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Fentress v. Exxon Mobil Corporation

United States District Court, S.D. Texas, Houston Division

March 30, 2018

BOBBY D. FENTRESS, et al, Plaintiffs,
v.
EXXON MOBIL CORPORATION, et al, Defendants.

          MEMORANDUM & ORDER

          HON. KEITH P. ELLISON, UNITED STATES DISTRICT JUDGE

         I. INTRODUCTION

         This is an Employee Retirement Income Security Act (“ERISA”) case alleging a breach of fiduciary duties in the management of a defined contribution plan. Defendants' Motion to Dismiss the Amended Class Action Complaint (Doc. No. 37) is pending.

         II. BACKGROUND

         The following facts are alleged in the Amended Class Action Complaint. (Doc. No. 36.) Plaintiffs are current and former employees of Exxon Mobil Corporation (“Exxon”) who were participants in and beneficiaries of the Exxon Mobil Savings Plan (the “Plan”) and who were invested in Exxon company stock during the period of November 1, 2015 through October 28, 2016 (the “Class Period”). (Doc. No. 36 at 1, 11.) Defendants are Exxon and senior corporate officers of Exxon who were fiduciaries of the Plan during the Class Period. (Id. at 12.) The corporate officers are referred to as “Trustee Defendants” and, collectively, Exxon and the Trustee Defendants are referred to as “Defendants.” Plaintiffs allege that Defendants “knew or should have known that Exxon's stock had become artificially inflated in value due to fraud and misrepresentation, thus making Exxon stock an imprudent investment under ERISA and damaging the Plan and those Plan participants who bought or held stock.” (Id. at 2.)

         The Plan is an employee stock ownership plan (“ESOP”) and a defined contribution benefit plan sponsored by Exxon. (Id. at 13.) Eligible employees can contribute up to 25% of their compensation to the Plan, and Exxon will make a matching contribution of 6%. (Id.) During the Class Period, the Plan was managed by Trustee Defendants Beth Casteel, Suzanne McCarron, Malcolm Farrant, Daniel Lyons, and Len Fox, all of whom were appointed by Exxon. (Id. at 12-13.) Exxon stock represented the single largest holding of the Plan, “approximately $10 billion.” (Id. at 15.) Plaintiffs allege that the Plan purchased at least $800 million in Exxon stock during the Class Period. (Id. at 48.)

         Exxon is a publicly-traded, multinational oil and gas company. (Id. at 2.) Plaintiffs allege that Exxon made materially false and misleading statements throughout the Class Period when Exxon highlighted its strong business model, transparency, and reporting integrity, especially with regard to its oil and gas reserves. (Id.) Plaintiffs allege the public statements were materially false and misleading when made because they failed to disclose: (1) that Exxon's own internally-generated reports concerning climate change recognized the environmental risks caused by climate change; (2) that, given the risks associated with climate change, Exxon would not be able to extract all of the hydrocarbon reserves Exxon claimed to have and it therefore should have written down those reserves as “stranded”; and (3) that Exxon used an inaccurate “price of carbon” in evaluating the value of its future oil and gas reserves. (Id. at 3.)

         According to Plaintiffs, Securities and Exchange Commission (“SEC”) reporting rules require “proved” reserves to be oil and gas that is economically producible based on a backward-looking 12-month price average; other reserves are “stranded.” (Id. at 18.)

         During 2014, oil prices fell by nearly 50%. (Id. at 19.) Exxon's competitors all reported impaired reserves; Exxon did not. (Id. at 19.) From June through August 2015, oil prices fell again, but Exxon again reported no impact on its reserves. (Id. at 21-22.) For example, in an October 30, 2015 earnings release, Exxon did not indicate there had been any impact on its reserves. (Id. at 22.) On February 19, 2016, Exxon issued a release announcing that it had increased its reserves. (Id. at 23.) In its Form 10-K filed with the SEC on February 24, 2016, Exxon boasted about its rigorous methods for calculating reserves. (Id. at 23-25.) Exxon representatives made similar remarks throughout March, April, and July 2016. (Id. at 25-33.) Exxon's stock reached a Class-Period high of $95 per share in mid-July 2016. (Id. at 3.)

         In fall of 2015, news articles reported that Exxon had understood for decades the environmental impact of burning fossil fuels, despite having funded climate change denial research, think tanks, and publications. (Id. at 16, 18.) State attorneys general announced climate change litigation against Exxon, and Exxon retaliated by countersuing Massachusetts Attorney General Healey. (Id. at 17-18.) On August 19, 2016, The New York Times reported that New York Attorney General Schneiderman was investigating whether Exxon was then potentially defrauding its investors by overstating the value of its reserves. (Id. at 34.) Share prices dropped $1 that day. (Id. at 35.) In September, The Wall Street Journal made similar reports, adding that the SEC was investigating Exxon for securities fraud, and again Exxon share prices dropped about $1 with each new report. (Id. at 35-37.)

         On October 28, 2016, before trading opened, Exxon disclosed that it might need to write down nearly 20% of its oil and gas assets if energy prices remained low for the rest of 2016, and that 4.6 billion barrels of reserves may need to be written down or were not profitable. (Id. at 38.) Exxon share prices fell more than $2. (Id.)

         Plaintiffs allege three alternative actions that Trustee Defendants should have taken. First, Plaintiffs allege Trustee Defendants should have made, or caused others to make, corrective disclosures regarding the valuation of Exxon's oil and gas reserves. (Id. at 43.) Plaintiffs allege that the longer a fraud persists, the more harm there will be, so earlier corrective disclosures would lead to a milder stock price correction. (Id. at 44.) Second, Plaintiffs allege that Trustee Defendants should have halted all new investments or contributions to Exxon stock. (Id. at 50.) Third, Plaintiffs argue that Defendants should have invested a “small but significant portion of the Plan's holdings into a low-cost hedging product.” (Id. at 53.) They describe the hedging products as irrevocable trusts that are managed by an independent third party and that pool funds together from a group of financially-healthy and diverse companies for a fixed period of time, during which the pooled funds are invested “typically in United States Treasury securities.” (Id. at 54.)

         Plaintiffs bring two claims: (1) failure to prudently and loyally[1] manage the Plan's assets pursuant to 29 U.S.C. §§ 1104(a)(1)(D) and 1109(a), and (2) failure of Exxon, as an appointing fiduciary, to monitor or remove the individual fiduciaries. (Id. at 57-61.) Defendants have filed a Rule 12(b)(6) Motion to Dismiss, urging the Court to dismiss the Amended Complaint with prejudice because it does not meet the heightened pleading standard the Supreme Court and Fifth Circuit have set out for ERISA breach of fiduciary duties actions. (Doc. No. 37.) Defendants argue that the Amended Complaint also fails to allege the existence of material information Exxon misrepresented/failed to disclose or that Exxon had a duty to monitor, which it failed. (Id.)

         III. LEGAL STANDARD

         A court may dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). When considering a Rule 12(b)(6) motion to dismiss, a court must “accept the complaint's well-pleaded facts as true and view them in the light most favorable to the plaintiff.” Johnson v. Johnson, 385 F.3d 503, 529 (5th Cir. 2004). “To survive a Rule 12(b)(6) motion to dismiss, a complaint ‘does not need detailed factual allegations, ' but must provide the plaintiff's grounds for entitlement to relief-including factual allegations that when assumed to be true ‘raise a right to relief above the speculative level.'” Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir. 2007) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). That is, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570).

         IV.ANALYSIS: DUTY OF PRUDENCE CLAIM

         ERISA requires the fiduciary of a pension plan to manage plan assets “with the care, skill prudence, and diligence . . . that a prudent man acting in a like capacity and familiar with such matters” would use under the circumstances. 29 U.S.C. § 1104(a)(1)(B). This duty of prudence “trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary.” Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459, 2468 (2014). The duty of prudence applies fully to ESOPs, except that ESOPs need not be diversified. Id.

         The Supreme Court explained, “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 (quotation omitted). Generally, ERISA fiduciaries may prudently rely on the market price. Id. Plaintiffs may attempt to allege imprudence (1) on the basis of publicly available information by pointing to a special circumstance affecting the reliability of the market price or (2) on the basis of non-public information. Id. at 2471-72. Fifth Third established frameworks for assessing duty-of-prudence claims based on public information and insider information.

         Plaintiffs' duty-of-prudence claim is based on the allegation that Defendants “knew or should have known that Exxon's stock had become artificially inflated in value due to fraud and misrepresentation.” (Doc. No. 36 at 2.) Thus, Plaintiffs' allegations are based entirely on how Defendants should have managed the Plan based on insider information. This Court first assesses whether Plaintiffs have alleged the existence of, and Trustee Defendants' knowledge of, insider information and false or misleading statements that were inconsistent with the information. Then, the Court will turn to whether Plaintiffs have sufficiently alleged alternative actions that the Defendants could have taken “that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” Fifth Third Bancorp, 134 S.Ct. at 2472.

         A. False or Misleading Statements

         To plausibly allege violations of the duty of prudence based on non-public information, a plaintiff must allege that the defendants knew or should have known that the market price was based on materially false or misleading statements that would make it an imprudent investment. See In re Citigroup ERISA Litig., 104 F.Supp.3d 599, 616 (S.D.N.Y. 2015) (failure to state a claim because plaintiffs “have not sufficiently alleged that there was any material, nonpublic information to be disclosed); In re BP p.l.c. Sec. Litig., No. 10-md-2185, 2015 WL 1781727, at *10 (S.D. Tex. Mar. 4, 2015), rev'd on other grounds, Whitley v. BP, P.L.C., 838 F.3d 523 (5th Cir. 2016) (the first hurdle to be cleared before an insider information prudence claim requires plaintiffs to plausibly allege that defendants “had knowledge of the relevant insider information which would indicate that the stock price is distorted”); Price v. Strianese, No. 17-cv-652, 2017 WL 4466614, at *2 (S.D.N.Y. Oct. 4, 2017).

         Plaintiffs allege that Exxon's public statements were materially false and misleading when made because they failed to disclose: (1) that Exxon's own internally-generated reports concerning climate change recognized the environmental risks caused by climate change; (2) that, given the risks associated with climate change, Exxon would not be able to extract all of the hydrocarbon reserves Exxon claimed to have and it therefore should have written down those reserves as “stranded”; and (3) that Exxon used an inaccurate “price of carbon” in evaluating the value of its future oil and gas reserves. (Doc. No. 36 at 3.) Plaintiffs attribute Trustee Defendants' knowledge of the falsity of the statements to their positions and tenure within Exxon.

         i. Environmental risks caused by climate change

         Plaintiffs allege that Exxon had understood the impact of burning fossil fuels on the environment for decades, despite funding a climate change denial campaign. (Doc. No. 36 at 16, 18.) News articles and reports that Defendants filed with their motion to dismiss corroborate this disconnect between what Exxon knew about climate change science internally and what it presented externally. (Doc. No. 37-2 at Exh. G (an October 9, 2015 Los Angeles Times article), Exh. H (a September 16, 2015 Inside Climate News article).) These investigative reports note, for example, that between 1986 and 1992 researchers looked at the effects that a warming Arctic would have on oil operations and reported their findings to Exxon headquarters in Houston and New Jersey. (Id. at Exh. G at 4.) Exxon was “at the forefront of climate change research, funding its own internal science as well as research from outside experts” since the late 1970s. (Id. at Exh. G at 8.) Publicly, Exxon dismissed the science as “uncertain” and “unproven.” (Id.)

         Defendants also argue that not only did Exxon disclose the risks of climate change before and during the Class Period-November 1, 2015 through October 28, 2016-but the “internal documents” on which the Plaintiffs relied were publicly available before the Class Period. (Doc. No. 37 at 17-18.) Defendants point to Exxon's publicly available 2015 Corporate Citizenship Report, which acknowledges “risks of climate change” (Doc. No. 37-2 at Exh. D), as well as a mention of “global climate change” in its Form 10-K for the fiscal years ending December 31, 2007 and December 31, 2015 (id. at Exh. E, Exh. F).

         Plaintiffs object that the information about the misleading nature of Exxon's disclosures was not publicly available long before the Class Period. (Doc. No. 38 at 16.) The two investigative reporting articles that Defendants cited and that purport to show Exxon's deceit regarding climate change relied on archival materials in Calgary's Glenbow Museum, the University of Texas, the Massachusetts Institute of Technology, and the American Academy for the Advancement of Sciences, as well as interviews with Exxon employees. (Doc. No. 37-2 at Exhs. G, H.) Plaintiffs argue that interviews and archival materials in various institutions are not public information of which a plaintiff alleging fraud is expected to be aware. (Doc. No. 38 at 18, citing Terra Secs, Asa Konkursbo v. Citigroup, Inc., 740 F.Supp.2d 441, 448 (S.D.N.Y. 2010).)

         The parties' arguments miss the point. Plaintiffs have alleged that Exxon studied the risks of climate change for decades. During the Class Period, however, the insider information could only be that Exxon had studied the risks for decades; information about the risks of climate change was publicly available during 2015 and 2016. Even if Exxon knew more about climate change than the company publicly let on, an efficient market can incorporate other information than what a company discloses. See Singh v. RadioShack, 882 F.3d 137, 146 (5th Cir. 2018) (recognizing that a market can incorporate news articles and analyst reports into a company's stock price). During the Class Period, there was ample publicly available information about climate change for the market to consider in valuing Exxon's stock. (See Doc. No. 37-2 Exhs. IK.) The Supreme Court recognized that “[t]he harms associated with climate change are serious and well recognized” and could be attributed, at least in part, to “manmade greenhouse gas emissions, ” in 2007, years before the Class Period. Massachusetts v. EPA, 549 U.S. 497, 521, 523 (2007). To pretend that environmental risks about climate change were unknown until Exxon itself shared information about climate change is an affront to scientists, academics, and government bodies, not to mention the people who were already experiencing the effects of climate change by 2015.[2]

         While Exxon's decades-long misinformation campaign about the causes and effects of climate change should not be understated, the Amended Complaint provides no plausible reason to believe that the risks posed by climate change were not incorporated into the Exxon stock price. See RadioShack, 882 F.3d at 145-46. If Plaintiffs intend to bring a duty of prudence claim based on publicly available information, they must allege “a special circumstance affecting the reliability of the market price as an unbiased assessment of the security's value in light of all public information that would make reliance on the market's valuation imprudent.” Fifth Third Bancorp, 134 S.Ct. at 2472 (internal quotation omitted). Plaintiffs have not.[3]

         ii. ...


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