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Stock Drop Appeal Comes Up Short — Again

The U.S. Supreme Court may have booted the “presumption” of prudence for employer stock holdings, but a new court ruling finds no “duty to inform” plan fiduciaries of “material, nonpublic company information.”

The recent ruling by Judge Keith P. Ellison was the second time the U.S. District Court for the Southern District of Texas has rejected parts of the stock-drop class action filed by BP workers who claim that the plan fiduciaries violated their duties under ERISA by allowing workers to invest their retirement plan investments in their employer’s stock — stock whose value plummeted following the 2010 Deepwater Horizon disaster.

The suit, which alleged that plan fiduciaries knew or should have known that continued investment in that employer stock was imprudent, was first dismissed in 2012, but was later revived by the U.S. Court of Appeals for the Fifth Circuit after the U.S. Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer that set aside the so-called “presumption of prudence” in ERISA stock-drop cases. The case was then remanded to the district court.

Current Ruling

In the most recent iteration of the BP case, Judge Ellison held that the corporate defendants — including BP, BP America, BP North America and the boards of these companies — weren't plan fiduciaries, and couldn't be held vicariously liable for the acts of those who had made the investment decisions. Additionally, the court held that ERISA’s duty to monitor doesn't include the duty to apprise plan fiduciaries of material, nonpublic company information.

To try and overcome the fact that none of these defendants were specifically named as fiduciaries in plan documents, the plaintiff employees argued that the corporate defendants should be held vicariously liable for the acts of those they had appointed to be plan fiduciaries.

While in cases like that involving Enron more than a decade ago, the Labor Department has indicated that the power to appoint fiduciaries creates a fiduciary responsibility, in the most recent case, the court rejected this attempt, saying that to be vicariously liable, the defendants needed to “actively and knowingly” participate in the fiduciary breaches.

The court also tossed claims that the corporate defendants and board members breached their ERISA duties by failing to monitor the fiduciaries they had appointed to manage the plans' assets. The employees had argued that the duty to monitor carries with it the duty to inform appointees of material, nonpublic information that could affect the appointees’ evaluation of the prudence of investing in employer stock. The court rejected this notion. “The Department of Labor has specifically laid out the ‘ongoing responsibilities of a fiduciary who has appointed trustees or other fiduciaries’ in the Code of Federal Regulations, and a ‘duty to inform’ appointed fiduciaries is nowhere to be found,” the court said.

Fiduciary breach claims against those appointed to oversee the plans' investments directly are still pending.

Prudence Presumption

The presumption of prudence in such cases dated 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 Third 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.”

That said, it’s not the first post-Fifth Third stock drop suit to be rejected despite the demise of the presumption of prudence. In Dennis Smith v. Delta Airlines Inc., et al., the 11th Circuit noted that, “…while Fifth Third may have changed the legal analysis of our prior decision, it does not alter the outcome.”

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