Continuing the trend observed throughout 2011, the Southern District of Indiana granted defendants’ motion to dismiss plaintiff’s complaint in DeWald v. Zimmer Holdings, Inc., Case No. 1:09-cv-00745 (S.D. Ind. Dec. 23, 2011), a typical stock drop complaint alleging that defendants violated ERISA by continuing to offer employer stock as an investment in a 401(k) plan even as the value of the stock fell. Plaintiff specifically alleged that the company’s stock lost value due to alleged customer concerns about the quality and safety of its medical products. Plaintiff also alleged that defendants failed to provide adequate information to participants regarding the risks of investing in the company’s stock.
In rejecting the complaint at the motion to dismiss stage, the Court found that “even if deemed economically significant,” the drop in the stock price was insufficient evidence that the fiduciaries acted imprudently in carrying out their fiduciary duties to the plan and its participants. Quoting the Seventh Circuit’s decision in Howell v. Motorola, Inc., 633 F.3d 552 (7th Cir. 2011), the Court pointed out that plaintiff failed to allege any facts that would support a conclusion that the fiduciaries “were or should have been tipped off to the fact that Zimmer’s stock had become ‘so risky or worthless’ that it warranted removal of the stock as a Plan investment option.” The Court also noted that the single-day price declines suffered by the stock — 4%, 7%, and 13.5% — were “modest by any standard” and could not support plaintiff’s claim.
The Court also dismissed plaintiff’s failure to disclose claim. Plaintiff alleged that defendants breached their ERISA disclosure obligations by failing to provide participants specific information about the potential decline in the stock price due to the alleged product concerns. In denying plaintiff’s disclosure claim, the Court agreed with defendants that ERISA Section 404(c) barred any relief for a failure to disclose this information. Instead, the Court found that the plan documents provided sufficient information to participants regarding the risks associated with investing in the company’s stock and that participants retained control over their investments.
This decision is one more in a long line of recent cases that demonstrate courts’ strong skepticism of stock drop claims. It remains to be seen if the repeated rejection of such claims at the motion to dismiss stage leads to a precipitous drop in filing of these claims by the plaintiffs’ bar.