The nation’s highest court has declined to weigh in on a reverse stock-drop case, leaving in place a standard of fiduciary review higher than that traditionally imposed in such cases.
The traditional standard of review has been whether a prudent fiduciary could have made the same decision as the case under consideration. But the 4th U.S. Circuit Court of Appeals — whose decision is left in place by the Supreme Court’s denial of certiorari — held in Tatum v. RJR Pension Investment Committee, et al., that the applicable standard in this case was whether a prudent fiduciary would have made the same decision. Last August, the 4th Circuit court ruled 2-1 that a defendant has the burden of proof if there is a breach of duty, and that a fiduciary can be held liable for damages even for a prudent decision.
The Case
The case was a “reverse” stock drop case in which the employer (RJR) was sued for dropping two company stock funds from the plan. The 1999 spin-off of the R.J. Reynolds Tobacco Company from Nabisco resulted in the creation of a new RJR 401(k) plan (which was spun off from the existing RJR-Nabisco 401(k) plan).
The plan document said that the Nabisco stock fund was to remain as a frozen fund in the RJR plan after the plan spin-off, but approximately six months after the corporate transaction, the RJR plan fiduciaries liquidated the Nabisco stock fund at a point when its shares had declined significantly in value from the time of the corporate spin-off. Within a year of that decision, a takeover bid for Nabisco sparked a bidding war that drove the price of the now-liquidated Nabisco stock up dramatically. So, in this case, participants were suing not because the stock had been held as an imprudent investment, but because of the decision to remove the stock as an investment option.
The decision to eliminate the Nabisco stock fund from the spun-off RJR plan wasn’t formally investigated and approved by the benefits committee as required by the plan document, nor was the plan was properly amended to remove the relevant stock fund. According to the record, testimony of company executives and benefits committee members indicated that more thought was given to the effect of the decision on the company than on the plan participants.
Amicus ‘Brief’
The U.S. Chamber of Commerce had filed an amicus (or “friend of the court”) brief on behalf of the employer defendants, to resolve a split among five circuits in the applicable fiduciary standard of review that the Chamber said was “unworkable.” On the other hand, invited by the Supreme Court to weigh in on the issue, the Department of Labor had argued against taking the case, saying in its amicus brief that this case was “a poor vehicle for consideration of the questions presented.”
