The plaintiff, a former Whole Foods employee, brought a putative class action against certain Whole Foods executives who are named fiduciaries for the company’s 401(k) plan, alleging that they breached their fiduciary duties by allowing employees to continue to invest in Whole Foods stock while its value was artificially inflated. The District Court dismissed the action as failing to meet the requirements set forth by the U.S. Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014), and the U.S. Fifth Circuit affirmed.
The plaintiff alleged that during the Class Period, the Plan was a net buyer of Whole Foods stock with purchases outpacing sales by $34 million. According to him, a prudent fiduciary should have realized that the Plan was going to be a net purchaser of stock, and should have factored that into its analysis about whether early disclosure would do more harm than good. The plaintiff intends this allegation to refute any claim that the Defendants’ actions could have been justified by the potential benefit of an overvalued stock to those selling the stock. Because the Plan was a net purchaser, any potential benefit to sellers would have been outweighed by harm to buyers.
However: While this allegation is the sort of specific factual allegation necessary to support a proposed alternative action, it still falls short of meeting Plaintiff’s burden, as “any time a company discloses fraud, there is a risk that the market could overcorrect.” It would be “difficult to conclude that any alternative action that indisputably lowers the company’s stock price — possibly even more than warranted — would be so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.”
The District Court “also noted that Martone’s argument benefitted from hindsight because no one could have known, at the beginning of the Class Period, whether the Plan would be a net purchaser or net seller of Whole Foods stock. On appeal, Martone challenges this characterization. He argues that fiduciaries are, in fact, in the business of trying to predict the future and that Defendants should have predicted that the Plan would be a net purchaser and should have factored that into their analysis about when to disclose.”
But: “While a prudent fiduciary might have looked at purchasing trends, no fiduciary could have known with certainty that the Plan would be a net purchaser over the course of the Class Period. And even if a prudent fiduciary could have predicted that the Plan would be a net purchaser over time, that fact alone does not show that an earlier disclosure would be ‘so clearly beneficial’ that no prudent fiduciary would consider it more likely to harm than help. As Defendants rightly note, an unusually-timed disclosure risks ‘spooking the market,’ creating the potential for an outsized stock drop. A prudent fiduciary could have concluded that such a risk outweighed the potential benefits of an earlier disclosure, regardless of the Plan’s status as a net purchaser.”
Martone v. Robb, 902 F.3d 519 (5th Cir. 2018).