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Coburn v. Evercore Trust Co., N.A.

United States Court of Appeals, District of Columbia Circuit

December 30, 2016

Donna Marie Coburn, on behalf of herself and all others similarly situated, Appellant
Evercore Trust Company, N.A., Appellee

          Argued October 13, 2016

         Appeal from the United States District Court for the District of Columbia (No. 1:15-cv-00049)

          Peter W. Overs, Jr. argued the cause for the appellant. Robert I. Harwood was with him on brief. Daniel M. Cohen entered an appearance.

          Jonathan D. Hacker argued the cause for the appellee. Meaghan VerGow was with him on brief. Jeffrey W. Kilduff entered an appearance.

          Before: Henderson and Rogers, Circuit Judges, and Edwards, Senior Circuit Judge.


          Karen LeCraft Henderson, Circuit Judge:

         Donna M. Coburn, on behalf of herself and all others similarly situated, appeals the district court's dismissal of her complaint against Evercore Trust Company, N.A. (Evercore) pursuant to the Employee Retirement Income Security Act of 1974 (ERISA) §§ 409, 502(a)(2)-(3), 29 U.S.C. §§ 1109(a), 1132(a)(2)-(3). Coburn, a former J.C. Penney employee and investor in a J.C. Penney employee stock ownership plan (ESOP) managed by Evercore, claims that Evercore breached its fiduciary duties of prudence and loyalty when it failed to take preventative action as the value of J.C. Penney common stock tumbled between 2012 and 2013, thereby causing significant losses. Despite clear factual similarities, Coburn argues that the pleading requirements outlined in Fifth Third Bancorp v. Dudenhoeffer, U.S., 134 S.Ct. 2459 (2014), are inapplicable to her allegations because she challenges Evercore's failure to appreciate the riskiness of J.C. Penney stock rather than Evercore's valuation of its price. We disagree and therefore affirm the district court's judgment.

         I. Background

         While Coburn was employed by J.C. Penney, the large retailer offered its employees the opportunity to "save for their retirement" by investing in the J.C. Penney Savings Profit-Sharing and Stock Ownership Plan (the Plan). Its defined contribution plan was an "employee pension benefit plan" within the meaning of ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A), and an eligible individual account plan within the meaning of ERISA § 407(d)(3), 29 U.S.C. § 1107(d)(3). Once an employee opted into the Plan, she could allocate her contribution among a variety of investment options. One of the options was the Penney Stock Fund, an ESOP that consisted largely of J.C. Penney common stock. This was the option Coburn selected.

         On December 17, 2009, Evercore became the designated fiduciary and investment manager of the Penney Stock Fund. In this role, Evercore had the authority to restrict or limit the ability of Plan participants to purchase or hold J.C. Penney stock, including the power to "eliminate the [Penney Stock Fund] as an investment option under the Plan and to sell or otherwise dispose of all of the Company Stock held in the [Penney Stock Fund]." Evercore did not manage any other investment option available through the Plan.

         In 2011, J.C. Penney attempted to reconceptualize its brand and hired former Apple, Inc. executive Ron Johnson as its chief executive officer. Distancing himself from J.C. Penney's historic reliance on sales, coupons and rebates to boost sales, Johnson implemented a more straightforward pricing scheme, reasoning that a "fair and square" pricing policy would attract shoppers. Johnson also reworked both the Company logo and the traditional layout of its stores in an effort to modernize. Taken as a whole, Johnson sought to bring J.C. Penney up to speed with the fads and fashions of 2012, simplifying the business model in order to lower expenses and increase gross profit margins. This strategy proved to be less than successful.

         J.C. Penney's 2012 first quarter earnings report showed a $163 million loss, or a $0.75 loss per share. Johnson's poor start was only the beginning, as the next twenty-one months-from the end of 2012's first quarter to the end of 2013's fourth quarter-saw J.C. Penney's stock price fall from $36.72 to $5.92 per share. As market analysts became increasingly bearish regarding its stock, J.C. Penney cancelled dividends for only the second time since 2006. The disastrous performance led Johnson to a telling realization: the abandoned coupons "were a drug" that "really drove traffic." Johnson's tenure ended in April 2013.

         Throughout the entire period that the value of J.C. Penney common stock dipped ever lower, Evercore stood resolute. Despite its authority to eliminate the Penney Stock Fund as an investment option in the Plan and its ability to sell shares currently in the Fund, Evercore exercised neither option. The shares in the Penney Stock Fund that Coburn and other investors owned took the full force of the hit. In 2015, Coburn sued on behalf of herself and all others similarly situated, alleging that Evercore was liable for $300 million in losses to the Plan for having breached its fiduciary duty under ERISA §§ 409, 502(a)(2)-(3), 29 U.S.C. §§ 1109(a), 1132(a)(2)-(3).

         On February 17, 2016, the district court granted Evercore's motion to dismiss the complaint for failure to state a claim. Primarily relying on the United States Supreme Court's opinion in Dudenhoeffer, the district court held that Coburn's allegations that Evercore should have recognized from publicly available information alone that continued investment in J.C. Penney common stock was "imprudent" were generally implausible absent "special circumstances" affecting the market. Because Coburn failed to plead special circumstances-indeed, Coburn expressly disclaimed any need to plead them-the district court held that Coburn's complaint could not survive Evercore's Rule 12(b)(6) challenge. The district court also rejected Coburn's alternative argument that, pursuant to Tibble v. Edison International, U.S., 135 S.Ct. 1823 (2015), Evercore violated its fiduciary "duty to monitor" investments and remove imprudent ones. The court reasoned that Tibble did not affect the Dudenhoeffer holding and thus could not save Coburn's complaint. Coburn timely filed her notice of appeal.

         II. Analysis

         We review de novo the dismissal of a complaint for failure to state a claim. Taylor v. Reilly, 685 F.3d 1110, 1113 (D.C. Cir. 2012). The familiar pair of Iqbal and Twombly guide the analysis of a Rule 12(b)(6) motion to dismiss. Ashcroft v. Iqbal, 556 U.S. 662 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). Under that precedent, a complaint must "state a claim to relief that is plausible on its face." Iqbal, 556 U.S. at 678 (internal quotation marks omitted) (quoting Twombly, 550 U.S. at 570). That is, the complaint must include factual allegations that, when taken as true, rise above a "speculative level." Twombly, 550 U.S. at 555. It is "a plaintiff's obligation to provide the grounds of his entitle[ment] to relief [with] more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. (first alteration in original) (internal quotation marks omitted).

         In Dudenhoeffer, the Supreme Court further refined pleading requirements regarding "allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock." See Dudenhoeffer, 134 S.Ct. at 2471; accord In re Lehman Bros. Sec. & ERISA Litig., 113 F.Supp.3d 745, 755 (S.D.N.Y. 2015) (noting that Dudenhoeffer "appears to have raised the bar for plaintiffs seeking to bring a claim based on a breach of the duty of prudence" (internal quotation marks omitted) (emphasis removed)), aff'd sub nom. Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56, 66 (2d Cir. 2016). In Dudenhoeffer, a putative class of employees brought a claim against fiduciaries who oversaw an ESOP, alleging that they had violated the duties of loyalty and prudence imposed by ERISA §§ 409, 502(a)(2), 29 U.S.C. §§ 1109, 1132(a)(2). Dudenhoeffer, 134 S.Ct. at 2464. Specifically, the Dudenhoeffer plaintiffs alleged that the fiduciaries "knew or should have known that [the employer company's] stock was overvalued and excessively risky, " in part because "publicly available information such as newspaper articles provided early warning signs" of the company's financial troubles. See id. The Dudenhoeffer fiduciaries, however, "continued to hold and buy" the company's stocks, a move that ultimately "eliminated a large part of the retirement savings that the participants had invested in the ESOP." Id.

         The Supreme Court affirmed the district court's dismissal of the complaint, holding that "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. Driving the Dudenhoeffer opinion was the recognition that "investors . . . have little hope of outperforming the market in the long run based solely on their analysis of publicly available information, and accordingly they rely on the security's market price as an unbiased assessment of the security's value in light of all public information." Id. at 2471 (internal quotation marks omitted) (quoting Halliburton Co. v. Erica P. John Fund, Inc., ___ U.S. ___, 134 S.Ct. 2398, 2411 (2014)). Dudenhoeffer was thus grounded in the efficient capital market theory-the "theory that security prices reflect all available information." Yesha Yadav, How Algorithmic Trading Undermines Efficiency in Capital Markets, 68 Vand. L. Rev. 1607, 1632 (2015) (citing Eugene F. Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, 25 J. Fin. 383, 384 (1970)); Appellee's Br. 11-12. Indeed, according to the efficient capital market theory, a security price in an efficient market "represents the market's most accurate estimate of the value of a particular security based on its riskiness and the future net income flows that investors holding that security are likely to receive." Yadav, supra at 1633; accord Basic Inc. v. Levinson, 485 U.S. 224, 246 (1988) ("[T]he market price of shares traded on well-developed markets reflects all publicly available information . . . ."). "Where efficient markets exist, traders cannot profit by using existing information available in the market, since this news should already be reflected in securities prices." Yadav, supra ...

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