Lehman Brothers Wins Stock Plan Lawsuit in 2nd Circuit

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By Jacklyn Wille

March 18 — Lehman Brothers employees lost yet another battle in their eight-year fight to hold the company liable for losses in its employee stock ownership plan.

The March 18 ruling by the U.S. Court of Appeals for the Second Circuit marks the first time a circuit court has applied the U.S. Supreme Court's recent decision reaffirming the high hurdle facing employees who challenge company stock losses under the Employee Retirement Income Security Act (Amgen Inc. v. Harris, 136 S.Ct. 758 (U.S. 2016) (per curiam) ).

In particular, the Second Circuit rejected the idea that orders issued by the Securities and Exchange Commission banning the short-selling of Lehman securities contemplated the type of “special circumstances” required to make a valid ERISA claim based on publicly available information.

This special circumstances requirement has derailed several ERISA lawsuits in the past two years, with courts dismissing claims involving the company stock plans of General Motors, RadioShack Corp. and J.C. Penney Corp.

Mark C. Rifkin, counsel for the Lehman employees, criticized the court's decision, saying it misapplied the Supreme Court's 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459, 58 EBC 1405 (U.S. 2014) .

Decision Challenging for Plaintiffs

Rifkin, a New York-based partner with Wolf Haldenstein Adler Freeman & Herz LLP, told Bloomberg BNA that the Second Circuit improperly interpreted Fifth Third Bancorp v. Dudenhoeffer as creating a higher bar for plan participants than the “presumption of prudence” in place before that decision was released.

“We believe the Second Circuit's decision improperly applies the Supreme Court's decision in Fifth Third,” Rifkin said in a March 18 e-mail. “When the Supreme Court overturned the presumption of prudence, it did not intend to create an even higher pleading burden for plan participants. The Second Circuit has misinterpreted Fifth Third in doing just that.”

Samuel Bonderoff, an attorney with Zamansky LLC who has represented workers in similar lawsuits, said the decision confirms “that it is very difficult to bring an ERISA prudence claim against ESOP fiduciaries based on the public stock price alone.”

“There needs to be artificial inflation of the Stock and the fiduciaries need to be insiders with knowledge of the fraud,” Bonderoff told Bloomberg BNA in a March 18 e-mail.

Jonathan K. Youngwood, a partner with Simpson Thacher & Bartlett LLP and counsel for the Lehman benefits committee, said this decision marked the fifth time the employees' claims have been rejected by federal courts.

According to Youngwood, the decision underscores the difficulties that plaintiffs will continue to have in demonstrating the requisite special circumstances.

“Articulating special circumstances is going to be difficult,” Youngwood told Bloomberg BNA on March 18. He added that while plaintiffs may continue bringing these suits, “in most cases courts are going to reject them.”

H. Douglas Hinson, an ERISA lawyer who has defended companies from these types of claims, had a somewhat similar take.

The Second Circuit's decision will “discourage plaintiffs from filing these cases, just as the Supreme Court intended when it decided Dudenhoeffer, and as it emphasized in Amgen,” Hinson, a partner with Alston & Bird LLP, told Bloomberg BNA on March 18.

“The bar is high, and rightly so because these cases are based on impermissible hindsight,” Hinson said.

He also praised the decision for confirming the “absence of a duty to disclose material nonpublic information about employer stock under ERISA” and for rejecting the idea that “unusual company circumstances” can constitute special circumstances under Dudenhoeffer.

No Special Circumstances

The Second Circuit first rejected these claims against Lehman in 2013, a year before Dudenhoefferestablished special circumstances as the appropriate pleading standard .

Following Dudenhoeffer, the Lehman employees tried to establish special circumstances by pointing to orders issued by the SEC in the summer of 2008 that prohibited the short-selling of Lehman securities. They argued both that the orders described market conditions that constituted special circumstances and that the orders themselves qualified as special circumstances.

The Second Circuit rejected the first argument, explaining that the SEC orders “speak only conditionally” about the market effects of short sales. It declined to consider the second argument, calling it a conclusory assertion.

Finally, the court rejected the workers' claims against former Lehman Chairman Richard S. Fuld Jr., finding no basis to hold him liable for failing to monitor the situation or for failing to share information with the people running the company's stock plan.

The opinion was joined by Judges Dennis Jacobs, Richard C. Wesley and Debra Ann Livingston. The decision affirms a July 2015 ruling by the U.S. District Court for the Southern District of New York .

Wolf Haldenstein Adler Freeman & Herz LLP and Gainey McKenna & Egleston represented the employees. Simpson Thacher & Bartlett LLP represented Lehman Brothers. Allen & Overy LLP represented Fuld.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com