The president of the ESOP Association calls the Supreme Courts decision in Fifth Third Bancorp v. Dudenhoeffer a mish-mash and says he doesnt consider it to be a big victory for employers.
Because it deals with a publicly traded company, the decision isnt a victory for the majority of ESOPs, 90% of which are offered by small private firms, says Michael Keeling, president of the ESOP Association in Washington, D.C.
The decision still applies to ESOPs at privately held companies, says Jamie Fleckner, chair of Goodwin Procters ERISA litigation practice in Boston, however, its more favorable for plaintiffs who want to sue with respect to private companies.
Like many other large financial institutions, Fifth Bancorp had exposure to investments in subprime mortgages and the stock of the company dropped as a result of the financial crisis in 2007-2008. Participants in the retirement plan who had investments in Fifth Third company stock sued under ERISA for the losses in their investments. They argued, amongst other things, that it was imprudent to have continued to allow them to invest in Fifth Third stock, says Fleckner.
There have been hundreds of stock drop cases since the collapse of Enron and lower courts have held there was a presumption of prudence that would apply to ESOP and 401(k) plan fiduciaries who allowed the plan to be invested in employer stock when such investment was required by the governing plan document, says Fleckner. Thats been known as the Moench presumption.
But in the unanimous decision in Fifth Third Bancorp v. Dudenhoeffer, authored by Justice Breyer, ESOP fiduciaries are not entitled to any special presumption of prudence. Rather, they are subject to the same duty of prudence that applies to ERISA fiduciaries in general
Its disappointing [the decision] didnt uphold all other lower federal courts on the presumption of prudence issue, says the ESOP Associations Keeling.
But the Supreme Court also recognized that plan fiduciaries whose plans invest in company stock have unique challenges, says Fleckner.
For example, if theyre insiders under securities laws, theyre precluded from using their inside information to manage the plans investments or else they would run afoul of the securities laws, he says. So on the one hand the Supreme Court said theres no presumption of prudence, which seems to cut against employers and fiduciaries. On the other hand, the Supreme Court said that there are unique circumstances with regard to holding employer stock and, I think, made it quite hard for plaintiffs to actually put together a case that it was a mistake of the plan fiduciary to continue investing in company stock.
Its unclear how lower courts will interpret the Supreme Courts decision going forward, but Barry Klein, a partner with the employment, benefits and labor practice at Blank Rome says ESOP fiduciaries could be placed in an untenable position that undermines the whole concept of employee ownership through ESOPs.
Because ERISA plan investment committees typically undergo a deliberate due diligence process of comparing their investments to other possible investments and comparing the records of their investment managers to the records of other managers, we fear that plaintiffs could make a case under Dudenhoeffer that traditional ESOP fiduciaries must undertake the same analysis compare the historical and projected performance of their single stock against the performance of thousands of alternative investments. Only a few single stocks could pass that test, says Klein.
But while the Supreme Courts rejection of the Moench presumption is disappointing for ESOP fiduciaries and may result in a new wave of these stock drop cases, it is unlikely to change their outcome, says Paul Ondrasik, who heads up law firm Steptoes ERISA, labor and employment group. As the [Supreme] Court recognized, the lower courts can and should continue to divide the plausible sheep from the meritless goats on a motion to dismiss. And the opinion gives them the tools to do so by rejection as implausible claims based on little more than the fact of a stock drop and allegations of insider information.
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