Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
The U.S. Supreme Court declined Oct. 15 to review two decisions of the U.S. Court of Appeals for the Second Circuit adopting the rebuttable “presumption of prudence" standard in Employee Retirement Income Security Act “stock-drop cases” (In re Citigroup ERISA Litigation (Gray v. Citigroup Inc.), U.S., No. 11-1531, cert. denied 10/15/12; Gearren v. McGraw-Hill Companies Inc., U.S., No. 11-1550, cert. denied 10/15/12).
In separate split decisions issued Oct. 19, 2011, the Second Circuit joined with the U.S. Courts of Appeals for the Third, Fifth, Sixth, and Ninth circuits and ruled that the prudence presumption applies in cases in which employers offer employer stock in their defined contribution plans (203 PBD, 10/20/11; 38 BPR 1961, 10/25/11; 51 EBC 1735; 51 EBC 1765).
The presumption originated with the Third Circuit's decision in Moench v. Robertson, 62 F.3d 553, 19 EBC 1713 (3d Cir. 1995), and is frequently cited by the defense bar as grounds to dismiss stock-drop lawsuits.
The Citigroup lawsuit was brought by Citigroup employees who alleged the company had invested extensively in subprime mortgages and securities related to subprime mortgages in the mid-2000s. When the subprime mortgage market collapsed, Citigroup lost tens of billions of dollars in its subprime mortgage-related investments. As a result, Citigroup's stock lost 52 percent of its value during the class period, falling from a high of $55.70 per share to a low of $26.94 per share.
The employees alleged that Citigroup and the investment and administration committees for the plans at issue knew the company would sustain heavy losses from the subprime mortgage investments but failed to tell employees and investors about the company's immense subprime loan loss exposure. The employees further alleged that Citigroup's chief executive officer breached fiduciary duties by failing to provide complete and accurate information to participants regarding the company stock fund and its exposure to the risks associated with the subprime market.
The McGraw-Hill class action alleged that McGraw-Hill Cos. and its leadership knew or should have known that the company's stock was likely to decline sharply in value once it was revealed that the company's financial services division, Standard & Poors (S&P), had given improperly high credit ratings to complex financial instruments like residential mortgage-backed securities and collateralized debt obligations. From Dec. 31, 2006, through Dec. 5, 2008, the price of McGraw-Hill stock declined from $68.02 per share to $24.23 per share--a drop of 64.4 percent.
The plans in both Citigroup and McGraw-Hill required that company stock be offered as an investment option.
The U.S. District Court for the Southern District of New York dismissed the complaints in both cases (167 PBD, 9/1/09; 36 BPR 2054, 9/8/09; 47 EBC 2025, and 29 PBD, 2/16/10; 37 BPR 415, 2/23/10; 48 EBC 2057).
In affirming the district court's decisions dismissing both cases, the Second Circuit adopted the presumption of prudence with respect to both eligible individual account plans (EIAPs) and employee stock ownership plans (ESOPs), and said the presumption could be overcome only where there was a showing of “dire circumstances” that were objectively foreseeable.
Among other things, the majority said an ESOP or EIAP fiduciary's decision to continue to offer investment in employer stock should be reviewed for an abuse of discretion. The Second Circuit said the burden to rebut the presumption varies directly with the strength of a plan's requirement that fiduciaries invest in employer stock.
The Second Circuit also determined that the presumption could apply at the pleadings stage because the Moench presumption is not an evidentiary presumption--it is a standard of review applied to an ERISA fiduciary's decision.
Both certiorari petitions asked the Supreme Court to determine whether ESOP and EAIP fiduciaries are afforded a presumption of prudence when plan investments include an employer's securities and only required to act when faced with a “dire situation.”
Additionally, the petitions sought guidance on whether a complaint must plead sufficient facts to overcome the presumption to survive a motion to dismiss.
The full text of the Second Circuit's Citigroup opinion is at http://op.bna.com/pen.nsf/r?Open=mmaa-8z4rdu.
The full text of the Second Circuit's McGraw-Hill opinion is at http://op.bna.com/pen.nsf/r?Open=mmaa-8z4rec.
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