Although the volume of so-called “stock drop” litigation has decreased somewhat in recent years, decisions announced in February and March, 2012, show this is still an issue to follow. The plaintiffs of Pfeil v. State Street Bank and Trust Company (2012 WL 555481 (6th Cir. 2012)) and In Re: BP ERISA Litigation (case number 4:10-md-02185, S.D. Texas (March 30, 2012)) alleged that ERISA fiduciaries to defined contribution plans breached their duties of prudence by continuing to allow participants to invest in company stock during the time periods leading up to the financial decline of the companies sponsoring the plans. The outcomes of each of these cases are opposite to the other due to differing applications of what has come to be known as the Moench presumption.

We last wrote of the Moench position in a February 6, 2012 blog entry. The presumption provides that a plan fiduciary is presumed to have acted prudently in making the determination to offer and continue to offer company stock as an investment. It can be rebutted by showing that the fiduciary abused its discretion in investing in employer securities. Abuse of discretion may be shown by evidence of fraud, conflict of interest, fiduciaries’ knowledge of the impending financial collapse of the company, or that reasonable fiduciaries could not have reasonably believed that continued investment in employer securities was prudent.

In Pfeil, the Sixth Circuit held a plaintiff need not plead enough facts to overcome the presumption in order to survive a motion to dismiss. State Street, an independent fiduciary for certain GM retirement plans, was sued by participant-plaintiffs alleging that State Street should have known by July 2008 that GM stock was an imprudent plan investment. The bank did not divest GM stock until five weeks before GM declared bankruptcy. In allowing the case to go forward, the court held that while State Street was entitled to the Moench presumption, the presumption may only be applied to a fully developed evidentiary record.

In contrast, the Southern District of Texas, in weighing the BP litigation, applied the Moench presumption at the motion to dismiss stage, holding that the BP plan fiduciaries were presumed to have acted prudently in continuing to offer BP stock as an investment option to plan participants following the Deepwater Horizon disaster. In so holding, the court found that the plaintiffs had not shown that plan fiduciaries were aware of non-public information that would have prompted removal of company stock from the investment line-up, that the oil spill disaster was not a novel risk unknown to investors, and that the 55% drop in BP stock price was not of a magnitude to call into question BP’s continued viability.

As the Pfeil case has been remanded to the court of the Eastern District of Michigan, it remains to be seen whether the plan participants can muster the evidence to prove that State Street breached the fiduciary duty of prudence. In any event, the presumption of prudence is still something to Moench on…

Related Links

In Re: Citigroup ERISA Litigation (Second Circuit)

Garren v. McGraw-Hill (Second Circuit)

Other ERISA Litigation-Related Posts

Disclaimer/IRS Circular 230 Notice