Court Opinion

ID: 4309632
Source: CourtListenerOpinion
Date Created: 2018-09-04 18:00:21.403405+00
Date Added: 2024-06-11T14:43:11.720955
License: Public Domain

Case: 17-50702   Document: 00514626609     Page: 1   Date Filed: 09/04/2018

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                             United States Court of Appeals
                                                                      Fifth Circuit

                                 No. 17-50702                       FILED
                                                             September 4, 2018
                                                               Lyle W. Cayce
THOMAS MARTONE,                                                     Clerk

             Plaintiff - Appellant

v.

WALTER E. ROBB, III; ROBERTA LANG; GLENDA JANE FLANAGAN,

             Defendants - Appellees

                Appeal from the United States District Court
                     for the Western District of Texas

Before HIGGINBOTHAM, SMITH, and CLEMENT, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
      Thomas Martone, a former Whole Foods employee, brought an action
against certain Whole Foods executives who are named fiduciaries for the
company’s 401(k) plan. Martone alleges that these executives breached their
fiduciary duties by allowing employees to continue to invest in Whole Foods
stock while its value was artificially inflated due to a widespread overpricing
scheme. The district court dismissed the claims, finding that Martone failed to
plausibly allege an alternative action that the fiduciaries 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. We affirm.
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                                       No. 17-50702
                                              I.
       Whole Foods Market, Inc., offers its employees a defined contribution
benefit plan called the Growing Your Future 401(k) Plan. The Plan provides
multiple investment options, including the Company Stock Fund, which is an
employee stock ownership plan. 1 Thomas Martone is a former Whole Foods
employee and Plan participant, and brings this suit against the three members
of Whole Foods’ Board and Investment Committee who are designated by the
Investment Committee Charter as Plan fiduciaries. 2
       Martone alleges that Defendants “breached their fiduciary duties to the
Plan and its participants when they knew (or should have known) . . . that
Whole Foods’ stock price had become artificially inflated due to undisclosed
misrepresentation and fraud, yet they took no action whatsoever to protect the
Plan or Plan participants from foreseeable resulting harm.” Specifically,
Martone claims that during the Class Period from January 1, 2010 through
July 30, 2015, Whole Foods engaged in “systemic, illegal overcharging of its
customers” by “regularly misstat[ing] the weight of pre-packaged food on which
prices were based.” 3 He further alleged that the company had “insufficient and
flawed quality control systems in place to prevent this fraud.”
       These allegations stem from multiple investigations by government
agencies in California and New York. According to Martone’s Amended

       1 An ESOP is “a type of pension plan that invests primarily in the stock of the company
that employs the plan participants.” Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459,
2463 (2014).
       2 Defendants-Appellees include the company’s co-CEO Walter E. Robb, III; its Chief

Financial Officer, Glenda Jane Flanagan; and its General Counsel, Roberta Lang.
       3 The Defendants dedicate a substantial portion of their brief to challenging the

evidence underpinning Martone’s allegations of systemic fraud. Because this appeal comes
at the motion to dismiss stage, these factual arguments are largely premature. See Ashcroft
v. Iqbal, 556 U.S. 662, 679 (2009) (“When there are well-pleaded factual allegations, a court
should assume their veracity and then determine whether they plausibly given rise to an
entitlement to relief.”).
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Complaint, City Attorneys for Los Angeles, Santa Monica, and San Diego filed
a complaint against Whole Foods in June 2014, alleging that it had violated
California law by “selling packaged items that contained less than the amount
stated on the packaging, failing to deduct the tare weight when selling pre-
packaged items, and selling items by unit when California law required them
to be sold by weight.” A week later, Whole Foods allegedly entered into the
“California Stipulation” and agreed to pay $800,000 and comply with a
permanent injunction prohibiting the company from engaging in certain
practices involving products sold by weight. Then, in August 2014 and January
2015, Whole Foods was allegedly caught overcharging customers in Albany,
New York; Martone claims that these Albany violations “result[ed] in
thousands of dollars of fines.” Finally, in June 2015, the New York City
Department of Consumer Affairs (“NYCDA”) announced it had uncovered that
Whole Foods’ eight New York City locations were systematically overcharging
customers by “routinely overstat[ing] the weights of its pre-packaged
products.” Martone further contends that it later “became clear that Whole
Foods’s illegal overcharging was systemic and widespread, and not limited to
simply New York City.” He cites a Washington Post article reporting that
Whole Foods stores received “more than 800 violations during 107 separate
inspections” between 2010 and 2015.
     Martone alleges that throughout this period, Whole Foods was
“report[ing] enormous growth of its sales revenues, net income, new stores and
stock price.” He also notes that during this time, Whole Foods made various
representations about its integrity and reputation, which he claims “led
investors to believe that the Company was not only committed to consumer
values and corporate responsibility, but that it had the controls and systems
to do so and the corporate culture among its employees that would prevent it
from hiding quality control problems from the public.”
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      On July 2, 2015, Whole Foods’ co-CEOs Walter Robb and John Mackey
released a video apologizing to customers for “any discrepancies that may have
occurred” and discussing steps that the company would take to ensure future
pricing accuracy. On July 29, 2015, Whole Foods filed a Form 8-K announcing
its financial and operating results for 2015, which fell below expectations. In
an earnings call, Robb acknowledged that the NYDCA press release and
attendant media coverage “ha[d] [a] significant impact on [the company’s]
sales” that was “felt across the whole country.”
      Martone alleges that “[a]s a result of these disclosures, Whole Foods
stock price declined” significantly. Martone claims that on January 1, 2010,
Whole Foods stock closed at $13.61 per share. After splitting two-for-one in
May 2013, it peaked at $63 per share in October 2013. Before the NYDCA press
release issued, the stock was trading above $40 per share. After Whole Foods
filed its Form 8-K, the company’s stock price declined over 11% to close at
$36.08 per share on July 30, 2015.
      On October 2, 2015, Martone filed his original Complaint. The district
court dismissed the claims without prejudice, and on October 14, 2016,
Martone filed the Amended Complaint at issue in this appeal. On August 2,
2017, the district court again dismissed the claims, finding that Martone failed
to state a claim that met the requirements outlined by the Supreme Court in
Fifth Third Bancorp v. Dudenhoeffer. 4 Martone timely appealed.

                                               II.

      “To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible on
its face.’” 5 “A claim has facial plausibility when the plaintiff pleads factual

      4   Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2465 (2014)
      5   Iqbal, 556 U.S. at 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
                                               4
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content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” 6
       We review a district court’s grant or denial of a Rule 12(b)(6) motion to
dismiss de novo, “accepting all well-pleaded facts as true and viewing those
facts in the light most favorable to the plaintiff[.]” 7 However, “the tenet that a
court must accept as true all of the allegations contained in a complaint is
inapplicable to legal conclusions” or “[t]hreadbare recitals of the elements of a
cause of action, supported by mere conclusory statements.” 8

                                            III.

       As a threshold matter, Defendants challenge Martone’s standing to bring
this action. To have standing, a plaintiff must have “(1) suffered an injury in
fact, (2) that is fairly traceable to the challenged conduct of the defendant, and
(3) that is likely to be redressed by a favorable judicial decision.” 9 “Where . . .
a case is at the pleading stage, the plaintiff must ‘clearly . . . allege facts
demonstrating’ each element.” 10 Defendants focus on the first element: injury-
in-fact. They contend that Martone lacks standing because he did not allege
that he sold his stock at a loss and “[w]hen a plaintiff alleges that a company’s
stock has been over inflated, simply holding the stock during the class period
is insufficient to establish a loss.” Specifically, Defendants contend that a
plaintiff must have bought the stock at the inflated price and sold it at a loss
in order to have standing.
       Defendants raised this issue in their first motion to dismiss. The district
court found that Martone alleged a concrete and particularized injury, namely

       6 Id. (citing Twombly, 550 U.S. at 556).
       7 True v. Robles, 571 F.3d 412, 417 (5th Cir. 2009) (quoting Stokes v. Gann, 498 F.3d
483, 484 (5th Cir. 2007)) (internal quotation marks omitted).
       8 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555).
       9 Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016).
       10 Id. (quoting Warth v. Seldin, 422 U.S. 490, 518 (1975)).

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“the loss in value and retirement money that he incurred from overpaying for
Whole Foods stock when it was artificially inflated and then holding the stock
while the price fell after news broke of the company’s overcharging practices.”
       We agree with the district court. Defendants’ argument overreads Dura
Pharmaceuticals v. Broudo, where the Supreme Court held that a “private
plaintiff who claims securities fraud must prove that the defendant’s fraud
caused an economic loss.” 11 Pleading “loss causation” requires more than
merely alleging an inflated purchase price. 12 This is so because “at the moment
the transaction takes place, the plaintiff has suffered no loss”; he simply owns
a stock that still retains its inflated value. 13 If the purchaser were to sell
immediately, while the stock is still inflated, there would be no loss. A loss only
occurs when the market corrects and the stock’s value declines. 14 Contrary to
Defendants’ suggestion, the Supreme Court did not establish a further
requirement that the purchaser sell the stock to prove loss causation. 15 The

       11  Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 338–39 (2005). While Dura
involved securities fraud rather than ERISA fiduciary duties, its logic still applies. See, e.g.,
Brown v. Medtronic, Inc., 628 F.3d 451, 456 (8th Cir. 2010) (“The Court in Dura did not face
a question of ERISA fiduciary duties. Regardless, the Court pronounced a rule that it
described as ‘pure logic.’ Presumably any such rule founded on basic concepts of loss and
injury and characterized as ‘pure logic’ should find broad application in ERISA, securities
law, and other contexts where plaintiffs describe their injuries in terms of stock price
changes.”) (internal citations omitted).
        12 In Dura, the complaint at issue alleged only that “‘[i]n reliance on the integrity of

the market, [the plaintiffs] . . . paid artificially inflated prices for Dura securities’ and the
plaintiffs suffered ‘damage[s]’ thereby.” 544 U.S. at 340.
        13 Id. at 342.
        14 Of course, selling a stock at a loss does not necessarily prove a causal connection,

since that loss could be based “not [on] the earlier misrepresentation, but changed economic
circumstances, changed investor expectations, new industry-specific or firm-specific facts,
conditions, or other events . . . .” Id. at 343.
        15 Id. at 346–47 (describing “judicial consensus” that “a person who ‘misrepresents the

financial condition of a corporation in order to sell its stock’ becomes liable to a relying
purchaser ‘for the loss’ the purchaser sustains ‘when the facts . . . become generally known’
and ‘as a result’ share value ‘depreciate[s].’” (quoting the Restatement (Second) of Torts §
548A, Comment b, at 107)); see also, e.g., Varghese v. China Shenghuo Pharm. Holdings, Inc.,
672 F. Supp. 2d 596, 611 (S.D.N.Y. 2009) (“[T]hat Class members have not yet sold their
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infirmity in Dura was the “complaint’s failure to claim that [defendant’s] share
price fell significantly after the truth became known.” 16
       Here, Martone alleged exactly that: he “purchased and held shares of
Whole Food’s stock . . . during the Class Period,” and “[w]hen the truth came
out” about the alleged overcharging scheme, “the stock price fell.” In doing so,
he alleged an injury-in-fact sufficient to establish his standing to sue.

                                             IV.

       ERISA “protects participants in voluntarily established, private sector
retirement plans . . . ‘by establishing standards of conduct, responsibility, and
obligation for fiduciaries of employee benefit plans.’” 17 It “provides that an
employer who sponsors an employee plan may also serve as a fiduciary of that
plan, and it imposes on the employer-fiduciary strict statutory duties,
including loyalty, prudence, and diversification.” 18 Companies may create
ESOPs like the Company Stock Fund, which are “designed to invest primarily
in qualifying employer securities.” 19
       There is an inevitable tension between an employer-fiduciary’s duty of
prudence and the use of a fund primarily to invest in the employer’s stock. 20 In
Fifth Third Bancorp v. Dudenhoeffer, the Supreme Court attempted to
navigate this tension and provide guidance on what a plaintiff must allege to

shares does not preclude a finding of loss causation.”); Ong ex rel. Ong v. Sears, Roebuck &
Co., 459 F. Supp. 2d 729, 743 (N.D. Ill. 2006) (“Dura held that a plaintiff must show economic
loss and causation; the Court nowhere stated that the loss must be realized through a sale.”).
       16 Id. at 347.
       17 Whitley v. BP, PLC, 838 F.3d 523, 526 (5th Cir. 2016) (quoting 29 U.S.C. § 1001(b)).
       18 Id. (internal quotation marks omitted).
       19 Id. (quoting 29 U.S.C. § 1107(d)(6)(A)).
       20 See Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2465 (2014) (“On the one

hand, ERISA itself subjects pension plan fiduciaries to a duty of prudence . . . . On the other
hand, Congress recognizes that ESOPs are ‘designed to invest primarily in’ the stock of the
participants’ employer, meaning they are not prudently diversified.”) (internal citations
omitted) (emphasis in original).
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adequately state a claim for breach of the duty of prudence by an ESOP
fiduciary on the basis of either public or inside information. With regard to a
claim based on nonpublic information, the Supreme Court held that:
       [t]o state a claim for breach of the duty of prudence on the basis of
       inside information, a plaintiff must 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. 21

       In Amgen, Inc. v. Harris, the Supreme Court clarified that a complaint
must allege “that a prudent fiduciary in the same position ‘could not have
concluded’ that the alternative action ‘would do more harm than good.’” 22 In
Whitley, we read these cases to say that “the plaintiff bears the significant
burden of proposing an alternative course of 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.” 23
       In his Amended Complaint, Martone suggests three alternative actions
that he claims meet the requirements of Dudenhoeffer and Whitley. First, he
asserts that Defendants could have “temporarily clos[ed] or fr[ozen] the
Company Stock Fund . . . until . . . Whole Foods stock again became a prudent
investment.” Second, he claims that Defendants could have “effectuated
corrective, public disclosures to cure the fraud . . . thereby making Whole Foods
stock . . . an accurately priced, prudent investment again.” Third, he suggests
that Defendants could have “divert[ed] some of [the] Company Stock Fund’s
holdings into a low-cost hedging product that would behave in a countercyclical
fashion vis-à-vis Whole Foods stock.”

       21   Id. at 2472.
       22   Amgen, Inc. v. Harris, 136 S. Ct. 758, 760 (2016) (quoting Dudenhoeffer, 134 S. Ct.
at 2463).
       23   Whitley, 838 F.3d at 529 (internal quotation marks omitted) (emphasis in original).
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                                              A.
       Martone suggested the first two alternatives—a temporary freeze or an
earlier public disclosure—in his original Complaint. Relying on Whitley, the
district court held that neither proposed action sufficed because “where both
alternatives proposed would make the stock price drop[,] a prudent fiduciary
could very easily conclude that such actions would do more harm than good.” 24
       In his Amended Complaint, Martone attempts to revitalize these
proposed alternatives and to distinguish this case from Whitley, alleging (1)
that defendants knew or should have known that “the longer a fraud goes on,
the more damage it does to investors,” and (2) that during the Class Period,
the Plan was a net purchaser of Whole Foods stock.
                                              1.
       First, Martone contends that Defendants should have known that “the
longer a fraud of a public company like Whole Foods persists, the harsher the
correction is likely to be when that fraud is finally revealed.” Thus, he argues
that they should have disclosed the alleged fraudulent conduct earlier to
reduce the damage. Martone bolsters this argument with a number of
statements about general economic principles, claiming that “in virtually every
fraud case, the longer the fraud persists, the harsher the correction tends to
be, usually because a prolonged fraud necessarily means that long-term
damage is also done to a fraudster’s reputation for trustworthiness.”

       24 In Whitley, the plaintiffs alleged that BP stock was “overvalued” because “BP had a
greater risk exposure to potential accidents than was known to the market.” Whitley, 838
F.3d at 529. The plaintiffs alleged two alternative actions that the fiduciaries could have
taken: (1) “disclosure of [accident risk] information to the public” and (2) “freezing trades of
BP stock.” Id. at 529. We noted that both of these proposed actions “would likely lower the
stock price,” and said that “it seems that a prudent fiduciary could very easily conclude that
such actions would do more harm than good.” Id. (emphasis in original).
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      The district court found this argument unpersuasive. It first noted that
this type of generalized allegation “is not the sort of specific factual allegation
that can distinguish this case, but an alleged economic reality.” Put another
way, if this principle applies “in virtually every fraud case” as Martone alleges,
then it would have been true in Whitley, where the Fifth Circuit “nevertheless
found that a prudent fiduciary could easily conclude that taking an action that
might expose fraudulent conduct might do more harm than good.” On that
basis, the district court considered itself bound by Whitley to reject this
argument.
      On appeal, Martone criticizes the district court for “ignoring” his
arguments regarding the potential for a slower recovery. He argues that the
greater risk of “reputational penalty” is a “critical factor[] that a prudent
fiduciary would have considered in deciding whether to effectuate corrective
disclosure.” Martone asserts that “Whole Foods’ stock price clearly suffered
such a penalty,” as evidenced by a “harsher price correction” and “a far longer
and slower recovery of the stock price thereafter.”
      Defendants argue that the allegations are too generic to meet the
requisite pleading standard, noting that Martone’s counsel has made
essentially the same argument for early disclosure in ERISA actions against
other companies in other jurisdictions. 25 Defendants further claim that Whole
Foods sought to properly and fully investigate the alleged fraud, and that a
prudent beneficiary “could have believed any of the alternatives would do more
harm to the fund than good because each would result in a public disclosure
depressing the stock price . . . before a full investigation had concluded.”

      25 See, e.g., Jander v. IBM, 272 F. Supp. 3d 444, 449–51 (S.D.N.Y. 2017); Price v.
Strianese, No. 17-cv-652, 2017 WL 4466614 at *7–8 (S.D.N.Y. Oct. 4, 2017); and Graham v.
Fearon, No. 16-cv-2366, 2017 WL 1113358 at *4– 5 (N.D. Ohio Mar. 24, 2017)).
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      We agree with the district court. If these “economic principles” are as
widely-known and generally-applicable as Martone contends, then they must
have applied with equal force in Whitley. Thus, these claims cannot be used to
get around Whitley’s reach.
                                         2.
      Martone also alleges that “[d]uring the Class Period, the Plan was a net
buyer of Whole Foods stock” with purchases outpacing sales by $34 million.
According to Martone, a prudent fiduciary should have realized that the Plan
was going to be a net purchaser of stock, and should have factored that into its
analysis about whether early disclosure would do more harm than good.
Martone intends this allegation to refute any claim that the Defendants’
actions could have been justified by the potential benefit of an overvalued stock
to those selling the stock. Because the Plan was a net purchaser, any potential
benefit to sellers would have been outweighed by harm to buyers.
      The district court found that “while this allegation is the sort of specific
factual allegation necessary to support a proposed alternative action, it still
falls short of meeting Plaintiff’s burden.” The court first noted that any time a
company discloses fraud, there is a risk that the market could overcorrect. It
then found that “[i]n light of Whitley, it would be difficult to conclude that any
alternative action that indisputably lowers the company’s stock price—
possibly even more than warranted—would be ‘so clearly beneficial’” that a
prudent fiduciary “could not conclude that it would be more likely to harm the
fund than to help it.”
      The court also noted that Martone’s argument benefitted from hindsight
because no one could have known, at the beginning of the Class Period,
whether the Plan would be a net purchaser or net seller of Whole Foods stock.
On appeal, Martone challenges this characterization. He argues that
fiduciaries “are, in fact, in the business of trying to predict the future” and that
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Defendants should have predicted that the Plan would be a net purchaser and
should have factored that into their analysis about when to disclose.
       Martone again fails to escape the requirements of Dudenhoeffer and
Whitley. While a prudent fiduciary might have looked at purchasing trends, no
fiduciary could have known with certainty that the Plan would be a net
purchaser over the course of the Class Period. And even if a prudent fiduciary
could have predicted that the Plan would be a net purchaser over time, that
fact alone does not show that an earlier disclosure would be “so clearly
beneficial” that no prudent fiduciary would consider it more likely to harm
than help. As Defendants rightly note, an unusually-timed disclosure risks
“spooking the market,” creating the potential for an outsized stock drop. A
prudent fiduciary could have concluded that such a risk outweighed the
potential benefits of an earlier disclosure, regardless of the Plan’s status as a
net purchaser.
                                              B.
       In the Amended Complaint, Martone also suggested a new alternative
action, claiming “[D]efendants could have used their authority as fiduciaries to
divert some of Company Stock Fund’s holdings into a low-cost hedging product
that would behave in a countercyclical fashion vis-à-vis Whole Foods stock.” 26

       26  In the Amended Complaint, Martone provides general details about how such a
hedging product would work, asserting:
        Available hedging products are structured as irrevocable trusts which pool
        funds together from a group of financially healthy and diverse companies for a
        fixed period of time. Applicants are thoroughly screened and vetted for the
        benefit and protection of other participating companies. The trust is managed
        by an independent third party. During a fixed time period, the pooled funds
        are invested in safely and securely, typically in United States Treasury
        securities. At the conclusion of the fixed period, the trust restores losses caused
        by declines in price of company stock.
Martone also alleges that the cost of participation would be “extremely low,” requiring annual
cash deposits of 1-2%, with the possibility of a significant refund if the trust is not required
to restore any losses in a given year.
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Martone asserts that such products have been available to ESOPs for several
years and impose “very few transaction costs.” Martone also claims that
“because such hedging products are not derivatives, an ESOP’s purchase of
them does not qualify as a disclosable event under the federal securities laws.”
The Amended Complaint does not cite any authorities that back up this claim.
       In deciding the motion to dismiss, the district court “accept[ed] as true .
. . that such a product exists as described.” It then concluded that:
       the only reasonable inference from [Martone’s] factual allegations
       regarding the hedging product is that a prudent fiduciary could
       reasonably conclude that investing in such a product would do
       more harm than good, either because it would lead to disclosure of
       the reason for the hedge—the alleged overpricing scheme—or, at
       the least, public knowledge that the Company faced a substantial
       risk, and in either case risk a stock price drop in the future.

       The court reached this conclusion after looking at the ERISA statute,
which requires that notice be given to plan participants following a “qualified
change in investment options” 27 and the Investment Committee Charter. The
district court noted that Martone “wholly fails to address why a reallocation of
the Fund from an investment solely in the company’s stock to an investment
including both the company’s stock and the hedging product described in the
amended complaint would not qualify as a ‘qualified change in investment
options.’” While the district court did not decide that notice would be required
as a matter of law (because of remaining questions about how defendants could
obtain such a product), it found that a prudent fiduciary “could conclude” that
the proposed course of action, as alleged in the Amended Complaint, “would

       27The statute defines a qualified change in investment options to include:
       a change in the investment options . . . under which . . . the account of the
       participant or beneficiary is reallocated among one or more remaining or new
       investment options which are offered in lieu of one or more investment options
       offered immediately prior to the effective date of the change . . . .
29 U.S.C. § 1104(c)(4)(B)(i).
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require some sort of disclosure to Plan participants and risk causing a stock
drop.” 28 Thus, it concluded that Martone “failed to carry his burden of showing
a plausible alternative course of action,” and granted the motion to dismiss.
       Martone argues on appeal that the district court erred in reaching this
conclusion because it should have drawn all reasonable inferences in his favor
at the motion to dismiss stage, and it “could just as easily have inferred” that
a prudent fiduciary would not believe that he needed to disclose the purchase
of a hedging product. Martone offers no explanation of how or why a fiduciary
would reach that conclusion.
       At the motion to dismiss stage, the court must accept all of Martone’s
factual allegations as true; however, this “tenet . . . is inapplicable to legal
conclusions.” 29 Whether a hedging product must be disclosed under securities
laws is a legal question, and thus the court is not bound to accept Martone’s
claim that such a product need not be disclosed. It is difficult to assess the
answer to this question without more details about the alleged hedging
product. Because the Amended Complaint offers no explanation for why the
hedging product would not need to be disclosed, Martone has at best alleged
the existence of a hedging product which may or may not need disclosure. A
prudent fiduciary could conclude that such a product would at least risk a
disclosure, thus rendering it more likely to harm the fund than to help it.
Accordingly, the hedging product—as alleged—is not a plausible alternative
action sufficient to overcome the requirements of Dudenhoeffer and Whitley. 30

       28 “In other words, while it is conceivable to the Court that there may be some way for
Defendants to have purchased a product like the one described in Plaintiff’s amended
complaint without sending a notice to plan participants, based on the information the Court
has about the proposed hedge from the amended complaint, it is simply not plausible.”
       29 Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555).
       30 Defendants also argued that the undisclosed purchase of a hedging product could

violate securities laws. Because we ultimately find that a prudent fiduciary could conclude
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                                          V.
      Because Martone has failed to “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,” we affirm the
district court’s dismissal of his claims.

that pursuit of a hedging product could do more harm than good, we need not address this
issue.
                                          15