The U.S. Supreme Court may have set aside the presumption of prudence, but it’s still no slam dunk for plaintiffs in stock drop cases.
The most recent example came in the 11th Circuit’s affirmed dismissal of ERISA breach of fiduciary claims in Dennis Smith v. Delta Airlines Inc., et al., 2015 U.S. App. LEXIS 13165 (11th Cir. July 29, 2015). In the case, plaintiff Dennis Smith was a participant in the Delta Family-Care Savings Plan, which offered Delta stock as an investment option. Smith’s account balance declined when the price of Delta stock dropped between 2000 and 2004, so he sued the Delta plan fiduciaries in March 2005, alleging among other things that they imprudently continued to allow participants to invest in the stock, despite the company’s poor financial performance and questions about its ability to survive.
The district court originally dismissed the complaint for failure to state a claim, and the 11th Circuit affirmed. Then the Supreme Court ruled in Fifth Third Bancorp v. Dudenhoeffer that the so-called “presumption of prudence” that had led to many of these stock-drop cases being dismissed wasn’t quite so inviolate after all. So Smith decided to take his case to a higher court, filing a petition for writ of certiorari with the U.S. Supreme Court, which vacated the 11th Circuit’s ruling and remanded the case for further consideration in light of the Dudenhoeffer ruling.
On remand, the district court again dismissed the claims and the 11th Circuit again affirmed. In its ruling, the 11th Circuit referenced Dudenhoeffer’s finding that “allegations based on ‘over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances,” concluding that Smith’s claim before it was just the type of claim that the Supreme Court would deem “implausible,” particularly since Smith had not alleged that the fiduciaries “had material inside information about Delta’s financial condition that was not disclosed to the market” or the existence of a special circumstance, such as fraud or other improper conduct, that would render reliance on the market price imprudent.
“Absent such circumstances, the Delta fiduciaries cannot be held liable for failing to predict the future performance of the airline’s stock,” the 11th Circuit wrote, “Thus, while Fifth Third may have changed the legal analysis of our prior decision, it does not alter the outcome.”
