By: Ronald Kramer, Alexis Hawley and Sam Schwartz-Fenwick
On September 6, 2011, in In re Nokia ERISA Litigation (Case No. 1:10-cv-03306-GBD), the Southern District of New York dismissed a class action complaint alleging breach of fiduciary duty claims based on defendants’ decision to continue to offer Nokia Corp. stock as an investment option under Nokia’s retirement plan.
According to plaintiffs, defendants Nokia, Inc. (a wholly owned subsidiary of Nokia Corp.), Nokia, Inc.’s Board of Directors, and Nokia, Inc.’s Plan Committee members breached their fiduciary duties by including Nokia Corp. Stock as an investment alternative when they knew or should have known that it presented an imprudent option. Concurrent with the ERISA litigation, a securities fraud action was filed against the parent, Nokia Corp., alleging that the company made various misrepresentations about Nokia’s financial condition. The majority of plaintiffs’ allegations in their ERISA complaint mirrored those in the related fraud action. Specifically, plaintiffs pointed to Nokia Corp’s decision to reduce the price of Nokia phones and to exit the Chinese market. Plaintiffs asserted that such decisions represented a dramatic shift in business strategy that Nokia Corp. allegedly failed to disclose to the public. Plaintiffs asserted that as a result of these undisclosed shifts in strategy, Nokia Corp.’s stock price plummeted.
Based on these alleged omissions by Nokia Corp., the Court evaluated whether the complaint stated a viable claim that Nokia, Inc. breached various fiduciary duties, including the duty to prudently and loyally manage plan assets and to disclose complete and accurate information. Relying on the Supreme Court’s Twombly/Iqbal pleading standard, the Court characterized plaintiffs’ complaint as dominated by conclusory allegations that utterly lacked any factual basis. First, plaintiffs failed to raise any factual allegations demonstrating that Nokia Corp. perpetrated securities fraud by making misleading representations regarding its financial condition. Thus, no plausible basis existed that Nokia stock was artificially inflated by fraud or that the stock constituted an imprudent investment. Second, even if plaintiffs had made the requisite factual showing that Nokia Corp. engaged in fraud, their Complaint still failed because they presented no factual basis for imputing knowledge of Nokia Corp’s misrepresentations to the ERISA defendants. Plaintiffs merely concluded – without factual support – that the ERISA defendants (none of whom were officers or directors of Nokia Corp.) possessed knowledge regarding the financial health of Nokia Corp. that would lead them to believe the stock was an improper investment option. In short, the Court declined to assume that Nokia, Inc. and its Board played any role in the alleged securities fraud or knew of the alleged misrepresentations committed by its parent, Nokia Corp.
This case presents an important victory for employers because it enforces a stricter pleading standard for plaintiffs in stock-drop actions. Courts should not entertain complaints based solely on conclusory allegations; rather, plaintiffs must assert sufficient facts that the company and plan fiduciaries either committed or possessed actual knowledge of fraudulent misrepresentations that would impair the value of the stock and thus render it an imprudent investment option.