Cassandra Wilson v. Theodore Craver ( 2021 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CASSANDRA WILSON, and all other No. 18-56139
individuals similarly situated,
Plaintiff-Appellant, D.C. No.
2:15-cv-09139-
v. JAK-PJW
THEODORE F. CRAVER; ROBERT
BOADA, OPINION
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
John A. Kronstadt, District Judge, Presiding
Argued and Submitted February 8, 2021
Pasadena, California
Filed April 19, 2021
Before: A. Wallace Tashima, Milan D. Smith, Jr., and
Mary H. Murguia, Circuit Judges.
Opinion by Judge Murguia
2 WILSON V. CRAVER
SUMMARY *
Employee Retirement Income Security Act
The panel affirmed the district court’s dismissal of an
action alleging breach of fiduciary duty under the Employee
Retirement Income Security Act in the management of the
assets of a pension plan.
An employee of Edison International, Inc., alleged that
fiduciaries of Edison’s employee stock ownership plan
breached their duty of prudence by allowing employees to
continue to invest in Edison stock after learning that the
stock was artificially inflated.
The panel held that the plaintiff failed to state a duty-of-
prudence claim under the Fifth Third standard because she
failed plausibly to allege an alternative 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.
Agreeing with other Circuits, and distinguishing a Second
Circuit case, the panel held that general economic principles
are not enough on their own to plead duty-of-prudence
violations.
COUNSEL
Samuel E. Bonderoff (argued), Zamansky LLC, New York,
New York, for Plaintiff-Appellant.
*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
WILSON V. CRAVER 3
John M. Gildersleeve (argued), Henry Weissman, and
Lauren C. Barnett, Munger Tolles & Olson LLP, Los
Angeles, California, for Defendants-Appellees.
OPINION
MURGUIA, Circuit Judge:
The Employee Retirement Income Security Act of 1974,
as amended (“ERISA”), requires the fiduciary of a pension
plan to act prudently in managing the plan’s assets.
29 U.S.C. § 1104(a)(1)(B). This case focuses on that duty
of prudence as applied to the fiduciary of an employee stock
ownership plan (“ESOP”)—a type of pension plan that
invests primarily in the stock of the company that employs
the plan participants. We must determine if the operative
complaint plausibly alleges a duty-of-prudence claim
against certain ESOP fiduciaries in accordance with the
context-specific pleading standard announced in Fifth Third
Bancorp v. Dudenhoeffer, 573 U.S. 409, 428 (2014), which
requires that the plaintiff “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.”
Plaintiff-Appellant Cassandra Wilson, an Edison
International Inc. (“Edison”) employee, brought this
putative class action against two Edison executives who are
fiduciaries of Edison’s 401(k) ESOP plan. Plaintiff alleges
that Defendant Fiduciary Boada breached his duty of
prudence by allowing employees to continue to invest in
Edison stock after he learned that the Edison stock was
artificially inflated. But as noted, to state a duty-of-prudence
4 WILSON V. CRAVER
claim against an ESOP fiduciary under Fifth Third, a
plaintiff must plausibly allege an alternative 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. See
573 U.S. at 428–29. The district court dismissed Plaintiff’s
claims, concluding that Plaintiff failed plausibly to allege the
requisite alternative action. We affirm.
I. Background
Edison is the parent company of Southern California
Edison Company (“SCE”), which supplies electricity to
much of Southern California. Eligible employees of SCE,
Edison, and other subsidiaries of Edison may participate in
a defined contribution plan, the Edison 401(k) Savings Plan
(the “Plan”), by diverting a percentage of their earnings to
be invested in funds offered by the Plan. One fund option
available to Plan participants was the Edison Company
Stock Fund (the “Stock Fund”). The Stock Fund is an ESOP
that primarily holds Edison common stock. Stock Fund
options are chosen by Edison’s Trust Investment
Committee. Theodore Craver, Edison’s CEO at all relevant
times, appointed the Trust Investment Committee’s
members, which included Robert Boada, Edison’s Vice
President and Treasurer. Craver and Boada are the
defendant fiduciaries in this action (collectively
“Defendants”).
Plaintiff alleges that Defendants breached their duty of
prudence because they knew that undisclosed
misrepresentations were artificially inflating Edison’s stock
price, yet they took no action to protect the Plan participants
from the foreseeable harm that inevitably results when fraud
is revealed to the market. The alleged misrepresentations
concerned SCE’s failure to disclose certain ex parte
communications between SCE executives and California
WILSON V. CRAVER 5
Public Utilities Commission (“CPUC”) decision-makers that
occurred while the CPUC was overseeing SCE’s rate-setting
proceedings and settlement negotiations with ratepayer
advocacy groups. The failure to disclose these
communications was material to the market because once
revealed, the ex parte communications called the highly
anticipated settlement between SCE and the ratepayer
advocacy groups into question.
A. The ex parte communications
In 2013, SCE, which provides utilities to nearly
14 million people in Central and Southern California, closed
one of its power plants—the San Onofre Nuclear Generating
Station (“SONGS”)—due to generator failure. As a result of
the plant closure, SCE participated in rate-setting
proceedings before the CPUC to determine how costs
associated with the closure should be allocated between SCE
(and its shareholders), on the one hand, and SCE’s
ratepayers, on the other. Edison—SCE’s parent company—
announced that a settlement had been reached with the
ratepayer advocacy groups in March 2014 (“SONGS
Settlement”), subject to the CPUC’s approval. The CPUC
approved the SONGS Settlement in November 2014.
Under the CPUC’s rules, while the SONGS proceedings
were ongoing, SCE was required to file a notice whenever
an SCE employee interacted privately with a CPUC official
if the interaction concerned any substantive issue in the
SONGS proceedings. In February 2015, two months after
the SONGS Settlement was approved, SCE filed a notice
with the CPUC that an SCE employee had engaged in an ex
parte communication in March 2013—after the SONGS
proceedings had commenced but before settlement
negotiations had begun—at an industry conference in
Warsaw, Poland (the “Warsaw communication”). As a
6 WILSON V. CRAVER
result of the disclosure, some of the intervening ratepayer
advocacy groups that were parties to the SONGS Settlement
requested the CPUC investigate whether sanctions should be
imposed on SCE in connection with the ex parte
communication and urged the CPUC to set aside or modify
the SONGS Settlement. The subsequent investigation
revealed additional non-reported ex parte communications,
inciting further frustration among the advocacy groups that
were parties to the SONGS Settlement. In August 2015, an
Administrative Law Judge (“ALJ”) overseeing the CPUC
investigation issued a ruling finding that SCE failed to report
ten ex parte communications. 1 In December 2015, the full
five-member CPUC issued its own ruling modifying in part
and affirming in part the ALJ’s ruling. 2 The CPUC
concluded that SCE failed to report eight qualifying
communications, justifying a penalty of $16.7 million.
B. Edison’s stock price
Edison’s stock price appreciated substantially after the
SONGS Settlement was first announced in March 2014,
rising from $49 per share to $54 per share in one week. The
stock price continued to rise after the CPUC approved the
SONGS Settlement in November 2014, rising to over
$67 per share in early 2015. The stock price began to
decline, however, when news that SCE executives had
engaged in improper ex parte communications with CPUC
decisionmakers came to light. Plaintiff claims that Edison’s
stock price depreciated fifteen percent as the truth of the ex
1
One ratepayer advocacy group contended that there were “more
than 70” reporting violations.
2
The CPUC decision is not mentioned in the Second Amended
Complaint but is the proper subject of judicial notice. See. Fed. R. Evid.
201(b).
WILSON V. CRAVER 7
parte communications slowly emerged over a series of
partial disclosures. The first alleged disclosure was the
February 2015 notice of the Warsaw communication,
followed by news reports of additional ex parte
communications that were revealed through the subsequent
investigation. The final disclosure was a June 24, 2015
application by one of the interested ratepayer advocacy
groups to charge SCE with “fraud by concealment,” which
confirmed fears that the SONGS Settlement was in jeopardy.
C. The Second Amended Complaint
On November 24, 2015, before the CPUC’s final ruling,
Plaintiff filed this putative class action against Defendants
on behalf of herself and all Plan participants that purchased
or held the Edison Company Stock Fund during the Class
Period—between March 27, 2014 (when the SONGS
Settlement was announced) and June 24, 2015 (the final
partial disclosure revealing the fraud to the market). She
alleged that as a member of the Trust Investment Committee,
Defendant Boada had a fiduciary duty to ensure the
continued prudence of all Plan participants’ investments,
including in the Stock Fund. She further alleged that as the
person responsible for overseeing the Trust Investment
Committee, Defendant Craver had a fiduciary duty to
monitor Defendant Boada and ensure he was fulfilling his
fiduciary obligations. Plaintiff alleges that Boada breached
his duty of prudence by failing promptly to disclose the ex
parte communications, which would have allowed the
Company’s stock price to correct and mitigated the harm
suffered by Plan participants. Derivatively, Plaintiff alleges
that Defendant Craver breached his duty by failing to ensure
Defendant Boada took corrective action. The district court
dismissed Plaintiff’s first two complaints without prejudice.
The district court later dismissed the operative Second
8 WILSON V. CRAVER
Amended Complaint (“SAC”), concluding that it failed to
satisfy the pleading standard for ESOP duty-of-prudence
claims set forth in Fifth Third, 573 U.S. 409. 3 This appeal
followed.
II. Standard of Review
We review a district court’s dismissal of a complaint de
novo. See Dowers v. Nationstar Mortg., LLC, 852 F.3d 964,
969 (9th Cir. 2017). The Court is obliged to “accept[] all
factual allegations in the complaint as true and constru[e]
them in the light most favorable to the [plaintiff].” Skilstaf,
Inc. v. CVS Caremark Corp., 669 F.3d 1005, 1014 (9th Cir.
2012). However, we need not accept as true legal
conclusions couched as factual allegations. Ashcroft v.
Iqbal, 556 U.S. 662, 680–81 (2009).
III. Discussion
The sole issue on appeal is whether Plaintiff plausibly
alleged a duty-of-prudence claim under the pleading
standard announced in Fifth Third, 573 U.S. 409. Plaintiff
makes two primary objections to the district court’s
application of the Fifth Third pleading standard. First, she
contends that the district court’s application makes it
impossible to plead duty-of-prudence claims. Second, she
asserts that the allegations in the SAC are analogous to the
allegations in Jander v. Ret. Plans Comm. of IBM, 910 F.3d
620, 632 (2d Cir. 2018), vacated and remanded, 140 S. Ct.
592 (2020), reinstated, 962 F.3d 85, cert. denied sub nom.
Ret. Plans Comm. v. Jander, No. 20-289, 2020 WL 6551787The district court dismissed the SAC with leave to amend but
3
Plaintiff elected not to file an amended complaint. Judgment was entered
on August 3, 2018.
WILSON V. CRAVER 9
(U.S. Nov. 9, 2020), which in Plaintiff’s view is the only
decision to correctly apply Fifth Third. Accordingly, a brief
discussion of the Supreme Court’s decision in Fifth Third is
instructive.
A. Fifth Third Bancorp v. Dudenhoeffer
Fifth Third set forth the pleading standard applicable to
ESOP duty-of-prudence claims. As ERISA fiduciaries,
Defendants were required to manage the Plan with “care,
skill, prudence, and diligence.” 29 U.S.C. § 1104(a)(1)(B);
see Fifth Third, 573 U.S. at 418–19. But prior to the
Supreme Court’s decision in Fifth Third, many circuit courts
of appeals, including this one, had determined that ESOP
fiduciaries were entitled to a presumption that their fund
management was prudent. 4 The presumption was developed
as a means to reconcile an ESOP fiduciary’s duty of
prudence with an ESOP fiduciary’s obligation to invest
primarily in the stock of the Plan participants’ employer and
Congress’s stated interest in encouraging the use of ESOPs.
Fifth Third, 573 U.S. at 415–16. The presumption was
“generally defined as a requirement that the plaintiff make a
showing that would not be required in an ordinary duty-of-
prudence case, such as that the employer was on the brink of
collapse.” Id. at 412.
In Fifth Third, the Supreme Court rejected the
presumption of prudence and held that “the same standard of
4
See Quan v. Comput. Scis. Corp., 623 F.3d 870, 881 (9th Cir.
2010); see also White v.Marshall & Ilsley Corp., 714 F.3d 980, 990 (7th
Cir. 2013); Lanfear v. Home Depot, Inc., 679 F.3d 1267, 1280 (11th Cir.
2012); In re Citigroup ERISA Litig., 662 F.3d 128, 137 (2d Cir. 2011);
Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254 (5th Cir. 2008);
Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir. 1995); Moench v.
Robertson, 62 F.3d 553, 571 (3d Cir. 1995).
10 WILSON V. CRAVER
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 418–19. In other
words, ESOP fiduciaries are subject to the same duty of
prudence as all other ERISA fiduciaries and are not entitled
to any special presumption.
The Supreme Court, however, recognized that absent the
presumption of prudence, ESOP fiduciaries may face
excessive litigation. Id. at 423–24. For example, because
ESOP fiduciaries are often company insiders, they are
frequently alleged, as they are here, to have inside
information that their company’s stock is overpriced.
Normally, a prudent investor that knew one of its
investments was imprudent would stop buying the
imprudent stock and divest the fund of its imprudent
holdings, but such action would conflict with the legal
prohibition on insider trading whenever the fiduciary’s
knowledge that the stock is imprudent stems from inside
information. The Supreme Court described this conflict as a
legitimate concern. Id. at 423. Similarly, the Court
recognized that because ESOP plans instruct their fiduciaries
to invest in company stock and ERISA requires fiduciaries
to follow plan documents, see 29 U.S.C. § 1104(a)(1)(D),
“an ESOP fiduciary who fears that continuing to invest in
company stock may be imprudent finds himself between a
rock and a hard place.” Id. at 424. The Supreme Court
illustrated this conflict by explaining that: “If [the ESOP
fiduciary] keeps investing and the stock price goes down he
may be sued for acting imprudently in violation of
§ 1104(a)(1)(B), but if he stops investing and the stock price
goes up he may be sued for disobeying the plan documents
in violation of § 1104(a)(1)(D).” Id.
WILSON V. CRAVER 11
In light of these considerations, the Supreme Court
endeavored to balance Congress’s stated interest in
encouraging the creation of ESOPs with the right of plan
participants to enforce their rights under a plan. Id. The
Court determined that the presumption of prudence, which
made it “impossible for a plaintiff to state a duty-of-
prudence claim, no matter how meritorious, unless the
employer is in very bad economic circumstances,” was not
“an appropriate way to weed out meritless lawsuits or to
provide the requisite ‘balancing.’” Id. at 425. Rather, the
Court determined that this “important task can be better
accomplished through careful, context-sensitive scrutiny of
a complaint’s allegations.” Id.
Accordingly, the Supreme Court announced:
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 428. As guidance, the Court highlighted three points
that “inform the requisite analysis.” Id. First, “courts must
bear in mind that the duty of prudence . . . does not require a
fiduciary to break the law.” Id. Therefore, ERISA’s duty of
prudence “cannot not require an ESOP fiduciary to perform
an action—such as divesting the fund’s holdings of the
employer’s stock on the basis of inside information—that
would violate the securities laws.” Id. Second, “courts
should consider the extent to which an ERISA-based
12 WILSON V. CRAVER
obligation either to refrain on the basis of inside information
from making a planned trade or to disclose inside
information to the public could conflict with the complex
insider trading and corporate disclosure requirements.” Id.
at 429. Third, the Supreme Court instructed:
[L]ower courts faced with such claims should
also consider whether the complaint has
plausibly alleged that a prudent fiduciary in
the defendant’s position could not have
concluded that stopping purchases—which
the market might take as a sign that insider
fiduciaries viewed the employer’s stock as a
bad investment—or publicly disclosing
negative information would do more harm
than good to the fund by causing a drop in the
stock price and a concomitant drop in the
value of the stock already held by the fund.
Id. at 429–30; see Amgen Inc. v. Harris, 136 S. Ct. 758, 760
(2016) (per curiam) (reiterating that courts must assess
“whether the complaint in its current form ‘has plausibly
alleged’ that a prudent fiduciary in the same position ‘could
not have concluded’ that the alternative action ‘would do
more harm than good’”) (quoting Fifth Third, 573 U.S. at
429–30). Determining whether a plaintiff has met this
pleading standard is a context-specific inquiry, focused on
“the circumstances . . . prevailing” at the time the fiduciary
acts. Fifth Third, 573 U.S. at 425 (alterations in original)
(quoting 29 U.S.C. § 1104(a)(1)(B)).
B. Applying the “more harm than good” standard
Plaintiff contends that in concluding the SAC failed to
satisfy Fifth Third, the district court “brushed right past the
majority of the [Fifth Third] opinion,” which flatly rejected
WILSON V. CRAVER 13
the presumption of prudence that made it impossible for a
plaintiff to state a duty-of-prudence-claim, only to apply the
newly announced standard in a manner that similarly makes
it impossible to state a duty-of-prudence claim. Plaintiff
argues that the district court incorrectly concluded that
whenever the plaintiff’s proposed alternative action—in this
case an immediate comprehensive corrective disclosure—
would result in a decline in the stock price, the Fifth Third
standard is not met because a prudent fiduciary could
conclude that such actions would do more harm than good.
We agree that such a per se rule would effectively bar nearly
all duty-of-prudence claims that are based on inside
information, because, as Plaintiff points out, the only way to
cure artificial inflation is to make a corrective disclosure,
which always results in a drop in the company’s stock price.
In Fifth Third, the Supreme Court expressly rejected the
presumption of prudence, in large part because the
presumption made it “impossible for a plaintiff to state a
duty-of-prudence claim, no matter how meritorious.”
573 U.S. at 425. Therefore, any application of the Fifth
Third pleading standard that makes it “impossible for a
plaintiff to state a duty-of-prudence claim, no matter how
meritorious” cannot be correct.
Plaintiff’s assertion that the district court applied such an
impossible standard, however, mischaracterizes the district
court’s order. The district court did not hold that Plaintiff
failed to state a duty-of-prudence claim solely because the
proposed alternative—a corrective disclosure—would have
caused a drop in Edison’s stock price. Rather, it concluded
that Plaintiff’s SAC failed to include context-specific
allegations plausibly explaining why a prudent fiduciary in
Defendants’ position “could not have concluded” that a
corrective disclosure would do more harm than good to the
Stock Fund. Instead, the district court concluded that
14 WILSON V. CRAVER
Plaintiff relied on wholly conclusory allegations “framed in
a manner that could apply to any similar ERISA claim.”
Plaintiff’s SAC primarily relies on the theory that no
reasonable fiduciary could have thought that disclosing the
truth of the ex parte communications would do more harm
than good to the Plan because throughout the Class Period
the stock price was continually rising and “key metrics
reflecting the underlying risk and volatility of Edison stock
indicated that the risk was increasing.” Therefore, “[a]
prudent fiduciary trying to determine whether and when to
make corrective disclosure would have recognized that,
given the increasing volatility underlying Edison [stock and
the trending rise in Edison’s stock price] . . . the longer that
corrective disclosure [was] delayed, the greater the negative
price impact would be once disclosure finally occurred.”
Plaintiff also alleged that Defendants should have
“understood that, the longer Edison’s fraud went on, the
more damage would be done to [Edison’s] reputation when
the truth emerged.” But nearly every court to consider duty-
of-prudence claims post Fifth-Third has rejected the notion
that general economic principles, such as those Plaintiff
relied on, are enough on their own to plead duty-of-prudence
violations. See, e.g., Allen v. Wells Fargo & Co., 967 F.3d
767, 774 (8th Cir. 2020) (“[W]e find Appellants’ allegation
based on general economic principles—that the longer a
fraud is concealed, the greater the harm to the company’s
reputation and stock price—is too generic to meet the
requisite pleading standard.”), pet. for cert. filed, No. 20-866
(U.S. Dec. 30, 2020); Martone v. Robb, 902 F.3d 519, 526–
27 (5th Cir. 2018) (holding that allegations based on the
general economic trend that “the longer the fraud persists,
the harsher the correction tends to be” are insufficient to
satisfy Fifth Third); Graham v. Fearon, 721 F. App’x 429,
WILSON V. CRAVER 15
436–37 (6th Cir. 2018) (same); Loeza v. John Does 1–10,
659 F. App’x 44, 45–46 (2d Cir. 2016) (same).
This consensus is consistent with Fifth Third’s call for
context-specific allegations and the Supreme Court’s stated
intent to provide some protection from meritless claims.
Notably, if all that is required to plead a duty-of-prudence
claim is recitation of generic economic principles that apply
in every ERISA action, every claim, regardless of merit,
would go forward. Accordingly, we join our sister circuits
in concluding that the recitation of generic economic
principles, without more, is not enough to plead a duty-of
prudence violation. To be clear, we do not hold that district
courts should not consider allegations reciting general
economic principles. See Jander, 910 F.3d at 629 (“While
these economic analyses will usually not be enough on their
own to plead a duty-of-prudence violation, they may be
considered as part of the overall picture.”); see also Allen,
967 F.3d at 774 (considering general economic principles as
“part of the overall picture”) (citation omitted). 5 But where
general economic principles are alleged, the complaint must
also include context-specific allegations explaining why an
earlier disclosure was so clearly beneficial that a prudent
fiduciary could not conclude that it would be more likely to
5
This notion is consistent with the legal standard applicable to
motions to dismiss. Iqbal, 556 U.S. at 679 (explaining that “legal
conclusions can provide the framework of a complaint, [but] they must
be supported by factual allegations”); Police Ret. Sys. of St. Louis v.
Intuitive Surgical, Inc., 759 F.3d 1051, 1058 (9th Cir. 2014) (“Although
we examine individual allegations in order to benchmark whether they
are actionable, we consider the allegations collectively and examine the
complaint as a whole.”).
16 WILSON V. CRAVER
harm the fund than help it. 6 The district court did not err in
requiring the same.
C. Jander v. Ret. Plans Comm. of IBM
Only one case post-Fifth Third has reversed the dismissal
of a duty-of-prudence claim in the ESOP context, Jander v.
Ret. Plans Comm. of IBM, 910 F.3d 620, 632 (2d Cir. 2018).
Plaintiff urges us to conclude the allegations in the SAC are
similarly sufficient to survive a motion to dismiss.
Assuming the allegations in Jander plausibly alleged a duty-
of-prudence claim under Fifth Third, the SAC in the instant
case lacks the pertinent context-specific allegations that
rendered the complaint in Jander sufficient.
In Jander, the plan participants alleged that their
employer, while eliciting buyers for a portion of its business,
failed to disclose losses the business was set to incur and
overvalued the business to the market. Jander, 910 F.3d
at 623. Once a buyer was found and the terms of the sale
were announced, the prior misrepresentation regarding the
6
Plaintiff’s assertion that Defendants should have assumed Edison’s
stock price and implied volatility would continue to rise is misplaced and
does not provide the context-specific facts needed to allege why an
earlier disclosure was so clearly beneficial that a prudent fiduciary could
not have concluded that it would be more likely to harm the fund than
help it. ERISA fiduciaries are not expected to predict the future of the
company’s stock performance. See Fifth Third, 573 U.S. at 427
(“Fiduciaries are not expected to predict the future of the company’s
stock performance.”) (quoting Quan v. Comput. Scis. Corp., 623 F.3d
870, 881 (9th Cir. 2010)); Rinehart v. Lehman Bros. Holdings Inc.,
817 F.3d 56, 63–64 (2d Cir. 2016) (explaining ERISA’s duty of
prudence requires “prudence, not prescience”) (citation omitted). And
the relevant context “turns on ‘the circumstances . . . prevailing’ at the
time the fiduciary acts.” Fifth Third, 573 U.S. at 425 (alteration in
original) (quoting 29 U.S.C. § 1104(a)(1)(B)).
WILSON V. CRAVER 17
business’s value was revealed to the market and the
employer’s stock price declined. Plan participants alleged
that once the plan fiduciaries learned the employer’s stock
price was artificially inflated, they should have disclosed the
truth. Id.The Second Circuit concluded that the complaint
sufficiently alleged a duty-of-prudence claim and
highlighted five allegations that rendered the complaint
sufficient: (1) the fiduciaries knew the employer’s stock
“was artificially inflated”; (2) the fiduciaries “had the power
to disclose the truth to the public [and] correct the artificial
inflation”; (3) the failure “promptly to disclose” the fraud
hurt the company’s “credibility . . . because the eventual
disclosure of a prolonged fraud causes reputational damage
that increases the longer the fraud goes on”; 7 (4) the
company’s “stock traded in an efficient market”, reducing
the risk of an “irrational overreaction to the disclosure of
fraud”; and (5) the fiduciaries “knew that disclosure of the
truth . . . was inevitable because [the employer] was likely to
sell the business and would be unable to hide its
overvaluation from the public at that point.” Id. at 628–30
(citations and internal quotation marks omitted). The
Second Circuit placed special emphasis on the fifth
allegation, describing it as “particularly important” because
it distinguished Jander from “the normal case.” Id. at 630.
As the Second Circuit explained, in “the normal case, when
7
Notably, the Second Circuit explained that the complaint’s
reference to reputational harm—a generic economic theory—was
relevant only because the complaint had already established in a fact-
specific manner that no further investigation was needed to ensure
disclosure would not have been premature. Id. at 629–30. This
application is consistent with the Second Circuit’s determination that
generic economic theories are relevant as part of the overall picture, but
insufficient on their own—a determination we adopt in Part III.B above.
18 WILSON V. CRAVER
the prudent fiduciary asks whether disclosure would do more
harm than good, the fiduciary is making a comparison only
to the status quo of non-disclosure,” but in Jander the
inevitability of the truth coming to light forced “the prudent
fiduciary . . . to compare the benefits and costs of earlier
disclosure to those of later disclosure.” Id. This latter
comparison, coupled with the general economic theory that
later disclosure is more harmful, allowed the plaintiffs
sufficiently to plead “that no prudent fiduciary in the Plan
defendants’ position could have concluded that earlier
disclosure would do more harm than good.” Id. at 631.
Although the SAC contains some of the same allegations
as the complaint in Jander, it is devoid of the “particularly
important” allegations that distinguished the allegations in
Jander from the “normal case.” For instance, even assuming
the SAC plausibly alleged Defendants knew that disclosure
of the ex parte communications was inevitable, the signs of
inevitability alleged in the SAC—including surfacing press
reports and a government investigation—did not begin to
surface until February 2015, after Edison’s stock price had
peaked. Therefore, even if Defendants fully disclosed the ex
parte communications once it appeared “inevitable” that the
information would become public according to Plaintiff’s
allegations, it likely would have been too late to benefit the
Plan participants by mitigating the correction. Accordingly,
it is far less likely that a corrective disclosure was so clearly
beneficial at that time that a prudent fiduciary in Defendants’
positions could not have concluded that it would be more
likely to harm the fund than to help it.
Moreover, Plaintiff’s contention that a prudent fiduciary
in Defendants’ positions would have made a prompt
corrective disclosure assumes that Defendants had enough
information during the class period to fully disclose the
WILSON V. CRAVER 19
number of ex parte communications that constituted
violations of the CPUC’s reporting rules, which is not clear
in light of the confusion surrounding the application of the
reporting rules. Even the CPUC acknowledged this
confusion when it explained in its order that SCE’s argument
“that it could hardly be expected to know whether these
communications fit the definition of ex parte
communications . . . is not entirely without weight.” 8 Due
to the nature of the concealed information in Jander—a
failure to disclose known losses—it was clear no further
investigation was needed to permit a comprehensive
corrective disclosure. The same is not true here, because it
was unclear until after the Class Period closed how many
CPUC rule violations, if any, SCE actually committed. See
Allen, 967 F.3d at 774–75 (holding that where the complaint
alleged an investigation was in process during the Class
Period, “a prudent fiduciary—even one who knows
disclosure is inevitable and that earlier disclosure may
ameliorate some harm to the company’s stock price and
reputation—could readily conclude that it would do more
harm than good to disclose information about [Defendant’s]
sales practices prior to the completion of the []
investigation”). Plaintiff even concedes that “where more
8
We are not required to “accept as true allegations that contradict
matters properly subject to judicial notice.” In re Gilead Scis. Sec. Litig.,
536 F.3d 1049, 1055 (9th Cir. 2008) (citation omitted); see Daniels-Hall
v. Nat’l Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010) (same).
Therefore, to the extent the SAC alleges Defendants knew of the ex parte
communications and knew the communications violated the CPUC’s
reporting rules such that Defendants were capable of making a
comprehensive disclosure, we need not accept those allegations as true
because they conflict with the text of the CPUC’s decision noting
ambiguity in the rules and the judicially noticeable fact that the ALJ and
CPUC reached different conclusions as to how many reporting violations
there were.
20 WILSON V. CRAVER
investigation of the underlying issue is called for, premature
disclosure could be a mistake and lead to an unnecessary
diminution of a company’s stock price.” Therefore, the
district court correctly determined that because the SAC
does not allege a “prudent fiduciary could not have
concluded that deferring a disclosure until after the
completion of investigations into the nature of the alleged
fraud or the degree to which the alleged fraud affected the
stock price would cause more harm than good,” Plaintiff’s
allegations are deficient, even under Jander. Accordingly,
Plaintiff’s proposed alternative of an early comprehensive
disclosure does not satisfy the “more harm than good” test
announced in Fifth Third.
IV. Conclusion
We conclude that the district court properly determined
that Plaintiff Wilson failed plausibly to plead that a prudent
fiduciary in Defendants’ position could not have concluded
that Plaintiff’s proposed alternative action of issuing a
corrective disclosure would do more harm than good. The
SAC relies solely on general economic theories and is
devoid of context-specific allegations explaining why an
earlier disclosure was so clearly beneficial that a prudent
fiduciary could not conclude that disclosure would be more
likely to harm the fund than to help it. Therefore, Plaintiff
failed to state a claim for breach of the duty of prudence
consistent with the standard announced in Fifth Third. As a
result, the derivative monitoring claim alleged against
Defendant Craver also fails.
AFFIRMED.