Supremes Let Lehman Stock Drop Decision Stand

The U.S. Supreme Court has declined to weigh in on a case involving a drop in the value of employer stock.

The case whose review was denied by the nation’s highest court (Rinehart v. Lehman Bros. Holdings Inc., U.S., No. 16-562, cert. denied 2/21/17) was brought by participants in a Lehman Brothers retirement plan who argued that directors breached their fiduciary duties by keeping the plan invested in proprietary stock during the run-up to the firm’s historic bankruptcy in September 2008, even though they knew the true nature of the investment bank’s financial condition.

Not quite a year ago, the U.S. Court of Appeals for the 2nd Circuit reconsidered the case presented by former participants in the Lehman Brothers plan in the context of Supreme Court’s 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer. That decision held that employee stock ownership plan (ESOP) fiduciaries are not entitled to any special “presumption” of prudence in the decision to hold employer stock in the plan.

Fifth ‘Amendments’

In rejecting (for a second time) the plaintiffs’ claims, the 2nd Circuit noted that in the Fifth Third case, the Supreme Court “made clear that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances,” and that it was prudent to, as a general matter, rely on the market price. Moreover, they noted that for claims alleging breach of the duty of prudence on the basis of nonpublic information, Fifth Third held that “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

The appellate court noted that while plaintiffs alleged that the defendants “knew or should have known, based on publicly available information, that investment in Lehman had become increasingly risky throughout 2008,” and that failing to consider the wisdom of continuing to invest in Lehman during this period constituted a breach of fiduciary duty. However the court agreed with the lower court that the findings in Fifth Third did not change the reality that, in its opinion, plaintiffs had still failed to plausibly state a breach of duty claim.

The 2nd Circuit also disagreed with the argument by the plaintiffs that if Lehman plan fiduciaries had conducted an independent investigation, they would have uncovered the fact that the investment in Lehman stock was imprudent. They also cited the recent Supreme Court holding in Amgen that a prudent fiduciary might well have concluded that divesting Lehman stock, or simply holding it without purchasing more, “would do more harm than good,” noting that “such an alternative action in the summer of 2008 could have had dire consequences.”

The bottom line: The 2nd Circuit held that the plaintiffs “simply have not met the Fifth Third standard for making out “sufficient facts and allegations to state a claim for breach of the duty of prudence.”

And now, the Supreme Court’s refusal to consider the case leaves that determination in place.

The results have been the same in a number of the recent “stock drop” cases, including those brought against Delta AirlinesJP Morgan and BP.

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