JPMorgan Stock Drop Suit Survives Second Challenge

Another stock drop lawsuit has been dismissed for the second time, finding no need for a presumption of prudence to justify keeping employer stock in the plan.

This time it was JPMorgan Chase & Co. fending off claims by a group of its plan participants who had challenged its decision to leave employer stock in their plan, subjecting their retirement accounts to losses following a series of risky investments made by Bruno Iksil (a.k.a. “the London Whale”), whose big derivatives bets resulted in a $6.2 billion trading loss for the company in 2012.

Plaintiffs in the case had revived their claim following the U.S. Supreme Court’s ruling in Fifth Third Bancorp v. Dudenhoeffer, which set aside the so-called “presumption of prudence” for employer stock holdings in these types of plans. (The JPMorgan plan’s holdings had originated as part of an employer stock ownership plan, or ESOP.)

Plaintiffs fared no better this time around, with Judge George B. Daniels of the U.S. District Court for the Southern District of New York dismissing the suit for the second time on January 8, finding that the workers failed to state a valid claim for ERISA violations.

Viable Alternative Required?

According to the ruling, plaintiffs failed to allege any viable action the JPMorgan could have taken. The judge noted that halting investments in JPMorgan stock would have required public disclosures, and the company could have reasonably concluded that those disclosures would have harmed its stock price — and the workers’ retirement savings — even more than keeping the stock in the plan.

Bloomberg News notes that, in granting JPMorgan’s motion to dismiss, Judge Daniels first found that the workers failed to demonstrate that two of the defendants — JPMorgan Case Bank NA and the parent company — qualified as ERISA fiduciaries for purposes of the lawsuit. Daniels concluded that JPMorgan Chase Bank’s status as the plan’s sponsor didn’t render it an ERISA fiduciary for purposes of this lawsuit, because actions taken as a plan sponsor don’t trigger fiduciary liability under ERISA. Their role as the plan trustee was similarly insufficient, Daniels said, because it operated as a directed trustee that lacked discretion to halt investments in company stock.

Daniels dismissed the workers’ fiduciary breach claims against the parent company on similar grounds, explaining that they had raised only “bare legal conclusions” as to the firm’s fiduciary status.

Bloomberg News reports that, with respect to the other defendants — which included the company’s 401(k) plan, its investment committee and various corporate officers, including Chief Executive Officer Jamie Dimon — the court said that the workers’ claims of fiduciary breach failed to satisfy the pleading requirements set forth in Dudenhoeffer.

Daniels set out what seems to be a new standard for such actions: that Dudenhoeffer requires plan participants who challenge a plan’s decision to continue investing in declining company stock to point to an alternative course of action that plan fiduciaries could have taken that wouldn’t have been more likely to harm the plan.

This was the latest in a series of rulings by various courts in the wake of the Dudenhoeffer decision that have upheld the decision to retain employer stock in the plan for a variety of reasons 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 and GM.

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