     Case: 15-20282   Document: 00513693089     Page: 1   Date Filed: 09/26/2016




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT    United States Court of Appeals
                                                   Fifth Circuit

                                                                       FILED
                                                                  September 26, 2016
                                 No. 15-20282
                                                                     Lyle W. Cayce
                                                                          Clerk
RALPH WHITLEY, Individually and on behalf of others similarly situated;
FRANKIE RAMIREZ; DAVID M. HUMPHRIES; CHARIS MOULE;
EDWARD F. MINEMAN; SYED ARSHADULLAH; JERRY T. MCGUIRE;
MAUREEN S. RIELY; THOMAS P. SOESMAN,

             Plaintiffs - Appellees

v.

BP, P.L.C.; ANTHONY HAYWARD; THE SAVINGS PLAN INVESTMENT
OVERSIGHT COMMITTEE; RICHARD J. DORAZIL; COREY CORRENTI;
MARVIN DAMSMA; JAMES DUPREE; PATRICK GOWER; JEANNE M.
JOHNS; PATRICIA H. MILLER; STEPHEN J. RINEY; BRIAN D. SMITH;
LORD JOHN BROWNE; STEPHANIE C. MOORE; BP CORPORATION
NORTH AMERICA, INCORPORATED; BP AMERICA, INCORPORATED;
LAMAR MCKAY; GREGORY T. WILLIAMSON; NEIL SHAW; THOMAS L.
TAYLOR; BP CORPORATION NORTH AMERICA, INCORPORATED’S
BOARD OF DIRECTORS; ROBERT A. MALONE,

             Defendants - Appellants




                Appeal from the United States District Court
                     for the Southern District of Texas


Before WIENER, CLEMENT, and COSTA, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge:
      In this stock-drop suit, the question on appeal is whether the district
court erred in holding that the plaintiff stockholders’ amended complaint
stated a plausible claim under the pleading standards of Fifth Third Bancorp
    Case: 15-20282     Document: 00513693089      Page: 2   Date Filed: 09/26/2016



                                  No. 15-20282
v. Dudenhoeffer, 134 S. Ct. 2459 (2014). Because we conclude that it did, we
reverse and remand.
                                        I.
      BP, p.l.c. (“BP”) is a multinational oil and gas company headquartered
in London, England. BP offered its employees a choice of investment and
savings plans (the “Plans”) regulated by ERISA, 29 U.S.C. §§ 1001-1461. The
Plans included the BP Stock Fund—an employee stock ownership plan
(“ESOP”) comprised primarily of BP stock—as an investment option.
      On April 20, 2010, the BP-leased Deepwater Horizon offshore drilling rig
exploded, causing a massive oil spill in the Gulf of Mexico and a subsequent
decline in BP’s stock price. The BP Stock Fund lost significant value, and the
affected investors filed suit on June 24, 2010, alleging that the plan fiduciaries:
(1) 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 determined that the fiduciaries’ investments in
company stock were entitled to a “presumption of prudence” under Kirschbaum
v. Reliant Energy, Inc., 526 F.3d 243, 255 (5th Cir. 2008) (applying Moench v.
Robertson, 62 F.3d 553 (3d Cir. 1995), abrogated by Fifth Third, 134 S. Ct.
2459). The district court held that the plaintiffs (hereafter “stockholders”) had
failed to overcome the Moench presumption and dismissed their claims under
Federal Rule of Civil Procedure 12(b)(6). The stockholders appealed, and while
their appeal was pending in this court, the Supreme Court issued Fifth Third,
holding that there was no such “presumption of prudence” under ERISA. 134
S. Ct. at 2467. Instead, the Court held that “[t]o 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
                                        2
    Case: 15-20282      Document: 00513693089    Page: 3   Date Filed: 09/26/2016



                                  No. 15-20282
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.” Id. at 2472. This court then vacated the district court’s
judgment and remanded for reconsideration in light of Fifth Third. Whitley v.
BP, P.L.C., 575 F. App’x 341, 343 (5th Cir. 2014).
      On remand, the stockholders moved to file an amended complaint
alleging, as per Fifth Third, that the defendant fiduciaries possessed
unfavorable inside information about BP and that they could have taken
various alternative actions that would not have done more harm than good to
the BP Stock Fund. The district court held that: (1) the stockholders had
plausibly alleged that the defendants had inside information; and (2) the
stockholders had plausibly alleged two alternative actions that the defendants
could have taken that met the Fifth Third standard: freezing, limiting, or
restricting company stock purchases; and disclosing unfavorable information
to the public. The district court granted the motion to amend with respect to
pleading these alternative actions. It then certified the defendants’ motion for
interlocutory appeal.
                                       II.
      Under 28 U.S.C. § 1292(b), this court has “appellate jurisdiction over the
order certified to the court of appeals,” and “review is not limited to the
controlling question of law formulated by the district court in its certification
order.” Hines v. Alldredge, 783 F.3d 197, 200 (5th Cir. 2015). This court reviews
“de novo a district court’s grant or denial of a Rule 12(b)(6) motion to dismiss.”
Id. at 200–01 (quoting True v. Robles, 571 F.3d 412, 417 (5th Cir. 2009)). Here,
because the district court’s grant of leave to amend was the functional
equivalent of a denial of a Rule 12(b)(6) motion to dismiss, and was based on a
question of law, this court reviews the district court’s order de novo.


                                        3
    Case: 15-20282    Document: 00513693089     Page: 4   Date Filed: 09/26/2016



                                 No. 15-20282
                                      III.
      ERISA, 29 U.S.C. §§ 1001-1461, protects participants in voluntarily
established, private sector retirement plans. It does this “by establishing
standards of conduct, responsibility, and obligation for fiduciaries of employee
benefit plans.” 29 U.S.C. § 1001(b). It “provides that an employer who sponsors
an employee plan may also serve as a fiduciary of that plan,” and it “imposes
on the employer-fiduciary and on those who manage the plan strict statutory
duties, including loyalty, prudence, and diversification.” Kirschbaum, 526 F.3d
at 248.
      Here, the BP Stock Fund was an ESOP. “The term ‘employee stock
ownership plan’ means an individual account plan . . . which is designed to
invest primarily in qualifying employer securities . . . .” 29 U.S.C. §
1107(d)(6)(A). When the share price of an employer’s stock decreases, the value
of an employee-held ESOP account decreases as well. When the share price of
an employer’s stock decreases significantly, the affected employees often sue
to recover their losses on their investments in employer stock. Such actions are
commonly known as “stock-drop” suits.
      Courts have recognized a tension between a fiduciary’s duty to prudently
manage investments under ERISA and Congress’s allowance of funds
composed primarily of employer stock. In Moench, the Third Circuit framed
the question as follows: “To what extent may fiduciaries of [ESOPs] be held
liable under [ERISA] for investing solely in employer common stock, when both
Congress and the terms of the ESOP provide that the primary purpose of the
plan is to invest in the employer’s securities[?]” 62 F.3d at 556. There, the
plaintiffs sued after their employer, a bank, collapsed, wiping out their ESOP
investments. After a lengthy discussion of the history and purpose of ERISA
and ESOP funds, the Third Circuit ultimately held that “an ESOP fiduciary
who invests the assets in employer stock is entitled to a presumption that it
                                       4
    Case: 15-20282     Document: 00513693089      Page: 5   Date Filed: 09/26/2016



                                  No. 15-20282
acted consistently with ERISA by virtue of that decision.” Id. at 571. This
presumption was later adopted by several other circuits, including this one in
Kirschbaum, 526 F.3d at 255.
      The Moench presumption was rejected by the Supreme Court in Fifth
Third. 134 S. Ct. 2459. There, the defendants included a large financial
services firm and the plaintiffs were ESOP participants. The firm’s stock price
plummeted seventy-four percent during the great recession. The plaintiffs
sued, alleging that “the fiduciaries knew or should have known that Fifth
Third’s stock was overvalued and excessively risky” based on both public
information and nonpublic, i.e., inside, information. Id. at 2464. The district
court held that the defendants were entitled to a “presumption that their
decision to remain invested in Fifth Third stock was reasonable,” Dudenhoeffer
v. Fifth Third Bancorp, 757 F. Supp. 2d 753, 758 (S.D. Ohio 2010), and cited
Moench. The district court held that the plaintiffs had failed to allege sufficient
facts to overcome the presumption and dismissed the complaint under Rule
12(b)(6). The Sixth Circuit reversed. Dudenhoefer v. Fifth Third Bancorp, 692
F.3d 410, 424 (6th Cir. 2012). The Sixth Circuit did not reject the application
of the presumption; rather, it held that the presumption concerns questions of
fact that do not apply at the pleading stage. Id. at 418-19.
      The Supreme Court noted that “[i]n applying a ‘presumption of prudence’
that favors ESOP fiduciaries’ purchasing or holding of employer stock, the
lower courts have sought to reconcile congressional directives that are in some
tension with each other.” 134 S. Ct. at 2465. “On the one hand, ERISA itself
subjects pension plan fiduciaries to a duty of prudence,” while “[o]n the other
hand, Congress recognizes that ESOPs are ‘designed to invest primarily in’ the
stock of the participants’ employer, § 1107(d)(6)(A), meaning that they
are not prudently diversified.” Id. After reviewing the “pertinent provisions of
ERISA,” the Court held that “the law does not create a special presumption
                                        5
    Case: 15-20282     Document: 00513693089      Page: 6   Date Filed: 09/26/2016



                                  No. 15-20282
favoring ESOP fiduciaries” and that “the same standard of prudence applies to
all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP
fiduciary is under no duty to diversify the ESOP’s holdings.” Id. at 2467.
        The Court nonetheless recognized the plaintiffs’ “legitimate” concern
“that subjecting ESOP fiduciaries to a duty of prudence without the protection
of a special presumption will lead to conflicts with the legal prohibition on
insider trading” because “ESOP fiduciaries often are company insiders and
because suits against insider fiduciaries frequently allege . . . that the
fiduciaries were imprudent in failing to act on inside information they had
about the value of the employer’s stock.” Id. at 2469. The Court disagreed that
the presumption of prudence applied by the lower courts was “an appropriate
way to weed out meritless lawsuits” and stated that such a task could “be better
accomplished through careful, context-sensitive scrutiny of a complaint’s
allegations.” Id. at 2470.
        Turning to pleading standards, the Court stated that “where a stock is
publicly traded, allegations that a fiduciary should have recognized from
publicly available information alone that the market was over- or undervaluing
the stock are implausible as a general rule, at least in the absence of special
circumstances.” Id. at 2471. The Court then stated:
             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.
Id. at 2472. The Court vacated and remanded, “leav[ing] it to the courts below
to apply the foregoing to the complaint in this case in the first instance.” Id. at
2473.



                                        6
    Case: 15-20282     Document: 00513693089     Page: 7   Date Filed: 09/26/2016



                                  No. 15-20282
      The Ninth Circuit soon took on the challenge of interpreting the Supreme
Court’s Fifth Third pleading standards in Harris v. Amgen, Inc., 788 F.3d 916
(9th Cir. 2015). Harris—like this case—was an employee stock-drop action that
was filed before Fifth Third. In Harris, the plaintiffs alleged that Amgen, a
pharmaceutical company, concealed unfavorable information about a drug,
and that when the unfavorable information came to light, Amgen’s share price
declined significantly. The plaintiffs claimed “that fiduciaries of Amgen’s stock-
ownership plans knew or should have known that the stock was overvalued
based on inside information, and should have either removed the Amgen stock
as an investment option or revealed to the general public” the unfavorable
inside information. Id. at 924 (Kozinski, J., dissenting from denial of rehearing
en banc). The Ninth Circuit decided that the allegations in the plaintiffs’
complaint—despite being written before Fifth Third—were sufficient because
it was “plausible” that the “defendants could remove the Fund from the list of
investment options without causing undue harm to plan participants.” Id. at
938. The court further held that the Supreme Court had “articulated certain
standards for ERISA liability in Fifth Third” but that the Ninth Circuit had
“already assumed those standards” in an earlier opinion. Id. at 940.
      The Supreme Court reversed. Amgen Inc. v. Harris, 136 S. Ct. 758 (2016).
The Court clarified that the complaint itself must plausibly allege “that a
prudent fiduciary in the same position ‘could not have concluded’ that the
alternative action ‘would do more harm than good.’” Id. at 760 (quoting First
Third, 134 S. Ct. at 2463). The Court clarified that a court cannot simply
presume that the plaintiff’s proposed alternatives would satisfy the Fifth Third
standards; rather, “the facts and allegations supporting that proposition
should appear in the stockholders’ complaint.” Id. Noting that the plaintiffs
were the “masters of their complaint,” the Court left it to the district court to


                                        7
    Case: 15-20282    Document: 00513693089        Page: 8   Date Filed: 09/26/2016



                                    No. 15-20282
determine whether the Amgen plaintiffs could amend their complaint to satisfy
the standards of Fifth Third. Id.
      In light of these decisions, the district court here erred when it altered
the language of Fifth Third to reach its holding. In Fifth Third, the Supreme
Court stated that the plaintiff’s proposed alternative must be one that “a
prudent fiduciary in the same circumstances would not have viewed as more
likely to harm the fund than to help it.” 134 S. Ct. at 2472 (emphasis added).
But here the district court stated that it could not determine, “on the basis of
the pleadings alone, that no prudent fiduciary would have concluded that [the
alternatives] would do more good than harm” (second emphasis added). These
statements are not equivalent. Under the Supreme Court’s formulation, the
plaintiff bears the significant burden of proposing an alternative course of
action so clearly beneficial that a prudent fiduciary could not conclude that it
would be more likely to harm the fund than to help it.
      Here, the stockholders have failed to do so. Indeed, in certifying this case
for interlocutory appeal the district court recognized that if defendants have
correctly read Dudenhoeffer to require “plaintiffs to plausibly allege that no
prudent fiduciary could have concluded that the proposed alternative action
would do more harm than good”—and Amgen has since confirmed that is the
standard—then the plaintiff’s claim should be dismissed. In their amended
complaint, the stockholders state that their proposed alternatives “(a) could
have been done without violating the securities laws or any other laws; (b)
should have been done to fulfill Defendants’ fiduciary obligations under
ERISA; and (c) would not have been more likely to harm the BP Stock Fund
than to help it.” Aside from these conclusory statements, the stockholders do
not specifically allege, for each proposed alternative, that a prudent fiduciary
could not have concluded that the alternative would do more harm than good,
nor do they offer facts that would support such an allegation. This runs counter
                                         8
    Case: 15-20282     Document: 00513693089      Page: 9   Date Filed: 09/26/2016



                                  No. 15-20282
to the Supreme Court’s directive that “the facts and allegations supporting” an
alternative action that could satisfy Fifth Third’s standards “should appear in
the stockholders’ complaint.” 136 S. Ct. at 760. See also Rinehart v. Lehman
Bros. Holdings Inc., 817 F.3d 56, 68 (2d Cir. 2016) (affirming a dismissal under
12(b)(6) because the plaintiffs’ complaint did not “plausibly plead facts and
allegations showing that a prudent fiduciary during the class period ‘would not
have viewed [disclosure of material nonpublic information regarding Lehman
or ceasing to buy Lehman stock] as more likely to harm the fund than to help
it’” (quoting Amgen, 136 S. Ct. at 759) (alteration in original)).
      The amended complaint states that BP’s stock was overvalued prior to
the Deepwater Horizon explosion due to “numerous undisclosed safety
breaches” known only to insiders. In other words, the stockholders theorize
that BP stock was overpriced because BP had a greater risk exposure to
potential accidents than was known to the market. Based on this fact alone, it
does not seem reasonable to say that a prudent fiduciary at that time could not
have concluded that (1) disclosure of such information to the public or (2)
freezing trades of BP stock—both of which would likely lower the stock price—
would do more harm than good. In fact, it seems that a prudent fiduciary could
very easily conclude that such actions would do more harm than good.
      Accordingly, we find that the stockholders’ amended complaint is
insufficient, and the district court erred in granting the stockholders’ motion
to amend.
                                       IV.
      For the foregoing reasons, the judgment of the district court is
REVERSED, and the case is REMANDED for further proceedings.




                                        9
