Nelson v. Hodowal

• Decision Date: 02 January 2008
• Docket Number: No. 07-1895.,07-1895.
• Parties: Joseph J. NELSON and Michael Wycoff, on behalf of a class, Plaintiffs-Appellants, v. John R. HODOWAL, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

512 F.3d 347

Joseph J. NELSON and Michael Wycoff, on behalf of a class, Plaintiffs-Appellants, v. John R. HODOWAL, et al., Defendants-Appellees.

No. 07-1895.

United States Court of Appeals, Seventh Circuit.

Argued November 30, 2007.

Decided January 2, 2008.

Steve W. Berman, Andrew Volk (argued), Hagens Berman Sobol Shapiro, Seattle, WA, for Plaintiffs-Appellants.

R. Hackney Wiegmann (argued), Dane H. Butswinkas, Williams & Connolly, Washington, DC, Paul A. Wolfa, Baker & Daniels, Indianapolis, IN, for Defendants-Appellees.

Before EASTERBROOK, Chief Judge, and FLAUM and WILLIAMS, Circuit Judges.

EASTERBROOK, Chief Judge.

Indianapolis Power & Light Company maintains not only a defined-benefit pension plan but also a defined-contribution supplemental plan called the "Thrift Plan." The defined-benefit plan holds a diversified portfolio of investments; the defined-contribution plan initially limited employees to holding stock of IPALCO Enterprises, Inc., the employer's parent corporation, or bonds issued by the United States. Employees may contribute to the Thrift Plan an amount that depends on § 401(k) of the Internal Revenue Code. The employer matches these contributions up to 4% of an employee's annual salary.

In 1995 the Thrift Plan was amended to allow participants to diversify their investments. By 2000 the Plan was offering nine options, from very conservative (a money-market fund) to risky (IPALCO stock and nothing else), with several bond funds and mutual funds in between. The Plan hired Merrill Lynch, Pierce, Fenner & Smith, Inc., to advise the participants about appropriate investments; Merrill Lynch stressed the benefits of diversification. The Plan allows participants to change investments among the nine options daily, with no need for advance notice. But as of 2000 all of the employer's matching contributions were allocated to IPALCO stock; the Plan's terms made this mandatory.

IPALCO merged with AES Corporation on March 27, 2001. The merger had been approved by IPALCO'S board of directors in July 2000 and by the shareholders that October. AES offered a premium of 16% relative to the price at which IPALCO'S stock had traded the day before the announcement. Between July 2000 and March 2001 Merrill Lynch distributed literature to the Thrift Plan's participants and held meetings at which all options, including moving investments from IPALCO'S stock to one of the mutual funds, were discussed. By the time of these meetings investors no longer needed to hold IPALCO'S stock to obtain the merger premium; the price of IPALCO'S stock had climbed in the market to reflect the value of the AES stock that it would soon become (less a small discount to reflect the chance that the merger would be called off). Nonetheless, when the merger closed about 64% of investments in the Thrift Plan were held as IPALCO stock ($145.4 million of the Plan's total assets of $228.1 million).

AES was, and is, a much larger firm than IPALCO. It operates energy businesses around the globe, and the value of its stock in the market reflects not only the acumen of its managers but also the energy policies of many foreign nations, plus the exchange rate between the dollar and the currencies in which AES does business. How Indianapolis Power & Light performs has but modest influence on the market price of AES stock. When the merger closed, AES was trading for $49.60 a share. Three months later it was at $42.28. On September 25, 2001, AES was trading for $24.25, and the bottom dropped out the next day: AES fell to $12.25. It reached a low of $4.11 on February 21, 2002. The record does not reveal the reasons for the collapse in price.^† We do know that, although the firm suffered red ink in 2001 and 2002, it continues to be a substantial enterprise. Its revenues in 2000 were $6.7 billion, with a profit of roughly $1.40 a share. In 2006 its revenues were $12.3 billion and its earnings per share 43¢. The stock closed on December 18, 2007, at $21.58. That is still a substantial loss compared with the price in March 2001—not only in absolute terms, but also relative to the stock market, which is higher today than in March 2001.

Two of the Thrift Plan's participants filed this class-action suit under the Employee Retirement and Income Security Act (ERISA) against the Plan's fiduciaries. The principal contention was that the fiduciaries (all of whom were executives at Indianapolis Power & Light) should have seen the decline coming, or at least should have understood that AES is too volatile to be a suitable investment for pension holdings, and therefore had to compel all of the participants to exchange their IPALCO stock for the Plan's other investment options before the merger closed. See 29 U.S.C. § 1104 (obligations of fiduciaries), § 1132(a)(2) (authorizing suit to recoup losses to a plan). Both the Supreme Court, in LaRue v. DeWolff, Boberg & Associates, No. 06-856, 2007 WL 4162505 (argued Nov. 26, 2007), and this court, in Rogers v. Baxter International, Inc., No. 06-3241 (argued Nov. 2, 2007), have under advisement cases posing questions about the extent to which § 1132(a) authorizes suits seeking recoveries by defined-contribution plans, whose participants may have made different choices and thus were affected differently by the fiduciaries' conduct. But the precise scope of § 1132(a) does not affect subject-matter jurisdiction, and as defendants have not argued that this suit falls outside § 1132 we need not hold this appeal for LaRue or Rogers.

The district court held a bench trial and found essentially every disputed fact in defendants' favor. 480 F.Supp.2d 1061 (S.D.Ind.2007). The judge concluded that the defendants had no reason to foresee any decline in the price of AES's stock (had, indeed, no inside information about AES) and that reasonable fiduciaries would have deemed AES a suitable stock. (For long-term investors, a stock's volatility may be a benefit, as higher risk usually is associated with higher return unless the risk is fully diversifiable. See Turan G. Bali, The intertemporal relation between expected returns and risk, 87 J. Fin. Econ. 101 (2008). A pension fund can ride out the ups and downs and reap the rewards of risk-taking.) Although participants' concentration in AES left them underdiversified—and without the offsetting incentive that IPALCO stock offered by linking the employees' fates with that of their employer—the fiduciaries adequately warned participants, directly and through Merrill Lynch, of that risk. The district court concluded that an ERISA fiduciary is not obliged to strip participants of the ability to make their own decisions, for good or ill. Nor, the judge concluded, were the fiduciaries obliged (or even allowed) to disregard the Plan's provision requiring all of the employer's contributions to be held as IPALCO (and then AES) stock.

Plaintiffs have abandoned on appeal all but one of the arguments they presented to the district court. The last issue remaining in dispute between the parties is whether the defendants had to tell the participants that the defendants were selling most of their own stock in IPALCO—not only stock held through the Thrift Plan, but also stock that the defendants were able to acquire by exercising vested options that they had received in their roles as managers or directors of Indianapolis Power & Light. Plaintiffs accuse the defendants of promoting AES as a good prospective employer (and implicitly as a good investment), while by divesting their own holdings they demonstrated that their true beliefs were otherwise. This is the sort of implied deceit that is called scalping in securities law. Compare SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963), with Lowe v. SEC, 472 U.S. 181, 105 S.Ct. 2557, 86 L.Ed.2d 130 (1985). The district judge found, however, that the defendants actually (and reasonably) believed everything they told the participants, and that they sold IPALCO stock, and cashed out their options, only because AES had announced that it would replace the management team at Indianapolis...