Fentress v. Exxon Mobil Corp.

• Decision Date: 30 March 2018
• Docket Number: CIVIL ACTION NO. 4:16–CV–3484
• Parties: Bobby D. FENTRESS, et al, Plaintiffs, v. EXXON MOBIL CORPORATION, et al, Defendants.
• Court: U.S. District Court — Southern District of Texas

304 F.Supp.3d 569

Bobby D. FENTRESS, et al, Plaintiffs,

v.EXXON MOBIL CORPORATION, et al, Defendants.

CIVIL ACTION NO. 4:16–CV–3484

United States District Court, S.D. Texas, Houston Division.

Signed March 30, 2018

Edward H. Glenn, Jr., Jacob H. Zamansky, Justin Sauerwald, Samuel E. Bonderoff, Zamansky LLC, New York, NY, J. Hampton Skelton, Austin, TX, for Plaintiffs.

Daniel Kramer, Daniel J. Toal, Jonathan H. Hurwitz, Theodore V. Wells, Jr., Paul Weiss et al., New York, NY, Gregory Laufer, Pro Hac Vice, New York, NY, Daniel H. Gold, Nina Cortell, Haynes and Boone LLP, Dallas, TX, Mark Ryan Trachtenberg, Haynes and Boone, LLP, Houston, TX, for Defendants.

MEMORANDUM & ORDER

HON. KEITH P. ELLISON, UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

This is an Employee Retirement Income Security Act ("ERISA") case alleging a breach of fiduciary duties in the management of a defined contribution plan. Defendants' Motion to Dismiss the Amended Class Action Complaint (Doc. No. 37) is pending.

II. BACKGROUND

The following facts are alleged in the Amended Class Action Complaint. (Doc. No. 36.)

Plaintiffs are current and former employees of Exxon Mobil Corporation ("Exxon") who were participants in and beneficiaries of the Exxon Mobil Savings Plan (the "Plan") and who were invested in Exxon company stock during the period of November 1, 2015 through October 28, 2016 (the "Class Period"). (Doc. No. 36 at 1, 11.) Defendants are Exxon and senior corporate officers of Exxon who were fiduciaries of the Plan during the Class Period. (Id. at 12.) The corporate officers are referred to as "Trustee Defendants" and, collectively, Exxon and the Trustee Defendants are referred to as "Defendants." Plaintiffs allege that Defendants "knew or should have known that Exxon's stock had become artificially inflated in value due to fraud and misrepresentation, thus making Exxon stock an imprudent investment under ERISA and damaging the Plan and those Plan participants who bought or held stock." (Id. at 2.)

The Plan is an employee stock ownership plan ("ESOP") and a defined contribution benefit plan sponsored by Exxon. (Id. at 13.) Eligible employees can contribute up to 25% of their compensation to the Plan, and Exxon will make a matching contribution of 6%. (Id. ) During the Class Period, the Plan was managed by Trustee Defendants Beth Casteel, Suzanne McCarron, Malcolm Farrant, Daniel Lyons, and Len Fox, all of whom were appointed by Exxon. (Id. at 12–13.) Exxon stock represented the single largest holding of the Plan, "approximately $10 billion." (Id. at 15.) Plaintiffs allege that the Plan purchased at least $800 million in Exxon stock during the Class Period. (Id. at 48.)

Exxon is a publicly-traded, multinational oil and gas company. (Id. at 2.) Plaintiffs allege that Exxon made materially false and misleading statements throughout the Class Period when Exxon highlighted its strong business model, transparency, and reporting integrity, especially with regard to its oil and gas reserves. (Id. ) Plaintiffs allege the public statements were materially false and misleading when made because they failed to disclose: (1) that Exxon's own internally-generated reports concerning climate change recognized the environmental risks caused by climate change; (2) that, given the risks associated with climate change, Exxon would not be able to extract all of the hydrocarbon reserves Exxon claimed to have and it therefore should have written down those reserves as "stranded"; and (3) that Exxon used an inaccurate "price of carbon" in evaluating the value of its future oil and gas reserves. (Id. at 3.)

According to Plaintiffs, Securities and Exchange Commission ("SEC") reporting rules require "proved" reserves to be oil and gas that is economically producible based on a backward-looking 12–month price average; other reserves are "stranded." (Id. at 18.)

During 2014, oil prices fell by nearly 50%. (Id. at 19.) Exxon's competitors all reported impaired reserves; Exxon did not. (Id. at 19.) From June through August 2015, oil prices fell again, but Exxon again reported no impact on its reserves. (Id. at 21–22.) For example, in an October 30, 2015 earnings release, Exxon did not indicate there had been any impact on its reserves. (Id. at 22.) On February 19, 2016, Exxon issued a release announcing that it had increased its reserves. (Id. at 23.) In its Form 10–K filed with the SEC on February 24, 2016, Exxon boasted about its rigorous methods for calculating reserves. (Id. at 23–25.) Exxon representatives made similar remarks throughout March, April, and July 2016. (Id. at 25–33.) Exxon's stock reached a Class–Period high of $95 per share in mid-July 2016. (Id. at 3.)

In fall of 2015, news articles reported that Exxon had understood for decades the environmental impact of burning fossil fuels, despite having funded climate change denial research, think tanks, and publications. (Id. at 16, 18.) State attorneys general announced climate change litigation against Exxon, and Exxon retaliated by countersuing Massachusetts Attorney General Healey. (Id. at 17–18.) On August 19, 2016, The New York Times reported that New York Attorney General Schneiderman was investigating whether Exxon was then potentially defrauding its investors by overstating the value of its reserves. (Id. at 34.) Share prices dropped $1 that day. (Id. at 35.) In September, The Wall Street Journal made similar reports, adding that the SEC was investigating Exxon for securities fraud, and again Exxon share prices dropped about $1 with each new report. (Id. at 35–37.)

On October 28, 2016, before trading opened, Exxon disclosed that it might need to write down nearly 20% of its oil and gas assets if energy prices remained low for the rest of 2016, and that 4.6 billion barrels of reserves may need to be written down or were not profitable. (Id. at 38.) Exxon share prices fell more than $2. (Id. )

Plaintiffs allege three alternative actions that Trustee Defendants should have taken. First, Plaintiffs allege Trustee Defendants should have made, or caused others to make, corrective disclosures regarding the valuation of Exxon's oil and gas reserves. (Id. at 43.) Plaintiffs allege that the longer a fraud persists, the more harm there will be, so earlier corrective disclosures would lead to a milder stock price correction. (Id. at 44.) Second, Plaintiffs allege that Trustee Defendants should have halted all new investments or contributions to Exxon stock. (Id. at 50.) Third, Plaintiffs argue that Defendants should have invested a "small but significant portion of the Plan's holdings into a low-cost hedging product." (Id. at 53.) They describe the hedging products as irrevocable trusts that are managed by an independent third party and that pool funds together from a group of financially-healthy and diverse companies for a fixed period of time, during which the pooled funds are invested "typically in United States Treasury securities." (Id. at 54.)

Plaintiffs bring two claims: (1) failure to prudently and loyally¹ manage the Plan's assets pursuant to 29 U.S.C. §§ 1104(a)(1)(D) and 1109(a), and (2) failure of Exxon, as an appointing fiduciary, to monitor or remove the individual fiduciaries. (Id . at 57–61.) Defendants have filed a Rule 12(b)(6) Motion to Dismiss, urging the Court to dismiss the Amended Complaint with prejudice because it does not meet the heightened pleading standard the Supreme Court and Fifth Circuit have set out for ERISA breach of fiduciary duties actions. (Doc. No. 37.) Defendants argue that the Amended Complaint also fails to allege the existence of material information Exxon misrepresented/failed to disclose or that Exxon had a duty to monitor, which it failed. (Id. )

III. LEGAL STANDARD

A court may dismiss a complaint for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). When considering a Rule 12(b)(6) motion to dismiss, a court must "accept the complaint's well-pleaded facts as true and view them in the light most favorable to the plaintiff." Johnson v. Johnson, 385 F.3d 503, 529 (5th Cir. 2004). "To survive a Rule 12(b)(6) motion to dismiss, a complaint ‘does not need detailed factual allegations,’ but must provide the plaintiff's grounds for entitlement to relief—including factual allegations that when assumed to be true ‘raise a right to relief above the speculative level.’ " Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir. 2007) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). That is, "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955 ).

IV. ANALYSIS: DUTY OF PRUDENCE CLAIM

ERISA requires the fiduciary of a pension plan to manage plan assets "with the care, skill prudence, and diligence...that a prudent man acting in a like capacity and familiar with such matters" would use under the circumstances. 29 U.S.C. § 1104(a)(1)(B). This duty of prudence "trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary." Fifth Third Bancorp v. Dudenhoeffer , ––– U.S. ––––, 134 S.Ct. 2459, 2468, 189 L.Ed.2d 457 (2014). The duty of prudence applies fully to ESOPs, except that ESOPs need not be diversified. Id.

The Supreme Court explained, "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 (quotation omitted). Generally, ERISA fiduciaries may prudently rely on the market price. Id. Plaintiffs may attempt to allege imprudence (1) on the basis of publicly available information by pointing to a special...