Wilson v. Craver

• Decision Date: 19 April 2021
• Docket Number: No. 18-56139,18-56139
• Citation: 994 F.3d 1085
• Parties: Cassandra WILSON, and all other individuals similarly situated, Plaintiff-Appellant, v. Theodore F. CRAVER; Robert Boada, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

994 F.3d 1085

Cassandra WILSON, and all other individuals similarly situated, Plaintiff-Appellant,

v.Theodore F. CRAVER; Robert Boada, Defendants-Appellees.

No. 18-56139

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 8, 2021 Pasadena, California

Filed April 19, 2021

Samuel E. Bonderoff (argued), Zamansky LLC, New York, New York, for Plaintiff-Appellant.

John M. Gildersleeve (argued), Henry Weissman, and Lauren C. Barnett, Munger Tolles & Olson LLP, Los Angeles, California, for Defendants-Appellees.

Before: A. Wallace Tashima, Milan D. Smith, Jr., and Mary H. Murguia, Circuit Judges.

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, 134 S.Ct. 2459, 189 L.Ed.2d 457 (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 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, 134 S.Ct. 2459. 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 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 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 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 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, 134 S.Ct. 2459.³ 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (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, 134 S.Ct. 2459. Plaintiff makes two primary objections to the district court's application of the Fifth Third pleading standard. First, she contends that the...