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Johnson & Johnson Stock Drop Case

This case has been quite iterative, with plaintiffs amending original claims of fiduciary breach due to an artificially inflated stock price resulting from management’s concealment of asbestos in its talc-based products. The stock price declined dramatically once news of this became public, negatively affecting participant balances in the Employee Stock Ownership Plan (ESOP). The standard for such stock drop claims has been established in similar cases. ‘”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.”’ The plaintiffs’ most recent argument to support their claim given this requirement involves the unitization of the stock funds. They allege that fiduciaries could have increased the cash buffer in the funds rather than continue new stock purchases until “such time as the stock was not artificially inflated.”’ The argument assumes that disclosure under federal securities laws would not have been required, which would have potentially signaled some negative news, and consequently potential devaluation of the stock. Participants would have therefore spared further harm at that point. This argument, however, proved implausible, as the judge assessed that increasing the cash buffer in the stock funds would in fact trigger a disclosure under ERISA and federal securities laws. The public at large would have been exposed to this action, and its basis, the artificially inflated stock price and/or the disclosure that talc-based products contained asbestos, which would have resulted in a decrease in the stock price, doing more harm than good. Further, the judge cited that public admission of the decades long asbestos contamination would have led to “significant reputational harm” and thus, a further decline in stock value. Plaintiffs have been granted one last chance to amend their complaint.

www.napa-net.org; March 15, 2021.