Lanfear v. Home Depot, Inc.

Decision Date08 May 2012
Docket NumberNo. 10–13002.,10–13002.
Citation53 Employee Benefits Cas. 1261,679 F.3d 1267,23 Fla. L. Weekly Fed. C 1008
PartiesRaymond A. LANFEAR, Randall W. Clark, Antonio Fierros, Plaintiffs–Appellants, Terry Clark, et al., Plaintiffs, v. HOME DEPOT, INC., Robert L. Nardelli, John I. Clendenin, Milledge A. Hart, III, Kenneth G. Langone, et al., Defendants–Appellees, Larry M. Mercer, et al., Defendant.
CourtU.S. Court of Appeals — Eleventh Circuit

OPINION TEXT STARTS HERE

Jeffrey M. Norton, Newman Ferrara LLP, Michael J. Klein, Edwin J. Mills, Stull, Stull & Brody, Thomas J. McKenna, Gainey & McKenna, New York, NY, Lisa T. Millican, Greenfield Millican, PC, Atlanta, GA, Gerald L. Rutledge, Alfred G. Yates, Jr., Office of Alfred G. Yates, Jr., Pittsburgh, PA, for plaintiffs-appellants.

Michael B. Wakefield, Darren A. Shuler, Michael R. Smith, David Tetrick, Jr., King & Spalding LLP, James Timothy Mast, John J. Dalton, Jaime Theriot, Troutman Sanders, LLP, Atlanta, GA, Joseph P. Rockers, Goodwin Procter, LLP, Boston, MA, for defendants-appellees.

Thomas Tso, U.S. Department of Labor, Washington, DC, for amicus curiae.

Appeal from the United States District Court for the Northern District of Georgia.

Before TJOFLAT, CARNES, and ANDERSON, Circuit Judges.

CARNES, Circuit Judge:

People build many things over the course of their lives. Throughout the time allotted them, they build houses and homes, character and careers, relationships and reputations. And if they're wise like Aesop's ant, during the summer and autumn of their lives they store up something for the winter. 1 Although the ant in the fable did well enough without its savings plan being protected by ERISA, the plaintiffs in this case seek the protections of that statute. They claim that the fiduciaries of their retirement plan violated ERISA in ways that damaged their efforts to stockpile savings for their winter years.

The plaintiffs planned for their retirement by investing in a single retirement plan that is both an “eligible individual account plan” (“EIAP”) and an “employee stock ownership plan” (“ESOP”). Their employer, The Home Depot, Inc., offered that retirement plan as an employee benefit. The plaintiffs claim that the fiduciaries of the Plan, who are the defendants in this case, 2 breached their fiduciary responsibilities under the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq. The complaint, as last amended, allegesthat the defendants: (1) continued to purchase and failed to sell Home Depot stock even though they knew based on nonpublic information that the stock price probably was inflated; (2) provided inaccurate information to the Plan participants in fiduciary communications; and (3) did not disclose to the Plan participants certain Home Depot business practices that had inflated Home Depot's stock price. The plaintiffs argue that those alleged breaches of the defendants' fiduciary duties, which ERISA imposes, diminished their retirement funds. One of Home Depot's advertising slogans was: “You Can Do It. We Can Help.”3 From the plaintiffs' perspective, when it came to overseeing their retirement plans, a more accurate slogan for the company would have been: “You Can't Do It Because We Won't Help.”

I.
A.

Like many other companies, Home Depot provides some of its employees with retirement benefits.4 It does so by sponsoring the Home Depot FutureBuilder Plan (“the Plan”), which is both an EIAP and an ESOP. Both of those types of plans are governed by ERISA. See29 U.S.C. § 1107(d)(3), (d)(6). Home Depot's Plan is a “defined contribution plan,” with accounts for each participant and with benefits based solely on the amount contributed to the participant's individual account by the participant and Home Depot. See id. § 1002(34). The Plan's assets are invested in a trust, which is managed by a trustee who is responsible for investing the trust's assets according to the Plan's terms and the participants' directions. The Trustee is subject to the directions of Home Depot, an Investment Committee,5 and an Administrative Committee.6 Both the Investment and Administrative Committees, and their members, are fiduciaries of the Plan. See id. § 1102(a)(2).

The Plan allows for three types of contributions to a participant's account: (1) voluntary, pre-tax contributions by the participant from his pay; (2) company matching contributions equal to a certain percentage of the participant's contributions; and (3) direct company contributions, which are not matching funds and which are made solely at the discretion of Home Depot's board of directors. A participant chooses how the amount in his individual account will be allocated among eight different investment funds, which vary in risk and potential reward.

The language of the Plan requires that one of the available investment funds be a “Company Stock Fund.” The “Company Stock Fund” is “the Investment Fund invested primarily in shares of [Home Depot] stock.” The Plan requires that all direct company contributions be invested initially in the “Company Stock Fund,” but voluntary contributions by Plan participants and company matching funds may also be invested in that fund. One of the eight investment funds, the “Home Depot, Inc. Common Stock Fund,” qualifies as the “Company Stock Fund” under the Plan, and it is the fund at issue in this case. The Summary Plan Description states that [t]he objective of [the Common Stock Fund] is to allow participants to share in ownership of [Home Depot].” The Plan description contains disclosures about the risk of investment and includes a graph reflecting the relative risks of the different funds, which shows that the Common Stock Fund is the riskiest one. The Plan description also provides: “Since [the Common Stock Fund] invests in only one stock, this fund is subject to greater risk than other funds in the plan.”7 Although Home Depot matching and direct contributions are initially invested in the Common Stock Fund, the participants may thereafter transfer them to a different fund.

B.

The plaintiffs allege that Home Depot stock became an imprudent investment when, unknown to the public, some officials and employees of the company engaged in misconduct that inflated the company's stock price. Home Depot had agreements with its vendors to allow return-to-vendor chargebacks, which gave the company account credits for defective merchandise. Sometimes vendors permitted Home Depot stores to destroy defective merchandise instead of returning it.8 The stores would then make an accounting adjustment to their “cost of goods sold” in an amount that offset the original cost of the item.

Some Home Depot stores, however, improperly used return-to-vendor chargebacks. They charged back to vendors not only defective merchandise but also merchandise that had been used or damaged in the stores or that had been stolen from them. All of these losses should have been borne by Home Depot, not by the vendors. Worse, some stores also processed return-to-vendor chargebacks for merchandise that was still in inventory and then sold that same merchandise to customers. These fraudulent return-to-vendor chargebacks inflated Home Depot's earnings and profit margins. The plaintiffs allege that the widespread use of return-to-vendor chargebacks to improperly improve Home Depot's bottom line began after a Home Depot executive issued a memorandum in April 2002 discussing “missed [return-to-vendor] dollars” and pinpointing departments with the best opportunity to “boost chargebacks.”9See Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1243 (11th Cir.2008). The plaintiffs allege that the defendants were aware of the illicit return-to-vendor chargebacks as early as July 2002.

In October 2004 Home Depot stopped improperly processing return-to-vendor chargebacks, which immediately hurt its bottom line. The fourth quarter of 2004 was the first time in ten quarters that Home Depot did not exceed analysts' earnings-per-share expectations, and its revenue and earnings growth fell short of historical levels. The effect on its stock was predictable. On February 18, 2005, the last trading day before Home Depot announced its fourth quarter 2004 results, the company's stock price closed at $42.02 per share; on the day the company announced those results, the stock price fell, closing at $40.28. And it kept falling. By the close of trading on April 28, 2005, the stock was trading at $35.09 per share.

The inflation of Home Depot's earnings through improper return-to-vendor chargebacks also led some of the defendants to make a number of inaccurate statements and material omissions in filings with the Securities and Exchange Commission. From the first quarter of 2001 to the third quarter of 2004, Home Depot filed Form 10–Qs and Form 10–Ks10 reflecting the improperly lower costs and higher profits that resulted from the illicit return-to-vendor chargebacks. During that same period, Home Depot also filed with the SEC Form S–8 registration statements11 for the Plan, and it sent to Plan participants stock prospectuses, all of which incorporated by reference those faulty Form 10–Q and Form 10–K filings.

Then in June 2006 Home Depot announced that its top executives had backdated their stock option grants “in at least five instances” before December 2001. Stock option holders had been allowed to change the date of stock options to earlier dates and exercise them at the advantageous, lower market prices that had existed on those earlier occasions, instead of exercising them at the market price on the date the options were actually issued. Home Depot did not properly expense this compensation. The plaintiffs allege that the defendants knew about the backdating of stock options all along because many of them were directly involved in issuing the stock options, and some of them received backdated stock options. A December 2006 Home Depot news release revealed that an internal investigation had discovered routine backdating at “all levels of the company”...

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