A federal district court has approved a preliminary settlement in one of the cases cited most often in employer stock litigation. You could think of it as a “Six Million Dollar ‘mien.’”
The settlement calls for $6 million to be set aside in an escrow account to be distributed to the affected parties. Additionally, Fifth Third agreed to a number of plan design changes, including:
- Participants will be prohibited from investing all future employee, employer and rollover contributions into the Fifth Third Stock Fund, and no new participants will be permitted to invest in that fund. Nor will participants be allowed to transfer existing balances into this fund, though those with balances in that fund will be allowed to transfer out (once out, they can’t transfer back in, however). Dividends on the holdings in that fund can be reinvested.
- Fifth Third agreed to develop a communication strategy to educate participants about these changes and the benefits of asset allocation and diversification. The defendants also agreed that the plan will send an annual notice to participants who have more than 20% of their account invested in Fifth Third Stock Fund and educate them about the benefits of asset allocation and diversification.
- Fifth Third will fund plan contributions in the form of cash (not shares) and agrees not to change this for at least the next eight years.
- While the Fifth Third Bancorp Pension, Profit Sharing, and Medical Plan Committee members receive annual fiduciary training, Fifth Third agrees to increase this training to be conducted at least twice annually.
While final settlement distributions are still to be worked out, the settlement agreement states that attorneys for the plaintiffs’ class may move the court for a Case Contribution Award, which shall not exceed $10,000 per Named Plaintiff. Defendants also agreed not to take a position on any fee motion submitted by plaintiff’s attorneys, so long as it is not in excess of one third (33 1/3%) of the Settlement Fund.
Case History
The original lawsuit, filed back in 2008, was filed by John Dudenhoefer, a Fifth Third employee from Collier County, Fla., who charged that the bank hid its true financial picture, and then the stock suffered a major plunge in its share price when the company’s financial problems were revealed.
In 2010, a federal judge in Ohio rejected arguments of a fiduciary breach, resting that decision on the so-called “presumption of prudence” established in the 1995 decision Moench v. Robertson, an oft-cited decision in a large number of these “stock drop” cases. In Moench, 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.
However, the 6th U.S. Circuit Court of Appeals reversed the Dudenhoefer decision, saying that the “legislative history combined with a natural and clear reading of Section 404 [of the Employee Retirement Income Security Act (ERISA)] [led] to the inexorable conclusion that ESOP fiduciaries are subject to the same fiduciary standards as any other fiduciary except to the extent that the standards require diversification of investments.” The U.S. Supreme Court subsequently agreed to weigh in on the presumption of prudence issue, and in June 2014 decided fiduciaries of employee stock ownership plans (ESOPs) were not entitled to any special presumption of prudence under ERISA.
What’s the Result(s)
Since that decision, a number of the stock drop cases have been rearisen to be evaluated on the post-Fifth Third basis. While legal pundits said the decision foreshadowed a new era in this type of litigation, the results have continued to favor defendants in a wide variety of jurisdictions without regard to the “presumption of prudence” that had triggered their dismissal prior to the Supreme Court’s ruling, including BP, Delta Air Lines, Lehman, GM, and even a so-called “reverse stock drop” case involving RJR.
