]he fact that Nokia Corp., a corporate parent, is alleged to have perpetrated a fraud does not alone establish a plausible theory for imputing Nokia Corp.’s knowledge of the truth to the subsidiary Defendants Nokia Inc., its corporate board of directors, or its ERISA Plan Committee.”
Applying the same rationale, the court also dismissed plaintiffs’ “failure to inform” claim. The court concluded that, because defendants were not alleged to have actual knowledge of the parent company’s alleged fraud, they had no duty to investigate and disclose to participants the parent company’s true financial condition.
Notably, the court acknowledged the current competing case law in the Second Circuit concerning whether the decision by the subsidiary company and the plan committee to offer parent company stock as a plan investment option in the EIAP was entitled to a “presumption of prudence” as articulated by the U.S. Court of Appeals for the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d. Cir. 1995). The court held that it was unnecessary to reach this question because the plaintiffs’ allegations “are wholly insufficient to demonstrate that Defendants engaged [in] any conduct that would make them liable for breach of their fiduciary duties.”
This decision is important for employers and ERISA plan fiduciaries because, in an era where allegations of corporate mismanagement and investor fraud seem to abound, the decision validates that putative plaintiffs must come to the table with something more than “I can’t believe they didn’t know” allegations in order to proceed with ERISA breach of fiduciary duty litigation against corporate subsidiaries and plan fiduciaries who have a more limited connection with the publicly held parent corporation. Accordingly, if faced with such an ERISA breach of fiduciary duty claim, subsidiary corporations and plan fiduciaries should carefully assess whether the claims can be challenged because they lack a sufficient factual underpinning.