# Nelson v. IPALCO Enterprises, Inc.

> District Court, S.D. Indiana · March 28, 2007 · 480 F. Supp. 2d 1061

URL: https://www.frixlaw.com/law-library/cases/2487306

## Case

- **Full name:** Joseph J. NELSON and Michael Wycoff, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs, v. IPALCO ENTERPRISES, INC., Employees’ Pension Committee for Employees’ Thrift Plan of Indianapolis Power & Light Company, John R. Hodowal, Ramon L. Humke, Bryan G. Tabler, Max Califar, Steve J. Plunkett, and Tom A. Steiner, Defendants
- **Court:** District Court, S.D. Indiana
- **Decided:** March 28, 2007
- **Citations:** 480 F. Supp. 2d 1061; 40 Employee Benefits Cas. (BNA) 1983; 2007 U.S. Dist. LEXIS 23318; 2007 WL 936745
- **Precedential status:** Published
- **Opinion:** Opinion by Hamilton
- **Judges:** Hamilton
- **Cited by:** 5 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2487306

## How later opinions describe it (automated extraction)

- concluding that fiduciaries did not breach duty of prudence although they never formally considered divestiture of company stock or sought independent analysis

## Opinion text

FINDINGS OF FACT AND CONCLUSIONS OF LAW
HAMILTON, District Judge.
Table of Contents
Introduction...................................................................1063
Findings of Fact................................................................1064
I.The Parties.............................................................1064
II.Thrift Plan History and the 1995 and 1997 Amendments......................1066
A. Investor Choices.....................................................1066
B. Investor Education Efforts............................................1067
C. Plan Terms on Investment Choices.....................................1069
III. IPALCO in 1999.........................................................1069
IV. Exploration of a “Transforming Transaction”................................1073
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V. Negotiations with AES...................................................1075
VI. After the Announcement..................................................1078
VII. Defendants’ Evaluation of AES and IPALCO................................1080
VIII. Plaintiffs’View of AES...................................................1082
IX. The Individual Defendants’ Interests in the AES Deal........................1085
A. Termination Benefit Agreements.......................................1085
B. Stock Sales by Defendants and Other IPALCO Insiders..................1087
C. Disclosure of IPALCO Insider Transactions.............................1090
X. Disclosures to Thrift Plan Participants......................................1092
XI. Financial and Investment Advice...........................................1092
A. The Country Club Advice Session for Executives.........................1092
B. Merrill Lynch Advisers for Plaintiffs ...................................1093
XII. Pension Committee Considerations.........................................1093
XIII. The Closing and the Individual Defendants’ Terminations.....................1094
Conclusions of Law.............................................................1095
I. Fiduciary Duties Under ERISA...........................................1095
II. Allowing Plaintiffs to Invest in IPALCO and then AES.......................1096
III. Wrongful Promotion and a Duty to Disclose.................................1103
IV. Conversion of the Employer Match.........................................1108
Conclusion.....................................................................1111
Introduction
The liability issues were tried to the court in this class action alleging breaches of fiduciary duty under Section 404 of the federal Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1104 . The court now states its findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure. Substance rather than the court’s label shall govern whether a matter is treated as a finding of fact or conclusion of law.
1
Defendant IPALCO Enterprises, Inc. is the parent company of the Indianapolis Power and Light Company, a public utility that generates and distributes electricity in the Indianapolis area. The AES Corporation acquired IPALCO in a stock-for-stock transaction that closed on March 27,
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2001. IPALCO became a wholly owned subsidiary of AES, and all IPALCO shareholders became shareholders of AES. In the year and a half that followed the March 27, 2001 closing, AES stock lost more than 90 percent of its market value. Ex. 89.
Plaintiffs are a class consisting of all plan participants and beneficiaries in a Section 401(k) plan known as the Employees’ Thrift Plan of Indianapolis Power & Light Company who held a beneficial interest in IPALCO stock on or about March 27, 2001 that was exchanged for stock in The AES Corporation. The Thrift Plan itself is also a plaintiff. The Thrift Plan allowed participants to make their own decisions about how to invest their own contributions, though employer matching contributions were always made and held as IPALCO stock.
When the IPALCO—AES deal closed on March 27, 2001, the Thrift Plan held total assets of $228 million. Approximately $145 million, or about 64 percent of the Thrift Plan assets, was invested in IPAL-CO stock that was exchanged for AES stock. As AES stock value declined in the months after AES bought IPALCO, plaintiffs’ accounts with the Thrift Plan experienced dramatic drops in value. Plaintiffs allege that the defendants—IPALCO itself and the former IPALCO executives who were responsible for the Thrift Plan before the AES deal closed—violated their fiduciary duties under ERISA by failing to remove IPALCO and then AES as investment options, by promoting continued investment in IPALCO and AES, by failing to disclose to Plan participants (more specifically than public disclosures required under federal securities laws) the individual defendants’ personal sales of IPALCO stock, and by allowing the conversion of Plan assets from IPALCO stock to AES stock.
As explained below, the court finds that defendants did not breach their fiduciary duties under ERISA. Without the benefit of hindsight, the AES transaction and investments in AES stock appeared reasonable, prudent, and consistent with the Thrift Plan itself at the time. There is no evidence at all that the individual defendants had any negative inside information about AES or the prospects of its stock. Defendants did not give investment advice themselves. They also made competent and appropriate investment advice readily available to Thrift Plan participants. The individual defendants fully complied with their obligations under federal securities law to disclose their own sales of IPALCO stock and the risks associated with investments in AES. ERISA did not require the defendants to make any additional and special disclosures only to the Thrift Plan participants. Accordingly, the court is entering final judgment in favor of defendants.
Findings of Fact
I.
The Parties
In 2000, defendant IPALCO Enterprises, Inc. (“IPALCO”) was a publicly traded holding company whose principal asset was its ownership of Indianapolis Power & Light Company, a public utility that generates and distributes electric power in the Indianapolis area.
In 1960, before the establishment of IP-ALCO as a holding company, Indianapolis Power & Light Company established the Employees’ Thrift Plan of Indianapolis Power & Light Company (“the Thrift Plan” or “the Plan”). The Thrift Plan was designed to supplement the traditional defined-benefit retirement plan that the company operated. The Plan enabled employees to make voluntary investments. The employer matched employee contributions up to four percent of salary. The Plan was designed so that employer matches
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were always made in the form of stock in the company. Employees could choose how to invest their own contributions.
2
The Plan was treated as an Eligible Individual Account Plan (“EIAP”) under ERISA, which allowed it to invest more than 10 percent of its assets in employer stock. See 29 U.S.C. § 1104 (a)(2). The Plan fiduciaries and administrators did not make specific decisions about how to invest the employee contributions. The Plan administrator and IPALCO as the Plan sponsor selected the available menu options for employees’ investment choices.
The Pension Committee:
Indianapolis Power
&
Light Company has been the sponsor of the Thrift Plan. The named administrator of the Thrift Plan was the Employees’ Pension Committee for Employees’ Thrift Plan of Indianapolis Power & Light Company, known here as “the Pension Committee.” During the time leading up to the March 27, 2001 closing of the AES deal, the Pension Committee members were the individual defendants in this case: IPALCO chief executive officer John R. Hodowal, IPALCO chief operating officer Ramon L. Humke, Pension Committee chairman Bryan G. Tabler (also vice president, secretary, and general counsel), Max Califar (vice president of human resources), Stephen J. Plunkett (controller), and Tom A. Steiner (also a vice president).
The Plaintiffs:
The court certified a plaintiff class in this ease consisting of the Thrift Plan itself and all Thrift Plan participants and beneficiaries who held a beneficial interest in IPALCO stock on or about March 27, 2001 that was exchanged for AES stock. The named class representatives are Joseph J. Nelson and Michael Wycoff.
Mr. Nelson worked for Indianapolis Power & Light for 31 years. After the AES purchase, he lost his job in 2002 when he was 57 years old. He worked in the coal and ash department, primarily as a manager, doing and supervising some of the most difficult work at Indianapolis Power & Light. Mr. Nelson joined the Thrift Plan early in his career with Indianapolis Power
&
Light. He invested over the years, steadily increasing the percentage he invested. By the time he retired, he was investing 13 percent of his pay in the Thrift Plan. He also benefited throughout his career from the employer match of four percent of his pay. In March 27, 2001, his Thrift Plan account was worth approximately $300,000. His account was invested 100 percent in IPAL-CO stock that converted to AES stock. By September 2002, his AES stock in the Thrift Plan had dropped in value to $17,185. At the time of trial, its value had climbed back up to more than $100,000. At the time of trial, his account was still all invested in AES stock. Tr. 293.
Mr. Wycoff worked for Indianapolis Power and Light as a computer operator, programmer, and analyst, and then as a payroll team leader for 22 years. He left the company in November 2000 after IP-ALCO shareholders approved the AES deal. His job included responsibility for keeping records for the Thrift Plan and producing the individual account statements for Thrift Plan participants and beneficiaries. He also joined the Thrift Plan as soon as he was eligible and increased his contributions over the years from four percent to ten percent. He originally invested all of his contributions in IPALCO stock but diversified several years before the AES deal.
When Mr. Wycoff learned of the proposed sale, he immediately began researching AES and noticed the recent in
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creases in its stock price. Tr. 318. The more he learned about AES, the less he liked the deal. Mr. Wycoff became an outspoken critic of the proposed deal. Before the deal closed, he sold all the IPAL-CO stock that he controlled in his Thrift Plan account. He retained about $5,500 in IPALCO stock, which was the employer match required to be held in the form of employer stock. That remaining IPALCO stock then became AES stock when the deal closed. He could have liquidated even the employer-match stock when he left IPALCO in November 2000, but he did not.
Overall, the plaintiff class consists of approximately 1800 individual members. Their Thrift Plan investments in IPALCO were valued at approximately $145 million at the time of the closing on March 27, 2001 when they converted to investments in AES.
II.
Thrift Plan History and the 1995 and 1997 Amendments
A.
Investor Choices
The Thrift Plan originally offered employees only two choices for investments: IPALCO stock and U.S. government bonds. The employer matching contributions were always made in the form of IPALCO stock. In the mid-1990s, most employee investments were in IPALCO stock. IPALCO encouraged such investments. Plaintiffs offered persuasive evidence that there was an informal culture within IPALCO and among employees to encourage both participation in the Thrift Plan in general and investments in IPAL-CO stock in particular.
IPALCO’s separate defined-benefit retirement plan did not invest in IPALCO stock, at least at any time relevant to this case. That practice avoided one of the most dangerous pitfalls for employees— having both their employment and all of their retirement benefits depend on the success of just one company. See Tr. 1000 (Malkiel). IPALCO made the Thrift Plan available to employees on a voluntary basis to supplement their retirement benefits through regular saving and investing, especially in the company. As a matter of plan design, at least prior to Thrift Plan amendments in 1995 and 1997, there was always a significant investment risk for employees in having their Thrift Plan investments concentrated in the stock of their employer.
In 1995 and 1997, IPALCO agreed with its principal employee unions to modify the Thrift Plan to expand the investment options available to employees. Through a contract with Merrill Lynch, employees could direct their investments as of 2000 among nine different investment vehicles with a wide range of strategies and risks. The options included, from most conservative to most risky, one cash-equivalent fund, two bond/fixed income funds, one blended or “allocation” fund, and four equity mutual funds. The ninth option, the one with the highest risk, was IPALCO stock. At all times relevant to this case, Thrift Plan participants were entitled to shift their investments among the different funds every business day, without restriction. Ex. 512 at 022384.
3
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B.
Investor Education Efforts
After IPALCO amended the terms of the Thrift Plan in 1995 and 1997 to expand the investment options, the Pension Committee arranged a series of meetings for all Thrift Plan participants. Each meeting was conducted by a member of the Pension Committee. Representatives of Merrill Lynch explained the investment options to the participants. Merrill Lynch provided detailed brochures that explained the basics of investing and investment choices to Plan participants. One of the clearest messages from both the oral presentations at those meetings and the written materials was the need to diversify investments. The program guide book for Thrift Plan participants described IPAL-CO stock as the investment that “generally carries more risk” than the mutual funds offered through the Plan. Ex. 512 at 022376.
Exhibit 453 is an enrollment kit for the Thrift Plan in 1995 and is another example of the education efforts. The book included “Five Principles of Investing.” The third was the uncontroversial advice: “Invest wisely.” The brochure explained that investing wisely meant diversifying investments to spread risk, as well as allocating investments among different investment vehicles depending on age and other individual factors. Ex. 453 at 48842, 48846, 48861. The Merrill Lynch materials taught that each individual would need to make individual decisions about how best to allocate investments among the different choices, depending on individual circumstances.
The brochure illustrated the need to diversify with examples of three hypothetical investors’ choices at different ages and stages of their careers. The most aggressive suggested profile was for a younger person with a portfolio weighted heavily toward equity funds for long-term growth. That highest-risk profile included only 20 percent of the investments in IPALCO stock. The percentages for the two profiles of older, more conservative investors were 10 and 5 percent for IPALCO stock. Ex. 453 at 48846. The Merrill Lynch materials put IPALCO stock in the highest risk category of all the available choices. Ex. 453 at 48844. For the many Thrift Plan participants who chose to invest heavily in IPALCO stock, those risks produced high rewards in the latter half of the 1990s. The annual total returns for Thrift Plan investments in IPALCO stock were as follows: +35.28 percent in 1995, +13.30 percent in 1996, + 58.49 percent in 1997, +35.27 percent in 1998 and -36.55 percent in 1999. Ex. 162. Even after taking into account the sharp drop in 1999, the five years still produced an average annual return of + 15.81 percent.
Id.
Investor education continued after the 1995 and 1997 Thrift Plan amendments. Merrill Lynch representatives were available to provide advice at no charge to Thrift Plan participants. (Plaintiff Wycoff met with a Merrill Lynch adviser at the IPL headquarters at no charge.) The Merrill Lynch advisers’ telephone number was even listed in the IPL internal phone book. Merrill Lynch representatives continued to provide educational materials for Thrift Plan participants on a periodic basis. Exhibit 158 is a 1999 set of slides for Thrift Plan participants about their investment choices. The slides also emphasized the need to diversify risk and allocate investments among different choices. IP-ALCO stock was identified as
the highest risk
among the investment choices available through the Plan. Ex. 158 at 57426. Exhibit 558 is a similar example from some time after March 31, 2000. This exhibit included the same information about the importance of diversifying investments and the risk of a heavy investment in IPALCO stock. See Ex. 558 at
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40406 (putting IPALCO stock in the riskiest category of available investments).
The message on the need to diversify had some effect, but it was limited. Some Plan participants obviously heard the message. By way of example, plaintiff Wycoff remembered attending the Merrill Lynch meetings about the changes to the Thrift Plan. He remembered that the speaker said: “you need to diversify, diversify, diversify. That’s one of his big war whoops.” Tr. 315. Mr. Wycoff met with the Merrill Lynch adviser and discussed both his Thrift Plan account and other assets that he and his wife owned. He transferred all IPALCO shares in his account (other than employer matching contributions) to other types of investments. He recalled that he lost money on the diversified investments, Tr. 317, which was during years that IPALCO stock was appreciating substantially in value. See Ex. 162.
Plaintiff Nelson was aware that he could shift his Thrift Plan investments to other options in 1995. He recalled attending one of the original Merrill Lynch meetings and being told about investments with different degrees of risk and the need to diversify. Tr. 287. Mr. Nelson never changed his investments in IPALCO stock. His account remained 100 percent IPALCO and then AES stock, even up through the trial.
4
Looking beyond the two named plaintiffs, the record shows a modest degree of diversification by plan participants away from IPALCO stock, but far less diversification than any competent adviser was recommending or would recommend. At the end of 1999, the total value of the Thrift Plan assets was $205.9 million, of which $158 million or 77 percent was invested in IPALCO stock. Ex. 71 at 215. At the end of 2000, the total value of Thrift Plan assets was $262.3 million, of which $199.3 million or 76 percent was invested in IPALCO stock.
Id.
By March 2001, the total value of the Thrift Plan was $228.1 million. The total value of AES common stock in the Thrift Plan at the same time was $145.4 million, or 64 percent. Ex. 1012.
Plaintiffs have argued that inertia and corporate culture play significant roles in individual investment decisions, both in general and in the Thrift Plan. The basis for the opinion of plaintiffs’ expert witness on this subject, Mr. John Guy, was quite thin, but the results of the Merrill Lynch educational efforts are consistent with the plaintiffs’ view. The employees in this case developed a degree of loyalty to their employer that was expressed in their investment choices. Management encouraged that loyalty and the investments in the company. Over the years, IPALCO stock was generally very profitable for the employees. Employees did not shift away from established habits. At the same time, it is beyond dispute that Plan participants had the power to make their own decisions about their investments and accounts. The court finds that IPALCO and the Pension Committee made reasonable investment choices available to participants and made reasonable efforts to inform participants of their rights and to provide prudent advice about how to use that power. The choices, apart from the new employer match, belonged to the participants.
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C.
Plan Terms on Investment Choices
One central issue here is whether the Pension Committee could have and should have acted in 2000 or early 2001 to remove IPALCO stock as an investment option for Thrift Plan participants.
As a matter of plan design, the Thrift Plan established as “available investment options” Funds A through H. Exhibit 94 (the Plan) § 305.10. The Thrift Plan expressly provided: “Employer Allocations for Participants shall be Designated Fund B Contributions and, thus, invested entirely in Fund B.” Plan § 305.30. Fund B consisted of “Common Stock,” which was defined as the stock of IPALCO or any successor. Plan § 301.170 & § 101.190. The Plan further provided that “Designated Fund B
Contributions”—ie.,
the “new employer match”—were “required to be held in Fund B at all times until distribution.” Plan § 301.320.
The Thrift Plan also provided: “Without the need of formal amendment and subject to any rules and conditions set forth in the Thrift Plan, the Committee may modify the available investment Funds.” Plan § 305.10. The very next sentence provided: “Notwithstanding anything contained in this Subsection to the contrary, the Funds shall be subject to the other special rules provided in Subsections 305.30 and 305.40.” In turn, Section 305.30 contained the directive: “Employer Allocations for Participants shall be Designated Fund B Contributions and, thus, invested entirely in Fund B.” Section 305.40(a)(i) provided: “Designated Fund B Contributions may not be shifted from Fund B.” The Thrift Plan could not reasonably have been clearer in requiring originally that the employer’s matching contributions be invested in IPALCO common stock, and in requiring that those investments be held in the employer’s stock until distribution. Those original requirements in the Plan itself did not violate ERISA.
Plaintiffs contend that Section 305.10 of the Plan still would have allowed the Pension Committee to remove “Fund B” as an option for the employees’ own contributions. The court is not persuaded that plaintiffs are correct on this issue. The Plan expressly required that employer contributions be kept in the form of “Fund B” as IPALCO stock. The Pension Committee would have violated the Plan terms if it had tried to eliminate or redefine Fund B. Although the Plan language did not expressly require that Fund B remain available for employee contributions, the Plan clearly assumed that it would. If the Pension Committee had acted on its own to eliminate Fund B as an available choice for employee contributions, and if the stock had then increased significantly in price, the Pension Committee members no doubt would have been accused of having violated their fiduciary duties by violating the terms of the Plan that assumed Fund B would be available for employee contributions. The discretion given to the Pension Committee certainly included choices from among different mutual funds and other investment vehicles, but it did not include the ability to prohibit employee investments in employer stock.
III.
IPALCO in 1999
The AES transaction and the disputes in this case must be understood in light of the strengths, weaknesses, prospects, and risks of IPALCO before the discussions that led toward the transaction. The evidence about IPALCO echoes Dickens: It was the best of times (in plaintiffs’ view), it was the worst of times (in defendants’ view). The court will try to present an objective view.
IPALCO and its corporate predecessors had been independent throughout their history. The principal asset had always been the electric public utility in India
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napolis. Its service area was already fairly densely developed with industrial, commercial, and residential customers for IPALCO, with limited opportunity for significant growth at the retail level for supplying electricity. Demand for its retail electricity was growing approximately three percent per year. The small service area was also surrounded completely by another public utility, one that IPAL-CO had tried unsuccessfully to acquire in a hostile takeover bid in the early 1990s. See Tr. 703-04 (Holstein), 805 (Humke). IPALCO generated the vast majority of its power by burning high-sulfur coal, which was a cheap source of energy. IP-ALCO also had not made any disastrous investments in nuclear power generation in the 1970s and 1980s. As a result of all those factors, IPALCO could generate and distribute electric power at low cost.
Within its industry, IPALCO was relatively small, well-managed, and profitable. See Tr. 377-79 (plaintiffs expert Guy, also referring to “this jewel of a small company”). Its market capitalization for its common stock was in the neighborhood of $2 billion. In 1998, the company was recognized as the “Number One” electric utility in the United States in terms of total shareholder return from each utility’s date of founding. Tr. 125. At the same time, IPALCO had limited opportunities for growth, whether measured in terms of gross revenues or earnings. See Tr. 799 (Humke), 617-18 (Tabler).
The IPALCO board of directors had fifteen members. Thirteen were independent outside directors with broad experience and success in a variety of industries. Only two directors were inside officers, defendants CEO Hodowal and COO Humke. The evidence showed that the directors had a distinct preference for keeping IPALCO independent. In early 2000, the directors were skeptical, and even resistant, toward the idea of a transaction that would lead to the company’s acquisition. See Tr. 137 (Hodowal), 624-25 (Tabler), 839^2 (Humke).
5
The CEO of IPALCO was defendant John Hodowal. He had worked for IPAL-CO since 1968 and had been CEO since 1989. In late 1998, Hodowal told the board that he was thinking of taking early retirement in 2000, when he would turn 55 years old. He also advised the board that COO Ray Humke, who was considerably older than Hodowal, was also thinking of retiring. Humke had joined IPALCO in 1990 after a long career in the telephone industry, one that straddled the transition from the old days of the regulated “Ma Bell” monopoly through the court-ordered break-up of AT & T and into the restructured world of competitive telephone services. Hodowal and the board began considering possible plans for new leadership of the company.
Historically, IPALCO stock had been a “widows and orphans” stock, one that paid regular dividends and maintained a stable value with relatively steady and modest growth over time. That changed in 1997. In that year, IPALCO cut its dividend by one-third and borrowed money for a stock repurchase program. Investors who preferred a steadier and higher dividend could sell if they wished to do so. Both those
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who held their stock and those who sold profited, at least through the end of 1998. Tr. 123-25.
The year of 1999 was very different. The value of IPALCO stock fell nearly 40 percent in that one year. See Ex. 90. That dramatic decline, before what became a much wider stock market drop in 2000 and 2001, is difficult to reconcile with plaintiffs’ description of IPALCO as a low risk “widows and orphans” stock as of 2000, when the decisions at issue here were made.
During late 1999, Hodowal put his retirement plans on hold, at least temporarily. He and the board began efforts to consider strategic options for the company to preserve and restore stock value. Those deliberations eventually led to the AES purchase of IPALCO (and to Hodowal’s retirement).
In the course of those deliberations, the IPALCO board of directors and officers heard presentations from experts both inside and outside the company on changes in the electric industry and the challenges the company faced. The two principal developments in the industry were consolidation and the prospect of deregulation, with concerns about environmental regulatory changes placing a close third. All three posed significant threats to the relatively stable and profitable status quo at IPAL-CO.
Indush'y Consolidation:
The electric industry was consolidating at an increasing pace in 1999. The IPALCO board heard that message from outside investment bankers and from inside executives. That continued consolidation meant that if IP-ALCO remained independent and did not grow by acquisition or other new investment, its relative size would shrink. Ex. 160 at 057721; Tr. 732 (Holstein). IPAL-CO’s options for major acquisitions were quite limited.
6
Deregulation:
The term “deregulation” can mean a number of different things. In 1999 and 2000 in the electric industry, it meant legislation that would expand competition at both the wholesale and retail levels of the business. At the retail level, the prospect was that state regulatory agencies would no longer directly control retail prices, and retail customers would choose from among competing electricity providers. One key dimension of a deregulated retail system is the price that an incumbent local electric company charges competitors for using its distribution network to reach their retail customers. No realistic plans for competition in retail electricity included plans to duplicate the local “last mile” of distribution networks that connect nearly every home and business in the United States to one integrated “grid.” Instead, plans to deregulate retail electricity service generally require the existing retail provider to allow other companies to sell electricity to the existing provider’s customers using the existing provider’s wires. One critical feature of those arrangements is whether the existing provider is allowed to charge rates that allow it to recover its so-called “stranded” costs—investments it has already made in its distribution network and generating capacity.
More than half a decade later, after the California deregulation debacle and the
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collapse of the Enron Corporation, hindsight makes it easy to minimize both the prospect of deregulation as it appeared in 1999 and 2000 and the risks it posed then for IPALCO. The board heard predictions that deregulation could produce a reduction of 25 to 30 percent in prices for electricity. These predictions were based on evidence that included experience in the United Kingdom and Australia. IPAL-CO’s chief financial officer John Brehm told the board that a decline of half that amount, 15 percent, would eliminate half of IPALCO’s net income, which would have devastating and long-term effects on the stock price. Tr. 696-97. Surrounding states had adopted some form of deregulation legislation, and Indiana had considered it. IPALCO was also concerned that it would face competitors who would receive unfair regulatory advantages under deregulation legislation.
This case is not the occasion for a detailed review of the conflicts within the electric utility industry over stranded cost recovery, but a few basics are important. What was billed as “deregulation” in the energy industry in 1999 and 2000 often seemed quite profitable for many electric companies, provided the legislation allowed them to recover their stranded
costs—i.e.,
their investments in less productive or non-productive assets. From IPALCO’s perspective, those features of deregulation schemes had the perverse effect of rewarding companies that had made poor investments in expensive generating plants and distribution networks, while punishing more prudent companies like IPALCO that had not.
Plaintiffs have argued that deregulation was (a) not imminent and (b) not a genuine threat to IPALCO. That argument benefits from hindsight, especially after the California debacle and the collapse of Enron. Plaintiffs’ argument does not accurately reflect either the issues the IP-ALCO board faced or the threat as it appeared in 1999-2000.
7
The IPALCO board was not trying to predict whether deregulation was likely to occur within the next one to two years. It was trying to decide whether to adhere to the company’s established strategy of remaining independent in the face of revolutionary changes in the industry. Based on the information available to it at the time, the board reasonably perceived a significant risk that IPALCO would be marginalized in the industry as a small company that no one wanted, so that shareholder value could decline sharply and permanently. Also, while many electric companies had managed to influence state deregulation legislation in ways that were profitable, see Ex. 154 at 001831, that pattern did not appear likely to help IPALCO, which did not need any large-scale recovery of stranded costs. Plaintiffs also pointed out correctly that IPALCO was trying to support deregulation legislation. Those efforts are best understood as defensive efforts to minimize the potential harm and not to be limited to a passive role on the sidelines as deregulation proceeded.
Environmental Concerns:
IPALCO produced virtually all the power it generated by burning high-sulfur coal. Most of that high-sulfur coal was from Indiana or other nearby locations, and it had been a relatively low cost source of fuel. What is
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meant by environmental concerns here is the prospect that enhanced restrictions on air pollution resulting from high-sulfur coal would cause increases in IPALCO’s costs that it could not expect to recover entirely from its customers, especially if deregulation and competition forced electricity prices lower. For the board considering the company’s long-term strategies, there was a clear risk that the company’s nearly total dependence on high-sulfur coal would expose it to risks that other companies in the industry would not face, at least to the same degree.
From all of this evidence, the court finds that in 1999 and 2000, the IPALCO board could not simply assume that the company’s future would resemble its past. Nor could its shareholders, including the plaintiffs. What had seemed for many years like a fairly safe and profitable “widows and orphans” stock had become riskier in the face of these changes and potential changes in the electric industry. In fact, the court finds that the IPALCO directors reasonably feared that if they did nothing, changes in the industry could cause a sudden and irreversible loss of shareholder value, dropping from a range near $20 per share to as low as $4 to $6 per share. See Tr. 157 (Hodowal) (describing board discussion).
IV.
Exploration of a ‘‘Transforming Transaction”
In the autumn of 1999, IPALCO management presented the IPALCO board with information about the company’s recent stock performance, which had been painful, and these changes and potential changes in the industry and the strategic alternatives open to the company. See Ex. 159 (board minutes from Oct. 26, 1999); Ex. 160 (board minutes from Nov. 30,1999).
By the time of the February 29, 2000 board meeting, Hodowal and IPALCO management had set the table for the board to consider the possibility of seeking a buyer for the company. The board heard additional presentations on IPAL-CO’s poor stock performance and the poor performance of electric company stocks generally. CFO Brehm evaluated the prospects that IPALCO’s stock price might return to its record high of about $28, which had been reached at the end of 1998. He advised that it was possible, but only if everything went perfectly and if the company were not hurt by risks beyond its control. Ex. 164 at 016636-37; Tr. 617 (Tabler), 133 (Hodowal). The factors that could prevent the stock price from returning to the $28 high included declining international power prices (especially after deregulation), improved technology allowing energy consumers to receive real-time price signals to manage their demand better, but with the effect of reduced value of electrical generating assets, and tighter environmental regulations.
At the same meeting, the board heard from an investment banking firm then known as Warburg Dillon Reed (“War-burg”). The Warburg bankers generally agreed with earlier reports by Michael Holstein (IPALCO vice president for strategic business initiatives) and CFO Brehm about the consolidation in the industry. Most important, Warburg warned that small to medium-size companies such as IPALCO “with regional or niche strategies are being bought out or marginalized into distressed merchandise.” Ex. 164 at 016639.
This prospect of “marginalization” and becoming “distressed merchandise” played a decisive role in the IPALCO board’s decisions in 2000. Board members Ben Lytle and Joseph Barnette had both been CEOs in Indiana in industries that had recently undergone their own processes of consolidation—Lytle in health insurance
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and Barnette in banking. Lytle advised the board that marginalization could involve “a huge loss of value very quickly.” Ex. 164 at 016638. Barnette commented on the fate of regional bankers: “early in the process, bankers’ worst fear was that they would be acquired; it soon changed to the fear that no one would want them.”
Id.
Translated to IPALCO’s situation in early 2000, the board faced the prospect that changes in the consolidating electrical industry would produce a sudden and irreversible loss of shareholder value. The board could not close its eyes to that risk.
The IPALCO board’s strategic discussions covered several possibilities, including entering into non-regulated businesses with greater profit potential, adding generating power, buying other businesses, and combining with a larger and more diverse company. Tr. 127-28 (Hodowal), 804-06 (Humke). None of these options appeared better than the prospect of what was euphemistically described as a “transforming transaction” with a buyer.
At the February 29, 2000 meeting, the board agreed to hire Warburg to advise on a potential transaction. Plaintiffs pointed out that Warburg’s views, despite its expertise, should be viewed skeptically because of the fee Warburg stood to earn through its work on the transaction. At the suggestion of IPALCO board member Mitchell Daniels,
8
in March the board directed management to engage another investment bank with expertise in the electric industry to provide a second opinion that could not be influenced by any financial incentive that depended on the board’s ultimate choice about strategy. Several directors suggested engaging Goldman Sachs for this purpose, and the company did so. See Ex. 165 at 16646. In late April, Goldman Sachs essentially agreed with Warburg about the challenges IPAL-CO faced and supported the basic strategy of looking for a buyer. See Ex. 167. Otherwise, shareholders faced high risks of an irretrievable decline in shareholder value. See Tr. 73 (Hodowal), 623 (Tabler), 811-13 (Humke), Ex. 951 at 74 (Daniels).
The board met again on March 28, 2000 and addressed the strategic issues. Ex. 165. Warburg bankers reported on their contacts with potential buyers. At that meeting, Hodowal stated that he would not be interested in leading a leveraged buyout of the company. Also, in response to a concern raised by at least one director in light of the cash benefits to Hodowal and Humke from a change in control, Hodowal and Humke reported that they had given signed and undated letters of resignation to the chairman of the board’s compensation committee and the company’s general counsel. Ex. 165 at 16644; Tr. 596-97 (Tabler), 755-56 (Humke). Hodowal also told the board that he was willing to stay at the company and to put aside his plans for retirement if the board wanted him to do so. See Tr. 145-46 (Hodowal).
At its April 19th meeting, the IPALCO board heard a presentation by Goldman Sachs with its overview of the electric industry. See Ex. 167. That overview reflected the key risks that IPALCO was facing, consistent with what the board had heard from Warburg, including deregulation, environmental risks, and outside economic factors that seemed to make it difficult to increase shareholder value. Goldman Sachs identified as a positive for IPALCO its “generally supportive regulatory environment” with only “modest” fears of punitive deregulation legislation.
Id.
at 8635. Goldman Sachs identified as negatives for IPALCO its small size in a
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consolidating industry, no growth to low earnings growth in its core regulated electric utility business, and the difficulty of “redeploying” capital to businesses with higher earnings growth.
Id.
By the April 19th meeting, the Warburg efforts to identify a buyer focused on two firms known as Laurel Hill and Madison Dearborn. Both were what Hodowal described as “financial” buyers, as opposed to “strategic” buyers. Hodowal had concerns about what a financial buyer might do to the company, its employees, and the community in order to turn a profit on its investment. He generally preferred a strategic buyer, another company in the business that would be able to find synergies and make a profit without inflicting a great deal of pain on employees and the community. See Tr. 147-49. As of the April 19th meeting, Warburg had not found any interest among strategic buyers.
9
The IPALCO board met again just six days later, on April 25, 2000. The principal new development was that AES had contacted Hodowal and had expressed interest in a possible acquisition of IPALCO. AES would be a strategic buyer. Hodowal reported to the board on the three prospective buyers, Laurel Hill, Madison Dearborn, and AES. See Ex. 51 at 014795-96 (proxy statement report on consideration of transaction). The board minutes for the meeting reflect that there was “considerable discussion” and that “each Board member who was not an employee of the Corporation spoke in favor of pursuing a satisfactory agreement on a transforming transaction.” Ex. 168 at 8660A.
This meeting was the watershed moment for IPALCO and its board. The board members had been reluctant to take the step of selling the company. The directors concluded, nevertheless, that their duties to shareholders required them to try to avoid significant losses in shareholder value. The comments of directors Bar-nette and Lytle, based on observations in their own industries, reflected the perception that doing nothing carried with it high risks for IPALCO shareholders. The court is persuaded that IPALCO’s board came only reluctantly to the conclusion that it was prudent to explore the possible sale of the company. The views of management, including defendants, are discussed in more detail below.
V.
Negotiations with AES
On May 19, 2000, AES proposed an all-cash transaction for $25.00 per share of IPALCO stock. IPALCO stock was then trading for $19.50. Ex. 90. Laurel Hill and another potential buyer withdrew from the negotiations around that time. Ex. 51 at 014796. Negotiations continued through May and June. On June 20th, Madison Dearborn proposed an all-cash transaction for $23.50 per share.
On June 22nd, AES told IPALCO that it was no longer willing to pay $25.00 cash per share but that it would offer $25.00 in AES stock for each share of IPALCO stock. This shift from a cash deal to a stock swap was a major focus of the trial. The shift happened quickly and with very little documentation. Plaintiffs contended the speed and the lack of questioning by IPALCO management show that IPALCO management was trying to complete the deal at all costs, even if that meant high risks for shareholders, including Thrift Plan members. The explanation provided by witnesses was that AES decided it did not want to commit the needed proportion of its available debt limits to the IPALCO transaction because such a large commit
*1076
ment would limit AES’s ability to do other transactions it wanted to pursue.
E.g.,
Tr. 677-79 (Brehm).
The court is not persuaded that there was anything suspicious about the change. As a matter of negotiation, perhaps, it raised questions about the prospect of “bait-and-switch” negotiation tactics, but AES made its intentions clear to IPALCO at a time when IPALCO could have backed away from a transaction if it had wished to do so. IPALCO had not yet agreed to negotiate exclusively with AES when IPALCO’s officers and directors learned of the change. AES had a complex and large array of debt in its capital structure. The court finds credible the explanation that AES preferred to do the IPALCO deal through a stock swap so as to preserve its ability to borrow to help finance other transactions around the world.
From the perspective of IPALCO, the change from cash to AES stock as the “currency” of the transaction added an extra layer of complexity to the deal. IP-ALCO needed to hedge against future fluctuations in the value of AES stock to ensure that an exchange of stock at the future closing date would provide fair compensation to IPALCO shareholders. The result was an agreement to determine the all-important exchange ratio based on the price of AES stock shortly before the closing, and to provide certain “collar” mechanisms that would modify the deal or even allow IPALCO to walk away from it if the price of AES stock dropped too low.
When AES changed its offer from cash to stock, IPALCO’s board and management already had some information about AES from presentations by the investment bankers advising them about a possible deal. The change in the terms of the offer required a closer look at AES. The specific issue was whether AES stock would hold up as a solid currency for the IPALCO acquisition between the time of an initial deal and a final closing, and perhaps at least long enough after closing to give IPALCO shareholders who wanted to sell their stock in the company enough time to do so. Tr. 708 (Holstein).
When IPALCO learned of the change in the proposed structure, Hodowal organized a team under the leadership of CFO Brehm to address those concerns by doing appropriate due diligence on AES. The record is a little confusing on the details, but it appears that at least Brehm and perhaps others began looking closely at AES in the five days between June 22nd and the June 27th IPALCO board meeting. After the IPALCO board agreed on June 27th to negotiate exclusively with AES, a larger due diligence team continued the effort for another week to ten days, up until shortly before the July 14th IPALCO board meeting when the board voted to accept the AES offer. The IPAL-CO due diligence group reviewed public documents (especially SEC filings) for AES and prepared a list of questions for a meeting with AES management in Virginia.
In an attempt to pin defendants on at least one horn of a dilemma, plaintiffs have criticized the IPALCO effort as too meager, yet they have also argued that they received so much non-public information that the IPALCO insiders (officers, directors, and members of the due diligence team) should be treated as if they were AES insiders. The evidence showed that AES shared some of its internal financial projections with the IPALCO team. Those internal projections were at least consistent with the contemporaneous Wall Street analysts’ projections for AES earnings. Brehm testified that the internal numbers from AES showed that it was beating analysts’ projections in 2000. The internal data from AES certainly did not provide any inside information of financial
*1077
weakness at AES or a risk of a sharp decline in its stock a year in the future. There is no evidence that the IPALCO due diligence team or any other IPALCO officers or directors obtained any other material non-public information about AES.
Even at that point in late June 2000, the IPALCO board had heard a good deal of information about AES as a potential buyer. IPALCO was still negotiating with Madison Dearborn, though its ability to finance the deal was still uncertain. Madison Dearborn was proposing a cash purchase for $23.50 per share, as compared to AES’s offer of stock worth $25.00 at closing (subject to the rather complex valuation method, which turned out to provide stock worth a little less than $23.00 upon closing).
The IPALCO board met on June 27, 2000 to consider the two offers, and it decided to pursue only the AES offer at that point. The board’s discussion that day was not well-documented. Based on the testimony of witnesses and the nature of the offers, the court finds that one principal advantage of the AES offer was that it appeared, at least, to offer higher value to the shareholders. (The Madison Dearborn offer also could have dropped in value in further negotiations, as the AES offer did, but the AES offer appeared then to be higher.) Another major advantage of the AES offer was that it would be a “strategic” buyer, one already in the business. IPALCO reasonably thought the AES deal offered better long term prospects for IPALCO employees, shareholders, and the community. The difference between cash and stock currency did not appear to be a disadvantage at that time. IPALCO shareholders who preferred cash to AES stock could easily sell their stock at any time, apart from the new employer match in the Thrift Plan.
On July 14, 2000, the IPALCO board met and gave its approval to the terms of the transaction with AES. According to the terms of the agreement, on the closing date, each share of IPALCO stock would be exchanged for a fraction of a share of AES. As explained in the proxy statement, the exchange ratio was to be based on the price of AES shares shortly before the closing date.
IPALCO’s board and management believed they had negotiated a substantial premium over IPALCO’s earlier share price. The proxy statement said that the purchase price of $25.00 per share represented a premium of 16.3 percent over the closing price of IPALCO stock the last day before the deal was announced. Ex. 51 at 14798. The proxy statement identified the risk posed by volatility of AES stock before closing.
Id.
at 14798-99.
10
*1078
After the IPALCO board vote on July 14th to be purchased by AES, the written agreement was signed on July 15, 2000. The deal was announced publicly on Monday morning, July 17, 2000.
IPALCO and AES expected they would be able to gain needed governmental approvals for the transaction and that the deal would close in early 2001. Delaying the closing until early 2001 allowed a reasonable time for the parties to go through the needed governmental processes. Delaying the closing past December 31, 2000 also allowed IPALCO executives who had Termination Benefit Agreements (“TBAs,” a/k/a “golden parachutes”) to increase the value of those TBAs by millions of dollars. Those with TBAs included all the individual defendants. The TBAs called for a payment of 2.9999 times each executive’s average W-2 income over the past five calendar years before closing. Closing after the end of 2000, the IPALCO executives had the opportunity to exercise various stock options before the end of the year, and most did so. The exercise of those options generated taxable income that increased the W-2 reported income. The value of each TBA increased by approximately 60 cents for every dollar in additional income realized through the exercise of the stock options in 2000. Additional details on the TBAs are set forth below in Part IX-A.
VI.
After the Announcement
The AES purchase required approval by IPALCO shareholders. IPALCO scheduled a special shareholders meeting for October 20, 2000. A proxy statement was prepared as of September 8, 2000 and was mailed to shareholders, including plaintiffs, approximately a week later. The proxy statement provided a detailed description of the transaction with information about AES and the risks the transaction posed for shareholders, as well as the reasons for the IPALCO board’s approval and recommendation. See Ex. 51. Plaintiffs have not argued that the proxy statement failed to comply with applicable securities laws governing such disclosures to shareholders.
At the special shareholders meeting, CEO Hodowal spoke in favor of the transaction. (Exhibit 193 is a video and audio recording of the meeting, and Exhibit 79 sets forth the text of his prepared remarks.) He said in part:
I’m also pleased to report that based on the proxies received, our shareholders are very excited about the prospect of IPALCO joining the AES Corporation so that we can leverage the talents of both organizations and meet the energy challenges of the future.
He then introduced the board and other officers, including defendants Humke and Tabler. The other members of the Pension Committee also attended the meeting. Hodowal then described AES, noting that its returns for shareholders had totaled more than 1000 percent over the last five years. He continued: “In short, AES is a great company. And as all of you know, IPALCO is a great company. And together we will be even greater.”
Hodowal then described how IPALCO had come to the transaction. He described IPALCO’s record of success and its recognition as the “Number One” electric company in terms of creating share
*1079
holder value from its founding through 1998. He described then the “huge disappointment” of 1999, in which the company actually increased its revenues and its income, yet its stock still “plummeted 40 percent.” That experience obviously had shaken Hodowal, other managers, and the IPALCO board. He told the shareholders that the Board had begun to consider the possibility of taking the company private. Ex. 79 at 27131. He pointed out that “the Board serves as a fiduciary for all our constituencies, including our shareholders and employees.”
Id.
He summarized the proxy statement’s account of IPALCO’s search for buyers. Prospective buyers who looked saw constraints on the company’s growth, “by macroeconomic forces that did not favor small, coal-fired utilities with limited geographic reach and problematic non-regulated investments. In the end, our Board came to the conclusion that all constituencies would be better served by becoming part of a larger energy company with a proven growth strategy.”
Id.
at 27132. Hodowal continued:
We needed more muscle, and AES had that muscle. AES also had the strategy, had the interest, and most important offered the best package for IP-ALCO shareholders and employees, as well as the communities served by IP-ALCO.
From a very personal point of view, I had hoped this day would never come. I had hoped, as many of you, that IPAL-CO could forever remain a stand-alone company. And I believe that the IPAL-CO family worked as hard as we could to remain independent and to sustain the stellar pattern of growth. Our board knew, however, that worse than losing independence is losing independence while at the same time losing shareholder value.
This transaction represents a premium of 16 percent over the closing price of IPALCO common stock on the last trading date prior to the announcement of the share exchange agreement. It also represents a 22 percent premium over the average closing price of IPAL-CO common stock for the one month prior to the announcement, a 30 percent premium over the average closing price of IPALCO common stock for the one year prior to the announcement and a 52 percent premium on a year-to-date comparison basis.
Apart from the stock price premium, AES has agreed to allow IPALCO and IPL to retain its local identity. It has provided job security and fair severance commitments to employees. And it has agreed to allow IPALCO and IPL employees to determine the ongoing level of community contributions.
Id.
He opened the floor for debate. Several shareholders spoke in opposition to the transaction, including plaintiff Wycoff. The opponents argued that the AES stock price was inflated and was risky, that shareholders would be hurt by the lack of a dividend, and that IPALCO would be better off remaining independent. Ex. 193. Two of the opponents who spoke referred specifically to the fact that senior IPALCO executives were already selling large blocks of their stock.
The vast majority of shares had been voted by proxy before the meeting. General Counsel Tabler announced the vote. The vote showed that 65.5 percent of outstanding shares were voted in favor and 11.6 percent were voted against. Ex. 79 at 27133. After the vote was taken and the deal was approved, Hodowal concluded:
Ladies and gentlemen, I am coming to the end of a 33-year career with Indianapolis Power & Light Company and IPALCO Enterprises. One-third of
*1080
those years were spent as your chairman and chief executive officer.
It has been a privilege for me to serve with the IPALCO women and men who have worked so nobly and so caringly for the benefit of this company, our customers, and our communities. I thank each and every one of them from the bottom of my heart. And I thank each and every one of you for your interest and concern for this remarkable company.
I truly believe the best is yet to come, and that our association with AES will help make that so. Thank you.
See Tr. 9-10.
One point of dispute has been the capacity in which Hodowal spoke at the shareholder meeting, with a special focus on the final comment that “the best is yet to come.” Plaintiffs view that comment with understandable bitterness now that they know that Hodowal was selling his personal stake in IPALCO and that AES stock later lost 90 percent of its value. Plaintiffs argued that Hodowal spoke in his capacity as a fiduciary of the Thrift Plan, as well as in his capacity as CEO. Defendants have argued that he spoke only in his capacity as CEO. Cf.
Varity Corp. v. Howe,
516 U.S. 489, 503 , 116 S.Ct. 1065 , 134 L.Ed.2d 130 (1996) (affirming conclusion that employer acted in dual capacity as employer and plan fiduciary in communicating to workers about the effect that transfer of employment from one affiliate to another would have on their benefits). CEO Ho-dowal testified that he never distinguished in his mind between the interests of IPAL-CO shareholders and Thrift Plan participants. Tr. 52. Neither did the other members of the Pension Committee. They testified that in their roles on the Pension Committee, they saw no difference between the interests of Thrift Plan members and other shareholders, and that they relied on the information they learned through the IPALCO board processes and other, less formal channels. See Tr. 777 (Humke), 933 (Califar), 589 (Tabler). The reference to acting as a fiduciary for employees lends some support to plaintiffs, though Indiana corporation law allows a corporation’s board to consider the interests of employees and other constituencies (beyond shareholders) in evaluating a transaction that will change control of the company. See Ind.Code § 23-l-35-l(d). The combination of all this evidence, and especially the defendants’ reliance on their care for all shareholders’ interests to show that they protected the interests of Thrift Plan participants, leads the court to find that Hodowal was speaking both as CEO and as a fiduciary of the Thrift Plan when he spoke at the shareholder meeting.
VII.
Defendants’ Evaluation of AES and IPALCO
A principal focus of evidence was whether the defendants acted prudently in evaluating the AES acquisition. More specifically under ERISA, the focus was whether IPALCO stock that would become AES stock was an appropriate investment option for the Thrift Plan participants and an appropriate form of investment for the employer match in the Thrift Plan. Plaintiffs contended that defendants did not take prudent steps to evaluate AES, and that if they had done so, they would not and should not have allowed continued investment in IPALCO, and thus in AES, through the Thrift Plan. Plaintiffs also contended that defendants at a minimum should have warned Thrift Plan participants and beneficiaries of what plaintiffs called a “sea change” in the investment risk resulting from conversion of IPALCO stock to AES stock.
What did the defendants know about AES? Before AES surfaced as a potential buyer, the April 19th presentation by
*1081
Goldman Sachs to the IPALCO board showed that AES had produced a total return for shareholders in 16 months of 62.5 percent, with an estimated price/earnings ration of 25.8. Ex. 167 at 8621. Earnings per share growth rate was 27 percent.
Id.
at 8626. AES had a market capitalization of equity about 10 times that of IPALCO, and it had more generating capacity than other unregulated generators of electricity.
After AES first expressed interest in a possible acquisition of IPALCO, the IPAL-CO board met on May 23rd and heard a report on the status of various proposals and negotiations. Warburg presented an overview of AES as part of its report on negotiations with all potential buyers. Ex. 57 at 8667-70. Warburg informed the IP-ALCO board that AES had equity value of more than $18 billion, that it owned or had an interest in 146 generating plants with 52,000 megawatts of electrical generating capacity, and 15 distribution businesses in 24 countries. Warburg noted that AES had grown quickly, from $2 billion in assets in 1995 to more than $21 billion in 1999. Its generating capacity was all over the world, and it relied on a variety of fuels to generate electricity. Warburg also reported on AES’s very good recent stock performance.
At the June 27, 2000 IPALCO board meeting, after AES switched its offer from cash to stock, Warburg provided an update and a more detailed overview of AES. Ex. 174. The report noted that 73 percent of AES shares were owned by institutional investors.
Id.
at 8736. The report included an overview of AES’s capital structure, revenues, and earnings, as well as recent stock price performance showing that AES had out-performed the S
&
P 500 and the S & P Electric indices over the past five years. The report noted that Warburg itself and several other investment bank research teams had rated AES a “strong buy” or a “buy.”
Id.
at 8743. The report noted that in the last 52 weeks, AES stock had been as high as $48,875, as low as $25,625, and was then trading at $40,875.
The information provided to the board indicated that AES was probably sound because of a solid track record of growth and profitability, even in a market sector where values tended to be declining. The analysts’ “buy” and “strong buy” recommendations must be taken with a large grain of salt, as both Dr. Malkiel and Mr. Guy testified, but the recommendations were consistent with the overall picture.
IPALCO’s board decided at the June 27th meeting to negotiate exclusively with AES. IPALCO then dispatched a team to pursue additional due diligence concerning AES. The IPALCO team included CFO Brehm, Michael Holstein, Dan Short, and Michael Banta, as well as Jason Sweet of Warburg. The court credits Brehm’s testimony that the team consisted of “true skeptics” from IPALCO. Tr. 695. (The court assumes Sweet might not have been as skeptical about the transaction.) The team reviewed the publicly available information about AES, including its SEC filings and analyst reports. The team reviewed some AES internal projections, submitted questions to AES, and traveled to AES headquarters in Virginia for interviews. This work was done in about seven to ten days, just before the July 14th meeting when the IPALCO board voted in favor of the AES deal.
The purpose of the due diligence was to determine the likelihood of detrimental effects for IPALCO shareholders in the share exchange transaction. The team examined risks and risk mitigation strategies. The team evaluated AES’s credit and verified the status of planned projects. The court credits Brehm’s testimony that the team had adequate time to fulfill its
*1082
purposes and was satisfied with AES’s responses to inquiries.
Plaintiffs are critical of the due diligence team for having spent too little time on the project. In light of how things turned out with AES stock, the criticism is understandable. Ultimately, however, the criticism is not persuasive. AES stock traded in an efficient market subject to extensive public disclosure requirements. The company and its stock were watched closely by many sophisticated investors and analysts. There simply is no reason to believe that the stock price at any given time, whether on July 14, 2000 or March 27, 2001, did not reflect a full and fair market assessment of the company’s prospects.
The purpose of the IPALCO team’s evaluation was not to evaluate AES as a long-term investment for all current IP-ALCO investors, including Thrift Plan participants. The purpose was to evaluate AES as a buyer that proposed to pay with stock. See Tr. 706-08 (Holstein). The stock was highly liquid, traded on a national exchange in sufficient volumes to provide a ready market for any IPALCO shareholder who preferred cash to AES stock. The due diligence team was satisfied that AES stock was solid enough to move forward with the proposed share exchange.
E.g.,
Tr. 742 (Holstein). The team found that AES had sustainable sources of revenue, a sound business model, and a scope and diversity of operations that created shareholder value while insulating the company against risks. Tr. 692-93 (Brehm), 740-42 (Holstein). The team considered the risks that AES faced and was satisfied that AES had sound strategies for mitigating those risks. The team certainly paid attention to the debt level of AES but also noted the company’s reliance on “project” or non-recourse debt to insulate the parent company in the event of failures of particular projects owned by subsidiaries. The team also considered currency risks with AES’s global operations, but concluded that the company’s operations were spread among so many different currencies that currency risk was diversified. In short, the due diligence team concluded that the AES business model was sound, that AES had good opportunities to grow, that it was well diversified, and overall that it was a sound company.
The IPALCO board met again on July 14, 2000 and decided to accept AES’s proposed share exchange. Before it did, Brehm reported on the due diligence. He reported that AES’s stock was “good currency” for the transaction, that AES’s prospects were good, and that any risks should be minimized by the diversity of its operations. Tr. 632 (Brehm); see also Ex. 513 (board minutes); Tr. 203 (Hodowal). The board minutes reflect that Brehm’s team focused on the risk that AES stock, which was then trading at $50,375, would drop below the $31.50 collar within the next 18 months. The report noted some currency risk, political risk, and economic risk, but stressed the diversified operations that mitigated the effects of those risks in any particular country. Ex. 513 at 8748. The only apparently non-public information provided was that AES’s internal projections exceeded Wall Street analysts’ expectations for earnings over the period the transaction was likely to be pending.
Id.;
Tr. 692 (Brehm). The board concluded unanimously that the AES share exchange was the best available course for IPALCO shareholders, including the choice of no transaction.
VIII.
Plaintiffs’ View of AES
Plaintiffs offered the testimony of John Guy, a successful and respected investment advisor in Indianapolis. He has some experience in evaluating investments in utility stocks, but he did not claim any
*1083
special expertise in the utility or electric industries. With the benefit of hindsight, of course, it is clear that Mr. Guy made the right call about AES stock. In June 2001, he spent about an hour looking at AES stock and its prospects. He quickly concluded that the stock was very risky and immediately sold all of his clients’ AES stock. He did this several months before the most dramatic price drops, though after the price had dropped about one-third from its recent high. Tr. 392-94, 397.
Mr. Guy testified that it was not prudent, after announcement of the AES deal, for the Thrift Plan to allow investment in IPALCO and then AES. At trial, he testified about a comparison of AES and IP-ALCO as of July 2000. See Ex. 902. His view was that AES was then a high risk stock and IPALCO a low risk stock. He based this evaluation on a comparison of a number of factors. IPALCO’s interest coverage was 4.6, compared to AES’s 2.1. The average annual price to earnings ratio for IPALCO was 14.7, compared to 27.2 for AES, presumably over the same time period. The relative price to earnings ratio for IPALCO was 0.83 and for AES 1.57. A major rating service rated IPAL-CO’s financial strength as “A+” and AES’s as “C + +.” An overall assessment of risk by Standard & Poor’s Stock Report rated IPALCO as low risk and AES as average. The yield for IPALCO was 3.1 percent; AES paid no dividends. The price to earnings ratio based on 2000 estimated earnings was 9.4 for IPALCO and 32.2 for AES. Tangible book value per share was $7.75 for IPALCO and only $3.88 for AES. The Beta, which Mr. Guy described as a “controversial” measure of volatility, was 0.15 for IPALCO and 1.47 for AES for the periods he considered. He also found that IPALCO had lower long-term debt, higher return on assets, and higher return on equity. Mr. Guy also believed that it was probably difficult to manage well the AES assets all over the world, and he believed that a change in AES’s business plan away from internal growth and toward growth by acquisition reflected additional risk. Tr. 374-75.
Mr. Guy believed IPALCO remained a low risk company as a small electric utility. He discounted any risk associated with deregulation because he expected those risks to affect all similar companies, “like the weather.” Tr. 378, 443^4. That discount of risk is not persuasive to the court. The weight of more credible evidence, both directly from witnesses with substantial expertise in the industry and in documents reflecting the views of other experts in the industry, was that deregulation covered a wide range of different types of legislation and industry restructuring. Different electric companies faced widely varying potential effects. See,
e.g.,
Tr. 734 (Holstein).
The most significant flaw in Mr. Guy’s opinion is that he assumed in effect that IPALCO had the option of simply remaining as it was in 1997 or 1998, in his terms, that “jewel of a small company.” He discounted the risk of deregulation of prices and increased environmental regulation, and he did not consider the risk that a consolidating industry might drive the stock price back down, way below even its poor performance in 1999. See Tr. 430-39.
The most appealing aspect of Mr. Guy’s opinion, of course, is that he made the right call back in June 2001, independent of litigation. Hindsight shows that if the Pension Committee had made the same judgment before March 2001, the plaintiffs might have avoided the losses they suffered (and other investors would have suffered the losses instead). That is not the fair way to evaluate these events. Mr. Guy based his opinions on public information about both AES and IPALCO. Tr. 398. All of that information was available to investors in an efficient market. Both
*1084
Mr. Guy and Dr. Burton Malkiel, defendants’ expert on financial markets, agreed that one cannot reliably predict stock prices. Tr. 418-21, 973-74. There is no reason to think that the price of AES stock did not accurately reflect the market’s valuation of the company’s prospects at relevant times.
Even more to the point, defendants had no reason to expect the later decline of AES stock. Where Mr. Guy saw danger, other investors saw opportunity. That is always the case in an efficient market. Someone will be right and someone will be wrong. There was no particular reason why the IPALCO board or officers or the Pension Committee should have foreseen what other investors also did not foresee— that AES stock prices would fall so sharply several months after the IPALCO deal closed. There is no proof here that any of these defendants had negative insider knowledge about AES. Defendants saw a large, profitable company whose stock price had done well in recent years. The stock was obviously a highly liquid asset. Any IPALCO shareholder who preferred cash to stock could easily sell the AES stock at any time.
To rebut Mr. Guy’s testimony, defendants offered the testimony of Dr. Burton Malkiel, a prominent economist who is a former chairman of the Economics Department of Princeton University, a former member of the President’s Council of Economic Advisers, and a former dean of the Yale School of Management. Dr. Malkiel also has extensive experience in determining investment strategies for a major mutual fund company and a major insurance company. Dr. Malkiel even had experience as a board member of a relatively small public utility (a regional telephone company) as it made the transition from a regulated industry to a more competitive one. Dr. Malkiel has substantial expertise in capital markets and portfolio management.
Dr. Malkiel is best known for his book “A Random Walk Down Wall Street,” which argues persuasively that in efficient stock markets, a person without inside information is highly unlikely to be able to select stocks that will out-perform the whole market over time. The reason is that in efficient stock markets, the market will quickly, almost instantly, process public information about a company’s prospects so that all the relevant public information will be reflected in the stock price at any given time. Under Dr. Malkiel’s approach, the market price of a stock results from the interaction of those like Mr. Guy who see great risk and want to sell shares and others who see opportunity and want to buy shares.
Under these conditions, which applied to AES stock in 2000 and 2001, there is no reliable basis at any given time for believing that the current price will go up or down. Under these conditions, there was certainly no basis for requiring a group of fiduciaries who had no inside information about AES to act on the assumption that AES stock was overvalued in late 2000 or early 2001. The Seventh Circuit adopted this reasoning in
Summers v. State Street Bank & Trust Co.,
453 F.3d 404, 408 (7th Cir.2006) (holding that ERISA trustee could rely on pricing through major stock market for the best estimate of the current value of a stock at any given time, and citing work of Dr. Malkiel: “neither fiduciary was required to act on the assumption that the market was overvaluing United”); see also
id.
at 412 (expert’s proffered testimony that fiduciary should have expected stock price to continue falling amounted to testimony that fiduciary should have “outsmarted the market” and did not present viable theory of breach of ERISA fiduciary duties).
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Dr. Malkiel testified that AES was a prudent investment for the Thrift Plan in 2000 and early 2001, based on information available at the time, without the benefit of hindsight. In reaching that conclusion, he relied on the size and diversity of AES’s business, which tended to reduce risk. He also considered the AES business model, its debt and its reliance on project-specific debt, as well as the company’s earnings history, its historical stock performance, and its historical price/earnings ratio. He considered industry trends. He considered the fact that more than 70 percent of AES stock was held by sophisticated institutional investors, including one mutual fund family that has seemed to be an exception to the “Random Walk” thesis and has consistently been able to out-perform the market. Tr. 972-73. Dr. Malkiel found no evidence available in the spring of 2001 that AES was in danger of bankruptcy or even of a significant slide in its stock price. Tr. 973. In comparing investments in AES and IPALCO, he concluded that at the relevant times, AES was probably a more prudent investment than IPALCO, primarily because of the greater size and diversification of AES, especially in light of the industry trend toward deregulation at the time. Tr. 974. Dr. Malkiel was the rare expert witness whose testimony was credible and persuasive in essentially all respects, and which was consistent with his well-regarded economic research. For the reasons discussed, the court credits Dr. Malkiel’s opinions.
IX.
The Individual Defendants’ Interests in the AES Deal
Plaintiffs base their claims most heavily on the theories (a) that the individual defendants faced a conflict of interest between their self-interest and the interests of the Thrift Plan members and other IP-ALCO shareholders, and (b) that the defendants had an obligation to disclose to Thrift Plan members the defendants’ own decisions to sell all or nearly all of their personal holdings in IPALCO stock either before the AES acquisition or as soon as possible afterwards. The court is not persuaded, in the end, that most defendants’ personal interests actually favored the AES deal or that the defendants had an obligation to make disclosures of their personal transactions beyond those required under federal securities law. Because the law in this field is not well-defined and a reviewing court might disagree, however, a detailed account of the relevant facts is appropriate.
A.
Termination Benefit Agreements
Beginning at least as early as 1989, IP-ALCO’s senior executives entered into “Termination Benefit Agreements” (“TBAs”) with the company. The individual defendants—Hodowal, Humke, Tabler, Califar, Plunkett and Steiner—were parties to such TBAs that were triggered by the AES transaction. See Ex. 67. The most relevant provision of the TBAs was that in the event that the executive lost his job within three years after a change in control of IPALCO, the executive would receive a lump-sum payment of 2.9999 times the average compensation reported on the federal W-2 form over the last five calendar years.
The proxy statement reported that the following executives would receive the following amounts under their TBAs assuming that the AES transaction closed on January 1, 2001.
John Hodowal $15,730,000
Ramon L. Humke $ 7,921,000
John R. Brehm $ 4,157,000
Bryan G. Tabler $ 1,954,000
Joseph A. Gustin $ 1,447,000
Total of all officers with TBAs $46,331,000
Ex.
51
at 14807. Those figures were actually low because they did not take into account the exercises of stock options after September 7, 2000, which had the effect of raising the average compensation of the executives for the past five calendar years.
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The proxy statement noted this qualification but did not quantify the effect, since it was prepared as of September 8, 2000.
Id.
at 14806-07. The final total for all executives with TBAs was between $57 million and $60 million.
Hodowal, Humke, Tabler and other officers and directors were also entitled to deferred compensation totaling, for the group, $3,152,503. Hodowal had the largest amount, $1,334,733. Ex. 51 at 14807-OS. The proxy statement reported that all of these arrangements provided the beneficiaries with:
interests in the share exchange that differ from those of IPALCO’s shareholders. The IPALCO board was aware of these agreements and arrangements during its deliberations of the merits of the share exchange and in determining to recommend to the shareholders of IPALCO that they vote for the proposal to adopt the share exchange agreement.
Ex. 51 at 14806.
The TBAs were intended to address a tension inherent in a decision to change the control of a corporation. At the simplest level, shareholders have an interest in maximizing the value of their shares. Senior corporate executives often expect to lose good jobs if there is a change of control. There is always a risk that incumbent executives will try to protect their jobs by resisting a proposed transaction that would actually benefit all other shareholders. See generally
Gerow v. Rohm & Haas Co.,
308 F.3d 721, 723 (7th Cir.2002) (explaining how such agreements can benefit shareholders by overcoming such resistance). TBAs should be designed, at least in an ideal world, to encourage incumbent executives to focus their attention on the interests of shareholders and other constituencies without having to worry too much about their own livelihoods. See Tr. 824 (Humke). The TBAs gave the IPALCO executives a promise of three years of salary in the event that they lost their jobs. After all, the “T” in TBA stands for “Termination.”
The actual effects of the TBAs in this case were more complex because the transaction affected different individuals in different ways. Defendant Bryan Tabler testified that the day the AES transaction closed was the saddest day of his life. He was losing the best job he had ever had. The court credits that testimony. Similarly, John Brehm and Max Califar testified that they expected never to have such good jobs again. The weight of evidence indicates that the individual defendants were reluctant to recommend or approve of the AES purchase, which would bring an end to IPALCO’s independence and force them out of jobs they found satisfying. They were persuaded in the end, or at least they accepted what they believed was the best alternative for shareholders. The prediction about what was the best alternative for shareholders looks disastrous with the benefit of hindsight, and without knowing what might have been different without the AES transaction. Nevertheless, based on the information available to the individual defendants at the time, the transaction looked good for IPALCO shareholders and less good for these individual defendants who were losing jobs prematurely, but for whom the blow was cushioned by large sums of cash.
11
*1087
John Hodowal and Ramon Humke present a different situation. Hodowal had hoped to retire in 2000. Humke was nearing retirement in any event. It is not obvious that their TBAs served the usual function for them, at least to the usual degree. If Hodowal had simply retired, he would have left IPALCO with a generous retirement pension and a substantial portfolio of IPALCO stock. He would not have received the nearly $19 million he received under the TBA (after boosting the TBA payments by exercising stock options in late 2000). Similarly, COO Humke was nearing retirement from IP-ALCO. He would have been able to retire with a generous pension and many shares of IPALCO stock, but without the millions he received under the TBA.
As the IPALCO board was considering the company’s future, one board member raised an issue about Hodowal’s interest in such a transaction. In response, both Ho-dowal and Humke gave the IPALCO board undated but signed letters of resignation. See Ex. 264; Tr. 145-46 (Hodowal), 755-56 (Tabler), 755-56 (Humke). At any time, the board could have accepted those letters of resignation. The effect would have been to nullify the lucrative TBAs for both Hodowal and Humke. The IPALCO board never took that step. The board apparently retained confidence _ in both Hodowal and Humke. Hodowal and Humke also both informed the board that they would be willing to stay at IPALCO if the board chose a course that called for them to do so, either through no deal or through a deal with a buyer who wanted one or both to stay to manage the company.
Defendants argued that their tender of those resignation letters shows that Ho-dowal and Humke were not trying to push a sale for their personal benefit. Plaintiffs must argue in response that the letters were a bold bluff by two executives who were plotting to enrich themselves. Perhaps, but the more reasonable inference is that both men, who had dedicated all (Ho-dowal) or a good part (Humke) of their careers to IPALCO, were acting in what they viewed as shareholders’ best interests. That did not mean they were blind to their own personal interests, but it is hard to imagine any human being who might have been able to forget about his own situation under the circumstances. The court finds that both Hodowal and Humke honestly and reasonably believed the AES transaction was the best available course for IPALCO, its shareholders, and its employees.
B.
Stock Sales by Defendants and Other IPALCO Insiders
The centerpiece of plaintiffs’ case here is the pattern of IPALCO stock sales by the individual defendants. All sold all or nearly all of their IPALCO stock after agreeing to the AES purchase, as detailed below. With two exceptions (Humke kept a substantial investment in AES, and Califar kept a relatively modest investment in AES), these individual defendants did not suffer the 80 to 90 percent erosion in their investments that the plaintiffs experienced after their IPALCO stock in the Thrift Plan was converted to AES stock.
Many of the stock sales in question were “cashless” exercises of stock options that IPALCO had granted to the senior officers. The options were exercised by first buying IPALCO stock at the option price and then immediately selling the stock on the open market. The sale proceeds were then used to repay IPALCO for the cost of buying the stock. The difference between
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market price and option price was the profit, treated as ordinary income for the officer. (The vast majority of the relevant stock options were “non-qualifying” for federal income tax purposes.)
The court generally agrees with defendants that the second half of such a cashless transaction, the sale of the newly purchased shares, reflects nothing about the executive’s view of the company’s prospects. Plaintiffs pointed out correctly that the individual defendants all had the choice of exercising the options without selling the stock they received. That approach to the non-qualifying stock options would have resulted in realized ordinary income, thus boosting the basis for the TBAs. See Ex. 232 at 5756, 5760-61 (summary of advice given to IPALCO executives). The sums were large enough that even the prosperous defendants were not in a position to exercise their options and to keep the stock, covering the cost of exercising the options with readily available cash. Plaintiffs pointed out correctly that a defendant who was exercising stock options could have sold a majority of the shares to cover the exercise price and retained a portion of the shares for future investment.
Even if one disregards the exercise of the stock options, there is certainly a pattern here. Several defendants and other executives and directors exercised stock options in August 2000, just a few days after a special seminar on financial planning for IPALCO executives who would be affected by the AES acquisition. Trading by executives and directors was blocked for several weeks while the SEC was reviewing the draft proxy statement. On September 7, 2000, IPALCO General Counsel Tabler notified officers and directors that the proxy statement had been finalized and was being made public, so that beginning on September 8th, they were no longer barred from trading in IPALCO stock. The defendants immediately resumed exercising their stock options and selling their shares.
On September 8, 2000, the first day that the “window” opened, defendant and CEO Hodowal exercised all available options on 615,000 shares in a cashless transaction. The market value of those shares was $14,221,875, and the profit to Hodowal was $4,104,425. Ex. 581. Hodowal sold all of the IPALCO shares in his Thrift Plan account on December 14, 2000. The total was 67,181.9 shares for a net price of $1,589,417. On January 4, 2001, he sold an additional 87,076 shares he had acquired between 1988 and 2000, for a net price of $2,078,940. On January 16, 2001, certain restrictions on further sales were lifted, and on January 23, 2001, Hodowal sold 33,094 shares of IPALCO stock for a net price of $800,461. See Ex. 906, summarizing information in Ex. 65. Hodowal later sold the employer “new match” shares in the Thrift Plan as soon as he could, and he sold every other share that had converted to AES in June 2001 as soon as all restrictions on his sales were lifted. Tr. 98-101.
Hodowal testified that he was selling all equity holdings on the advice of his personal financial adviser. Despite plaintiffs’ skepticism, the court sees no persuasive reason to discredit that testimony. Ho-dowal had been an insider with IPALCO, but the AES deal put a cap (of $25.00 per share) on the value of IPALCO stock. See Tr. 743 (Holstein, explaining that AES deal effectively capped growth in value of IPALCO stock). When the AES deal closed, Hodowal gave up his job, and he was never an insider with respect to AES.
Defendant and COO Ramon Humke exercised his stock options in a series of cashless transactions beginning on September 8, 2000 and ending on December 4, 2000, for a total of 310,000 shares. The market values for those shares totaled $8,905,821, and Humke realized a profit of
*1089
$3,306,200. Humke did not exercise options for an additional 330,000 shares because he was concerned about violating the terms of the options if the AES deal did not close as expected. Tr. 791-92. Those options converted to options on AES stock on terms that left them “out of the money” as a result of the later decline in AES share price. Humke sold 24,016 shares of IPALCO stock on January 17, 2001, after some applicable restrictions were lifted the day before, for a net price of $585,390. On February 13, 2001, he sold the IPALCO shares in his Thrift Plan account that he could, 19,517 shares for $471,441. Humke retained approximately 78,000 AES shares after the deal closed, and he retained those shares at least through the date of the trial.
Defendant Tabler exercised his stock options in a series of transactions on August 23, 24, 25, and September 8, 2000. These totaled 170,000 shares that had a total market value of $3,962,433, and he realized a profit of $1,223,133 on those shares. Ta-bler sold all IPALCO shares in his Thrift Plan account on November 30, 2000: 3,355 shares for a net price of $78,061. On the same day, he sold 12,802 shares he held directly, for a net price of $297,645. On December 6, 2000, he sold another 27,117 shares he held directly for a net price of $640,645. On January 18, 2001, two days after the restrictions were lifted, Tabler sold 5,659 shares he held directly, for a net price of $137,938. Tabler retained some IPALCO shares that converted to AES shares that he could not sell until June 2001, and he sold those as soon as he could.
Tabler testified that he was acting on the advice of his personal financial advisor. He no longer recalled the specific reasons for the advice, but the court credits the testimony. Like Hodowal, he had been an insider with IPALCO, but everyone knew after the AES deal was announced that IPALCO shares were going to be worth about $25.00 when the deal closed, and no more. When the AES deal closed, Tabler gave up his job, and he too was never an insider with respect to AES.
Defendant Max Califar exercised stock options on August 18, 2000 and September 8, 2000 on 115,000 shares, for a total market value of $2,659,375. Califar realized a profit of $801,025 on those options. Cali-far also sold 6,851 shares of IPALCO stock that he held directly on January 17, 2001, one day after the restrictions were lifted. The net price to Califar was $166,565. In June 2001, Califar sold most of the employer match in his personal Thrift Plan account, which was then held as AES stock. He retained approximately $40,000 worth of AES shares. Those shares were worth about $17,000 at the time of trial.
Defendant Stephen Plunkett exercised options on a total of 25,000 shares in two transactions, on August 14, 2000 and on September 8, 2000. The market value of those shares was $539,760, and Plunkett realized a profit of $174,510. Plunkett also sold all of the IPALCO shares in his Thrift Plan account on January 5, 2001: 9,826 shares for a total price of $235,623.
Nine of the outside directors also sold all of their IPALCO stock before the AES deal closed.
12
The members of the IPAL-CO “due diligence” team that studied AES
*1090
also exercised all or nearly all available stock options and sold all or nearly all of their IPALCO stock, both in the Thrift Plan and owned directly, either before the closing or sold shares that converted to AES as soon as they could. (Brehm held 10,000 shares of AES stock until sometime in 2002.) These persons included John Brehm, Michael Holstein, Michael Banta, and Daniel Short. All of these individuals also had TBAs and lost their jobs when the AES deal closed.
All of the sales and exercises of options by IPALCO executives and directors were obviously linked to the AES acquisition and the fact that these executives and directors were very likely or even certain to lose their positions with IPALCO. The IPALCO executives and directors did not have any pattern of prior significant sales of IPALCO shares.
In light of all the rhetoric in this case about “insider” sales and the connotations it carries, the court must point out that the individual defendants and all other IPAL-CO executives and directors were not
AES insiders.
There is no evidence that they had access to any material, negative, nonpublic information about AES at any time. There is evidence that the due diligence team examined AES’s internal projections just before the July 14, 2000 board meeting and concluded that the projections were at least consistent with estimates published by Wall Street analysts. There is no evidence that the defendants or other IPALCO officers or directors were aware of any material non-public information suggesting that AES stock prices were likely to fall a year after the first agreement or several months after the closing.
C.
Disclosure of IPALCO Insider Transactions
All of the sales and exercises of options by senior executives and directors of IP-ALCO were reported to the Securities and Exchange Commission and were publicly disclosed. See Ex. 65 (SEC Form 144’s). The transactions were reported in a daily newspaper of general circulation (The Indianapolis Star) and a weekly business publication (The Indianapolis Business Journal) approximately five weeks after the transactions. See Exs. 549, 552. The transactions attracted enough attention so that during the October 20, 2000 special shareholder meeting to vote on the AES deal, at least two opponents of the deal mentioned the IPALCO officers’ sales of their stock. Ex. 193. On November 21, 2000, the Indianapolis Business Journal ran a front-page article with the headline “IPALCO execs will lose jobs,” and reported on the TBAs. Ex. 516 at 71275. On December 17, 2000, the IBJ ran another front-page article with the headline “IP-ALCO execs cash out on options.” Ex. 516 at 71278. The proxy statement provided detailed information about the TBAs and other deferred compensation and restricted stock grants for the IPALCO officers. A reader of the proxy statement should not have been surprised to learn of the later exercises of stock options.
The IPALCO executives’ sales were not reported directly to Thrift Plan participants and beneficiaries. The record of the special shareholder meeting shows that least some plaintiff class members (including Mr. Wycoff) learned of the defendants’ transactions prior to October 20, 2000. Ex. 193. There is no other evidence that any plaintiff class members actually learned of the transactions at the relevant times. Plaintiffs do not claim that there were any violations of securities laws relating to these transactions.
There is no evidence that the public disclosure of these transactions to the securities market caused any change in the
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price of IPALCO or AES shares. The combination of public reporting of the transactions and the absence of any effect on share prices is consistent with defendants’ argument that there is nothing unusual about sales by company insiders in connection with their departures from a company, as courts have repeatedly recognized in securities fraud cases. See
In re K-tel Int’l, Inc. Securities Litig.,
300 F.3d 881, 896 (8th Cir.2002) (sales in connection with executive’s resignation did not support inference of fraudulent intent);
Greebel v. FTP Software, Inc.,
194 F.3d 185, 206 (1st Cir.1999) (“not unusual” for persons leaving a company to sell their shares);
Provenz v. Miller,
102 F.3d 1478, 1491 (9th Cir.1996) (sales by one executive when he resigned did not support inference of fraudulent intent);
In re First Union
Corp.
Securities Litig.,
128 F.Supp.2d 871, 898 (W.D.N.C.2001) (same).
Plaintiffs have interpreted some testimony by Humke and Califar as confessions of a deliberate effort to conceal their stock sales. Humke was asked whether he disclosed his stock sales to plan participants other than by signing and filing the SEC disclosure forms. His answer was:
No. All of my experience involving activities like the Thrift Plan would indicate that one needs to be very cautious about not giving investment advice without the appropriate qualifications. And we did provide advisors to our Thrift Plan participants for that purpose.
In addition, seems to me that if I were to advise people that I was selling options or shares or whatever the case may be, it could very well be misconstrued as an opinion as to the regard of the future viability of the stock; and that was not the case.
These transactions were done for reasons totally apart from the prospects that I believed to be the case with AES. And so to have talked about them excessively could have well produced an incorrect assumption.
Tr. 794. Califar said that he did not make any further disclosure for similar reasons, a concern that participants might be misled if he made further disclosures. Tr. 907.
The court credits this testimony from Humke and Califar, and does not draw the negative conclusions that plaintiffs advocate. Neither Humke nor Califar had any reason to expect a dramatic drop in AES stock price. Both were cautious about taking actions that might be misinterpreted as giving investment advice they were not qualified or willing to give. Such caution is understandable, both in human terms and in terms of potential exposure to legal liability for giving improper advice they were not qualified to give.
Plaintiffs also contended that Hodowal deliberately misled them at the October 20, 2000 shareholder meeting when he was asked twice about his and other officers’ exercise of stock options. He responded by stating that executives with TBAs would have a choice between leaving the company with a “three year payment” or staying with the company. Ex. 193; Tr. 111-12. He pointed out that executives would be subject to blackout periods when they could not trade in IPALCO or AES stock. He went on to say that the options had to be exercised or they would be lost. That last comment was incorrect, as Ho-dowal conceded at trial. Tr. 113. An executive who failed to exercise an option would lose the ability to include the profit from the stock option in the calculation of his benefits under the TBA, but an IPAL-CO stock option that was not exercised was converted to an option to buy AES stock based on the share exchange ratio. See Ex. 51 at 14808 (proxy statement).
The court does not draw an inference of intent to mislead from this wrong answer.
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The correct answer was spelled out in proxy statement. Hodowal got the details wrong in his oral answer, but he got the gist right: the executives would be losing their jobs, and it was in their best interests to exercise the options while they still could. The difference between the details of the correct written answer in the proxy statement and the incorrect oral answer in the meeting is not so material as to persuade the court that Hodowal was trying to mislead shareholders or Plan participants. He had years of experience leading a public company and knew that his and other executives’ personal financial transactions in the stock were all public. It is not at all likely that he was intentionally trying to mislead shareholders or Plan participants by contradicting the proxy statement on this detail.
X.
Disclosures to Thrift Plan Participants
The proxy statement provided to all shareholders in September 2000 contained information relevant to AES and its stock. The proxy statement provided high and low stock prices for both AES and IPAL-CO for each quarter for the past two and a half years and reported that AES had not paid dividends since December 1993. The proxy statement also provided key financial data for both AES and IPALCO. Ex. 51 at 14785-90.
In a discussion of IPALCO’s reasons for the transaction, the proxy statement included at page 22 the heading “AES has significant resources and a strong reputation.” Ex. 51 at 14798. Under that heading, IPALCO identified as a potential risk the following:
The fact that the market price of AES common stock has been relatively volatile, presenting some risk to IPALCO shareholders that the value of AES common stock received in the share exchange will be less than $25.00. The IPALCO board also considered the fact that the share exchange agreement provides that the value of the exchange ratio to IPALCO shareholders is fixed at $25.00 per share of IPALCO common stock unless the average trading price (as determined in accordance with the share exchange agreement) of the AES common stock is below $31.50, as well as the fact that IPALCO may terminate the share exchange agreement in the event that the value of the exchange ratio to IPALCO shareholders falls below $21.00 per share of IPALCO common stock.
Id.
at 14798-99.
Mr. Guy was also highly critical of the proxy statement and its information about any risk associated with AES:
This is a case where too much disclosure is no disclosure. I had trouble reading it. Even today I couldn’t articulate the details of it. There were countless notes. It was all small print. I think the balance sheet had about 50 or 60 lines on the page. It was no disclosure at all. It just wasn’t there.
Tr. 381. Mr. Guy criticized the Pension Committee for failing to take more proactive steps to communicate to Thrift Plan participants and beneficiaries the risks associated with AES. He also criticized the failure to disclose to Thrift Plan members the sales of stock, especially those held in the Thrift Plan itself, by Pension Committee members. For reasons explained below, the court does not accept those criticisms.
XI.
Financial and Investment Advice
A.
The Country Club Advice Session for Executives
On August 14, 2000, Hodowal and Humke arranged for an IPALCO sponsored financial advice seminar for its officers and some other senior executives at the Twin Lakes Country Club in Indianap
*1093
olis. Consultants from a major accounting firm provided advice about decisions that would need to be made in connection with the AES purchase of IPALCO. See Ex. 32. The consultants had a detailed understanding of the AES transaction, SEC pooling restrictions on stock sales, the TBAs, stock options, and other employee benefits that would be affected by the transaction.
The consultants explained how to maximize TBA benefits by exercising stock options and otherwise accelerating income to 2000 so as to boost the five-year average of compensation used to calculate the TBA benefits. The consultants provided helpful tax advice. (That advice included that the exercise of most of the stock options, those treated as “non-qualifying” for tax purposes, would trigger ordinary income regardless of whether the executive also immediately sold the stock. Ex. 32 at 5756.) The consultants addressed a host of questions: whether to diversify plan assets, whether to maintain investments that would become AES holdings or to diversify, and numerous questions about estate and gift tax issues and trust mechanisms for reducing taxes. The consultants also offered advice on management of investments. Not surprisingly, one of the main messages of the consultants was the value of diversified investments, though the application of that general rule to stock options and certain restricted stocks could be considerably more complex for some executives as a result of tax issues that did not apply to Thrift Plan participants.
B.
Merrill Lynch Advisers for Plaintiffs
In connection with the Thrift Plan, Merrill Lynch continued to conduct regular meetings for investor education and investment advice for Thrift Plan participants. After the announcement of the AES deal, that practice continued. Merrill Lynch made presentations to Thrift Plan members to address investment choices as the closing date approached. Tr. 896, 927-30 (Califar). Also, the Merrill Lynch personnel remained available to provide financial planning advice to Thrift Plan members. As far as the evidence shows here, the available advice was competent and appropriate.
XII.
Pension Committee Considerations
On September 29, 2000, the Pension Committee held a meeting to consider how to vote the IPALCO shares held in the Thrift Plan. The Pension Committee voted to instruct the trustee (Merrill Lynch) to vote the shares in favor of the transaction. Ex. 189. The minutes of the meeting stated that chairman Tabler reviewed the matter with the committee and that the committee “considered this matter carefully.”
Id.
The resolution stated that the committee had considered the best interests of Thrift Plan beneficiaries, the fairness opinion of the investment bankers appended to the proxy statement, and “such other matters as it deems necessary for the purpose.” There is no other documentation of this decision. However, Pension Committee chairman Tabler had been intimately involved in the IPALCO board’s process of education about IPALCO’s prospects and the process that led to the decision to sell to AES. Califar’s role in the AES deal had been more limited, but he was certainly aware of the major developments and issues. Hodowal was an
ex officio
member of the Pension Committee but recalled attending only one committee meeting after he became CEO. Humke also was an
ex officio
member. He rarely attended meetings but reviewed minutes and reports on investment performance.
In voting on the share exchange agreement, the Pension Committee reviewed the proxy statement. Tabler honestly and reasonably believed that the AES deal was
*1094
a better prospect for IPALCO shareholders, including Thrift Plan participants, than other options available to the company, including remaining independent. Ta-bler did not believe that the AES deal was in his personal best interests. He would have preferred to remain employed as a senior executive with an independent IP-ALCO. The same was true of Califar. There is no specific evidence about defendants Steiner and Plunkett.
The Pension Committee never actively considered whether to eliminate IPALCO or AES stock as an investment option for the Thrift Plan. Tr. 906. There is no evidence that the question even occurred to them. If the question had occurred to them, the weight of evidence shows convincingly that they would not have decided to eliminate it and that they would have had sound reasons for that decision. During the period that these defendants were members of the Pension Committee, there were no meaningful trouble signs suggesting that AES stock was likely to head'in the wrong direction. From the perspective of the fall and winter of 2000-01, IPALCO stock was going to be converted at a reasonable premium for stock in a large, growing, highly successful, and profitable company with stock that was readily marketable. The court credits the opinion of Dr. Malkiel that, without the benefit of hindsight, continued investment in IPAL-CO and then AES remained a reasonable and prudent investment for the Thrift Plan. Continued investment was consistent with the specific terms of the Plan (see Ex. 94, § 301.170 and § 101.190, treating Fund B as common stock of IPALCO or any successor) and with its more general purposes, which included allowing and encouraging such investment in the employer. To the extent that plaintiffs rely on Mr. Guy’s opinion about the risk that AES would decline, recall that there was a buyer for every one of the shares that Mr. Guy arranged to sell in June 2001, three months after the closing. Hindsight shows that Mr. Guy was right and the buyers were wrong about the price of AES stock over the next several years, but there was no reliable way to know that at the time.
On January 16, 2001, IPALCO amended the Thrift Plan so as to transform Fund B from IPALCO stock into AES stock upon consummation of the planned share exchange. Hodowal signed the document in his capacity as president of Indianapolis Power
&
Light Company, the sponsor of the Thrift Plan. The amendment modified the definition of “Common Stock” in Section 301.170 of the Thrift Plan to read: “The term ‘Common Stock’ means the common capital stock of [IPALCO] Enterprises; provided, however, that effective, and conditioned, upon the consummation of the Agreement and Plan of Share Exchange between IPALCO Enterprises, Inc. and The AES Corporation, the term ‘Common Stock’ means the common capital stock of The AES Corporation.”
XIII.
The Closing and the Individual Defendants’ Terminations
All of the individual defendants in this case ended their employment with IPAL-CO on or about the date of closing, March 27, 2001. None played any further role in administering or overseeing the Thrift Plan after that date. That fact is relevant because of what happened to AES stock in a generally declining stock market. The price was $49.60 on the date of closing. A month later, it was $47.45. Two months later, on May 29, 2001, it was $45.40. Three months after closing, on June 27, 2001, it was $42.28. See Ex. 89. The decline became steeper in July, down to $37.30 on July 27, 2001. By September 10, 2001, the price had declined to $29.00. It declined to $24.25 by September 25, 2001, after the market interruptions resulting from the terrorist attacks on September
*1095
llth. The next day, the bottom really dropped out, with a one-day decline of nearly 50 percent, down to $12.25. AES stock recovered some of that loss over the winter, but in February 2002 dropped back below $13.00, reaching as low as $4.11 on February 21, 2002. For these purposes, the important point is that, at least in the first three or four months after the individual defendants gave up all responsibility for the Thrift Plan, there was nothing unusual about the decline in AES stock price. The proxy statement provided to IPALCO shareholders showed that in 1998 and 1999, the high and low prices during each year differed by a factor of more than two. See Ex. 51 at 14785.
Conclusions of Law
I.
Fiduciary Duties Under ERISA
The court has jurisdiction over the parties and the subject matter of this action, which arises under federal law. As members of the Pension Committee that administered the Thrift Plan, the individual defendants were fiduciaries under ERISA, at least to the extent they acted in their roles as members of the Pension Committee. IPALCO was the parent company of the plan sponsor. IPALCO itself did not hold a fiduciary position, but it could take on fiduciary roles to the extent it “exercise[d] any authority or control respecting management or disposition of [plan] assets.” 29 U.S.C. § 1002 (21)(A)(i).
The statutory language establishing fiduciary duties under ERISA provides in part:
a fiduciary shall discharge his duties with respect to a plan solely in the interests of the participants and beneficiaries and -
(A)for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchap-ter III of this chapter.
29 U.S.C. § 1104 (a). These duties are rooted in the common law of trusts, though the Supreme Court has described the analogy as “problematic” because the common law assumes that a trustee “wears only his fiduciary hat when he takes action to affect a beneficiary, whereas the trustee under ERISA may wear different hats.”
Pegram v. Herdrich,
530 U.S. 211, 225 , 120 S.Ct. 2143 , 147 L.Ed.2d 164 (2000). ERISA recognizes that a person who acts as an ERISA fiduciary may have financial interests adverse to beneficiaries, as long as the person acts only in the interests of beneficiaries when wearing the fiduciary hat.
Id.
The ERISA provision on fiduciary duties includes a requirement that the investments of plan assets be diversified. 29 U.S.C. § 1104 (a)(1)(C). The parties agree that the specific diversification requirement does not limit the Thrift Plan’s ability to invest in employer stock because the Plan is an eligible individual account plan or “EIAP.” See 29 U.S.C. § 1002 (34); § 1104(a)(2), 1107(b)(1), 1107(d)(3). Nevertheless, the general fiduciary duties of loyalty and prudence under ERISA still
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apply to an EIAP.
E.g., Armstrong v. LaSalle Bank National Ass’n,
446 F.3d 728, 732 (7th Cir.2006);
Steinman v. Hicks,
352 F.3d 1101, 1106 (7th Cir.2003).
When a plan provides for individual accounts and enables a participant or beneficiary to exercise control over the assets in his or her account, and if the plan also satisfies regulatory requirements established by the Secretary of Labor, ERISA also provides that a fiduciary shall not be liable for any loss or breach that results from a plan participant’s or beneficiary’s exercise of control over the assets of an individual account. 29 U.S.C. § 1104 (c)(1)(A). The parties agree that the Thrift Plan did not comply with the detailed regulatory requirements needed to take advantage of that safe harbor. See 29 C.F.R. § 2550 .404c-l. Outside the protection of that safe harbor in the case, the issue is whether the defendants complied with the general duties of loyalty and prudence under ERISA. The absence of the safe harbor does not mean that defendants violated ERISA, and it does not relieve plaintiffs of their burden of proving a violation of fiduciary duty. See
Jenkins v. Yager,
444 F.3d 916, 924 (7th Cir.2006).
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Plaintiffs contend that the defendants breached the ERISA fiduciary duties of loyalty and prudence in three principal ways. First, plaintiffs contend that the defendants breached their duties by failing to remove IPALCO and then AES stock as investment options for Thrift Plan members. Second, plaintiffs contend that the defendants breached their duties by promoting investments in IPALCO and AES and by failing to disclose their own sales of all or nearly all of their own IPALCO and AES stock. Third, plaintiffs contend that defendants breached their duties by allowing the employer matching contributions of IPALCO stock to be converted to AES stock upon closing.
II.
Allowing Plaintiffs to Invest in IP-ALCO and then AES
Before IPALCO and AES agreed to the share exchange, the Pension Committee members were complying with their fiduciary duties under ERISA. They had provided a diverse range of prudent investment choices for Plan participants and had arranged with Merrill Lynch to educate the participants about their choices and to provide individual advice about those choices. Plaintiffs do not contend there was any violation of ERISA prior to July 15, 2000.
The strongest form of plaintiffs’ claims is that defendants were corrupt and dishonest: that they decided to cash out for themselves through the AES deal, and that they deliberately misled the plaintiffs and mismanaged the Thrift Plan assets so as to help promote the AES deal for their own benefit. The court’s factual findings reject the premise of alleged dishonesty and selfishness. The court finds that the individual defendants honestly and reasonably believed that the AES deal was in the best interests of IPALCO shareholders, including the Thrift Plan participants.
Plaintiffs argue that they do not need to show dishonesty to show a breach of the duties of loyalty and prudence. They are
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right, at least in theory. The test is an objective one. Did the defendants, acting in their fiduciary capacities as administrators of the Thrift Plan, act for the exclusive purpose of providing benefits to participants and their beneficiaries, and, in the statute’s terms, “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims”? As found above, the defendants never considered the possibility of prohibiting plaintiffs from investing in IP-ALCO and AES.
The court has found that the Thrift Plan required the Pension Committee to maintain IPALCO stock as an option for participants’ investments of their own contributions. That finding is not necessarily the end of the story. A number of court decisions have recognized, usually in
dicta,
at least a possibility that under sufficiently dire circumstances, ERISA fiduciaries’ duty of prudence may require them to act contrary to the terms of a plan and to sell employer stock.
E.g., Summers v. State Street Bank & Trust Co.,
453 F.3d 404, 408 (7th Cir.2006) (employer’s stock dropped in value toward zero and bankruptcy);
Steinman v. Hicks,
352 F.3d 1101, 1106 (7th Cir.2003) (suggesting that duty of prudence might require diversification if plan participants were all close to retirement, plan assets were their principal retirement assets, and buyer’s stock was much more volatile and bankruptcy risk was greater);
Moench v. Robertson,
62 F.3d 553, 571-72 (3d Cir.1995) (employer’s stock slid toward zero, and insiders knew of impending collapse);
DiFelice v. U.S. Airways, Inc.,
397 F.Supp.2d 758, 773-74 (E.D.Va.2005) (employer’s stock dropped toward zero and bankruptcy).
Assuming the theoretical possibility that a fiduciary might need to act contrary to the Plan’s terms, at all times that the defendants in this case exercised authority over the Thrift Plan and its investments and investment options, both IPALCO and AES stock were reasonably healthy stocks. That fact weighs heavily against a finding of breach of fiduciary duty. See
Wright v. Oregon Metallurgical Corp.,
360 F.3d 1090, 1097-99 (9th Cir.2004) (fiduciary did not violate duty by failing to sell employer stock in 401 (k) plan in contravention of plan provisions where plaintiffs did not allege company was on brink of collapse);
Pedraza v. Coca-Cola Co.,
456 F.Supp.2d 1262, 1275-76 (N.D.Ga.2006) (dismissing claim that fiduciaries should have acted contrary to plan provisions and sold employer stock in face of drop in price where company was not “on the brink of collapse,” and recognizing that a “fiduciary who decides to scrap the ESOP is just as apt to be sued as he would be if he enforced the plan provisions”).
The defendants in this case did not ever face decisions about what to do with Thrift Plan assets in a glide toward bankruptcy. Under these circumstances, the defendants probably would have violated their fiduciary duty to comply with the terms of the Plan itself if they had tried to eliminate the option of investing in IPALCO and then AES stock. Even if ERISA might have permitted them to take that step, they certainly were not required to do so. They did not violate their fiduciary duties by failing to eliminate that option.
The Seventh Circuit’s opinion in
Steinman v. Hicks,
352 F.3d 1101 (7th Cir.2003), deserves more specific attention here. In
Steinman ,
an employer had established an employee stock ownership plan (“ESOP”) to supplement its traditional pension plan. The employer was acquired by a much larger corporation, Archer Daniels Midland, in a stock-for-stock exchange. ADM decided to terminate the
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plan and to give participants a choice between taking an immediate distribution in the form of either cash or ADM stock, or rolling over thei

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2487306. Public record. Not legal advice.