With employer stock holding no longer “presumed” to be prudent, a federal appeals court has vacated the dismissal of a stock drop suit against Lehman Brothers, re-opening the case.
Last week, Reuters reported that the 2nd U.S. Circuit Court of Appeals in New York vacated the October 2011 dismissal of the lawsuit by U.S. District Judge Lewis Kaplan, citing the U.S. Supreme Court’s recent decision in Fifth Third Bancorp v. Dudenhoeffer. In that case, the Supreme Court ruled that there was no “presumption of prudence” in the decision to hold employer stock in plans (generally employer stock ownership plans, or ESOPs), even though the plan document specifically provides for it.
The Lehman case was brought by participants in a Lehman Brotherrs 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.
In dismissing the case originally, Kaplan relied on a "presumption of prudence" in favor of corporate defendants who allow retirement plans to invest in company stock, noting that in order to overcome that presumption, plaintiffs had to establish that the plan fiduciaries had to know the firm was in a "dire situation." In dismissing the case, Kaplan found that the plaintiffs had failed to meet that standard.
This same appeals court affirmed that decision last year, but in view of the Fifth Third case, the 2nd Circuit issued a brief order requiring Kaplan to reconsider the case.
‘Presumption’ Origins
The presumption went back to the 1995 Moench v. Robertson case, where a plan participant sued a plan committee for breaching its fiduciary duty based on its continued investment in employer stock after the employer's financial condition “deteriorated.” In that case the 3rd Circuit affirmed the duty of prudence, but looked to ERISA’s diversification requirement and the allowances made for employer stock holdings in an employee stock ownership plan (ESOP), and found a rebuttable presumption that an ESOP fiduciary that invested plan assets in employer stock acted consistently with ERISA.
In the aftermath of the Moench ruling, nearly every court district court that considered the issue of prudence of employer stock holding had rejected plaintiff claims based on this so-called “presumption of prudence.”
However, now that the Supreme Court has rebuffed that “presumption,” it looks as though the plaintiff’s bar will get another shot. And it’s probably not the last of these.
The case is In re Lehman ERISA Litigation, 2nd U.S. Circuit Court of Appeals, No. 11-4232.
