A federal appeals court in St. Louis ruled for Wells Fargo & Co. by upholding a U.S. District Court's dismissal of a stock-drop lawsuit against the company and its fiduciaries.
Current and former employees of Wells Fargo sued soon after a banking scandal was made public by federal regulators in September 2016, causing the company's stock price to plummet and harming participants who invested in the stock through a 401(k) plan.
They argued that plan fiduciaries knew as early as 2005 that Wells Fargo's sales practices led to "artificially inflating the market value of Wells Fargo's stock," said the appeals court decision Monday.
They also claimed that fiduciaries knew "as early as 2013 that a government regulator was investigating Wells Fargo's possible misconduct," said the opinion in the case of Allen et al. vs. Wells Fargo & Co. et al.
Participants contended that the fiduciaries should have taken "corrective measures" such as publicly disclosing the sales practices, freezing the company stock fund or "purchasing a hedging product," the opinion stated.
However, a U.S. District Court judge in Minneapolis dismissed the lawsuit in September 2017 saying the participants' arguments did meet the standards set by the U.S. Supreme Court in its 2014 decision Fifth Third Bancorp vs. Dudenhoeffer et al.
Participants "failed to plausibly allege that a prudent fiduciary" working for Wells Fargo "could not have concluded" that the proposed corrective measures "would do more harm than good" to the Wells Fargo stock holdings, according to court records.
The participants subsequently filed an amended complaint with the U.S. District Court judge, who dismissed the complaint.
The participants then filed an appeal with the 8th U.S. Circuit Court of Appeals in St. Louis in April 15 this year, and the three-judge panel unanimously supported the decisions of the lower court.
"We find that a prudent fiduciary … could readily conclude that it would do more harm than good to disclose information about Wells Fargo's sales practices prior to the completion of the government's investigations," the judges wrote.
The participants "have failed to plausibly allege that a prudent fiduciary in (Wells Fargo's) position could not have concluded that earlier disclosure would do more harm than good," they added.
The Wells Fargo & Co. 401(k) Plan, San Francisco, had $39.5 billion in assets as of Dec. 31, 2018, according to the latest Form 5500.
