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Upcoming ruling will clarify the "presumption of prudence" in employer stock suits
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On Dec.13, 2013, the U.S. Supreme Court granted
Fifth Third Bancorp v. Dudenhoeffer. In doing so, the court agreed to decide a case about the “presumption of prudence” defense in class actions brought under the Employee Retirement Income Security Act (ERISA) challenging investments made through defined contribution reitrement plans in company stock that subsequently drops in value.
The Supreme Court will review a 2012 ruling by the U.S. Court of Appeals for the 6th Circuit to determine (1) whether the decision by the fiduciaries of an employee stock ownership plan (ESOP) to remain invested in employer securities was entitled to a presumption of prudence when the district court decided a motion to dismiss, and (2) whether plaintiffs were required to plead plausible allegations that the employer was in a dire situation or that the employer’s viability as a going concern was threatened to state a claim under ERISA against the plan fiduciaries.
The Supreme Court’s decision to grant
certiorari suggests that the Supreme Court will resolve the current division among circuit courts regarding the application of the “presumption of prudence” in employer stock cases—in particular, whether the parties must engage in expensive discovery before plaintiffs’ claims will be addressed by the courts.
Fifth Third Bancorp petitioned the Supreme Court to review two questions:
certiorari , the Supreme Court limited its review to the first question. Notably, although the Office of the Solicitor General urged the Supreme Court to reformulate the first question to consider whether a presumption of prudence should ever apply in employer stock cases, the Supreme Court declined to do so, opting instead to accept the question as presented by Fifth Third.
Fifth Third sponsored a defined contribution plan that had required one investment option to be a fund that invested primarily in Fifth Third stock. The plaintiffs’ consolidated class action lawsuit alleged that defendants violated their fiduciary duties under ERISA by (1) continuing to offer Fifth Third stock as a plan investment option when it was imprudent to do so during the 2008 financial crisis, and (2) making misrepresentations by incorporating by reference allegedly false and misleading SEC filings into plan documents.
The district court granted defendants’ motion to dismiss, holding that the ESOP fiduciaries’ decision to invest in employer stock was entitled to a presumption of prudence at the pleading stage.
Because plaintiffs’ complaint did not plausibly allege that Fifth Third’s viability as a going concern was in jeopardy, the district court also found that the presumption of prudence was not overcome.
The district court further held that the mere incorporation by reference of SEC filings into plan documents did not sufficiently state a claim for breach of fiduciary duty based on allegedly misleading statements or omissions in the underlying filings.
The 6th Circuit reversed the district court’s ruling on each ground:
Wilber H. Boies
Nancy G. Ross
Chis C. Scheithauer
Michael S. Yelin
(associate) are attorneys at law firm
McDermott Will & Emery.
© 2013 McDermott Will & Emery LLP. All rights reserved. Republished with permission.
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