United States Court of Appeals, Eleventh Circuit.
RAYMOND A. LANFEAR RANDALL W. CLARK, ANTONIO FIERROS, lllllllllllllllllllll Plaintiffs—Appellants, TERRY CLARK, et al., lllllllllllllllllllll Plaintiffs, lllllllllll versus HOME DEPOT, INC., ROBERT L. NARDELLI, JOHN I. CLENDENIN, MILLEDGE A. HART, III, KENNETH G. LANGONE, et al., lllllllllllllllllllll Defendants—Appellees, LARRY M. MERCER, et al., lllllllllllllllllllll Defendant.
No. 10–13002 _ D.C. Docket No. 1:07–cv–00197–ODE
Decided: May 08, 2012
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, alleges that 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. See 29 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.” 9 See 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–Ks 10 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 statements 11 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” beginning as early as 1981. The resulting correction led to a $227 million loss in the company's consolidated financial statements. But see infra note 18. C. The putative class action in this case began as three separate class actions, with two filed in New York and one filed in Georgia. All three claimed that the defendants violated ERISA. See 29 U.S.C. §§ 1109, 1132(a)(2). The two New York cases were transferred to Georgia, where the plaintiffs in those two cases voluntarily dismissed their lawsuits and joined the one that had been filed in Georgia all along. After the plaintiffs filed two amended complaints, the district court dismissed their suit with prejudice for lack of standing and, alternatively, because the plaintiffs had not exhausted their administrative remedies. The plaintiffs appealed. We held that the plaintiffs did have standing, but we agreed with the district court that they had not exhausted their administrative remedies. Lanfear v. Home Depot, Inc., 536 F.3d 1217, 1221–24 (11th Cir.2008). We reversed the dismissal and remanded the case to the district court to allow it to determine whether the proceedings should be stayed to allow the plaintiffs to pursue administrative relief. Id. at 1225. The plaintiffs then filed in the district court a motion for a stay to allow exhaustion, which that court granted. After exhausting their administrative remedies, the plaintiffs filed a third amended complaint, asserting six ERISA breach of fiduciary duty claims, two of which are relevant to this appeal. First, the plaintiffs claimed that the defendants breached their duty of prudence by “continu[ing] to offer and approve the Home Depot Stock as an investment option for the Plan,” and by “permitt[ing] Company contributions to be made in Home Depot Stock rather than in cash or in other investments.” Second, the plaintiffs claimed that the defendants violated their duty of loyalty by incorporating by reference into “Plan documents”—Form S–8s and stock prospectuses—“materially misleading and inaccurate SEC filings and reports” and “fail[ing] to disclose any information to [the Plan participants] regarding Home Depot's deceitful business practices and how these activities adversely affected Company stock as a prudent investment option under the Plan.” The defendants filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. They contended that the prudence claim was actually a failure to diversify claim dressed up as a prudence claim—a wolf in sheep's clothing 12—and noted that claims for failure to diversify are barred by 29 U.S.C. § 1104(a)(2). Alternatively, the defendants argued that § 1104(a)(2) creates a presumption of prudence that the allegations in the complaint could not rebut.
See Moench v. Robertson, 62 F.3d 553 (3d Cir.1995). The defendants also argued that there could be no breach of the duty of loyalty because the documents on which the complaint was based were not fiduciary communications. Finally, they argued that there was no general duty under ERISA to inform the Plan participants of nonpublic corporate information. The plaintiffs responded that, under the Third Circuit's decision in Moench, the presumption that fiduciaries are prudent is rebuttable, and the allegations in their complaint are sufficient to rebut that presumption. And, the plaintiffs argued, the defendants were acting in their fiduciary capacity when they sent the documents that incorporated by reference the inaccurate SEC filings, and they were required to reveal to the plaintiffs “critical information” regarding the Home Depot stock even though it was nonpublic information. The district court granted the defendants' motion to dismiss all of the claims. In doing so, the court determined that the prudence claim was “at its core a diversification claim” barred by § 1104(a)(2). In the alternative, the court concluded that, because the Plan required investment in Home Depot stock, the defendants' decision to invest in Home Depot stock was immune from judicial review. The court also concluded that, even if the defendants had discretion not to invest in Home Depot stock, the plaintiffs' allegations were insufficient to rebut the Moench presumption of prudence; they fell short by not alleging that Home Depot was on the “brink of financial collapse,” which would have required the defendants to deviate from the Plan. About the breach of the duty of loyalty claim, the district court concluded that the Home Depot officers did not make the SEC filings in their capacity as Plan fiduciaries and that incorporation of the SEC filings into the Form S–8s and stock prospectuses did not give rise to ERISA liability. It also concluded there was no ERISA-imposed duty to disclose nonpublic corporate information. The district court dismissed the remaining claims as derivative of the prudence and loyalty claims or because they were without merit for some other reason. This is the plaintiffs' appeal. II. “We review de novo the district court's grant of a motion to dismiss under 12(b)(6) for failure to state a claim, accepting the allegations in the complaint as true and construing them in the light most favorable to the plaintiff.” Ironworkers Local Union 68 v. AstraZeneca Pharm., LP, 634 F.3d 1352, 1359 (11th Cir.2011) (quotation marks omitted). “In assessing the sufficiency of the complaint's allegations, we are bound to apply the pleading standard articulated in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937 (2009).” Id. The “allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” Twombly, 550 U.S. at 555, 127 S.Ct. at 1965 (citation omitted). As a result, the plaintiff must plead “a claim to relief that is plausible on its face.” Id. at 570, 127 S.Ct. at 1974. And “we may affirm the district court's judgment on any ground that appears in the record, whether or not that ground was relied upon or even considered by the court below.” Harris v. United Auto Ins. Grp., Inc., 579 F.3d 1227, 1232 (11th Cir.2009) (alteration and quotation marks omitted). III. A. The plaintiffs contend that the district court erred by dismissing their claim that the defendants violated the fiduciary duty of prudence. They argue that the district court was wrong to conclude that their prudence claim was a camouflaged diversification claim. ERISA fiduciaries operate under a “[p]rudent man standard of care,” which requires that: (1) ․ [A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—․ (B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; [and] (C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. 29 U.S.C. § 1104(a)(1). Section 1104(a)(2) provides an exemption from the diversification requirement of paragraph (C) for plans structured as EIAPs, such as the Plan in this case. “In the case of an [EIAP], the diversification requirement of paragraph (1)(C) and the prudence requirement (only to the extent that it requires diversification) of paragraph (1)(B) is not violated by acquisition or holding of employer securities․” Id. § 1104(a)(2). The district court concluded that the plaintiffs' prudence claim was actually, at its core, a claim that the defendants “should have diversified the Plan's investments.” Based on that conclusion, the court dismissed the claim because it fit within the § 1104(a)(2) exemption. Although we agree that courts must keep an eye out for wolves in sheep's clothing, we are convinced that the plaintiffs' prudence claim is instead a sheep in sheep's clothing. The plaintiffs allege that the defendants “knew or should have known that ․ Home Depot Stock was not a suitable and appropriate investment for the Plan,” that they failed to “divest[ ] the Plan of Home Depot Stock,” that they should not have “permitted Company matching contributions to be made in Home Depot Stock,” and that they should not have “continued to offer and approve the Home Depot Stock as an investment option for the Plan.” So the plaintiffs' claim, at least in part, is: (1) the defendants knew, based on nonpublic information, about the improper use of return-to-vendor chargebacks and stock option backdating; (2) because of that nonpublic information, the defendants knew that Home Depot's stock price was likely inflated; (3) despite that knowledge the defendants did not divest the Plan of Home Depot stock; and (4) they continued to offer Home Depot stock to the Plan participants and invest matching funds and direct contributions in Home Depot stock. That is not a claim that the Plan did not have enough different kinds of fruit in its investment basket or had only apples. The plaintiffs recognize that the Plan ordinarily allows the defendants to fill the basket with nothing but apples. Their claim is that the defendants, knowing that apples were selling for more than they were worth, not only left them in the basket but kept adding them to the basket. In short, the plaintiffs allege that the defendants acted imprudently because they knew that Home Depot stock was overpriced, not merely because it made up too large a percentage of the Company Stock Fund. The Fifth Circuit concluded in Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 249 (5th Cir.2008), that similar allegations state a claim for violation of the duty of prudence. There the plaintiff alleged that the defendants should have concluded, based on publicly available information, that it was imprudent to invest “such massive amounts or such a large percentage of [the plan's] assets” in the company's own stock. Id. at 248–49. The Fifth Circuit held that was a diversification claim within the § 1104(a)(2) statutory exemption. Id. at 249. But the plaintiff also alleged that the defendants should have concluded, based on nonpublic information, that “it was imprudent for the plan to hold even one share of [the company's] stock,” and that the “defendants had a fiduciary duty to halt further purchases of [the company's] common stock, sell the [p]lan's holdings in the [c]ommon [s]tock [f]und, and terminate the [f]und.” Id. The Fifth Circuit concluded that was not a diversification claim and for that reason did not fall within the § 1104(a)(2) exemption. Id. Like the plaintiff in Kirschbaum, the plaintiffs here allege that, even putting aside diversification concerns, Home Depot stock was an imprudent investment and for that reason the defendants had a duty to divest the Plan of the stock and stop purchasing it. That is not a wolf in a wool sweater; it is a sure-enough sheep. It does not howl “diversify”; it bleats “prudence.” Because the plaintiffs' claim is not a diversification claim, it does not fall within the § 1104(a)(2) exemption.