Transcript Anticipating the Outcome of

Anticipating the Outcome of Fifth
Third on Fiduciary Breach Claims
Jeremy P. Blumenfeld
Brian T. Ortelere
Morgan, Lewis & Bockius LLP
Gregory Y. Porter
Bailey & Glasser LLP
Background to and Sixth Circuit’s
Ruling in Fifth Third
• ERISA “Stock Drop” Claims
– Fiduciary breach claims challenging the continued
offering of employer stock in EIAPs, including ESOPs
and K-SOPs.
– More than 200 suits brought since the
Enron/WorldCom scandals of 2001 and 2002.
– As evolved, two primary claims:
• Prudence claim – investment became imprudent and breach
based on continuing to offer employer stock.
• Misrepresentation/omission claim – fiduciaries breached
duties by failing to warn participants of risks (tension with
insider trading prohibitions of federal securities laws).
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Background to and Sixth Circuit’s
Ruling in Fifth Third
• The Presumption of Prudence statutory bases:
– ERISA section 404(a)(2) – EIAPs, the diversification
requirement and the prudence requirement (only
to the extent that it requires diversification) is not
violated by holding of qualifying employer
securities.
– ERISA section 407(b)(1) – excuses ten percent
ceiling on investments in qualifying employer
securities.
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Background to and Sixth Circuit’s
Ruling in Fifth Third
• Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995).
– Cites to arbitrary and capricious review of Firestone.
– “[T]he concept of employee ownership constituted a
goal in and of itself.”
– By subjecting investment decisions to strict scrutiny,
“we would risk transforming ESOPs into ordinary
pension benefit plans, which then would frustrate
Congress' desire to encourage employee ownership.”
– “Is the fiduciary always to seek the return-maximizing
investment, or is there some nontangible loyalty
interest served by retaining ESOP investments in
employer stock?”
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Background to and Sixth Circuit’s
Ruling in Fifth Third
• Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995).
– Varying standard of judicial review depending upon
language of trust instrument.
• If the trust requires the fiduciary to invest in a particular
stock, the trustee must comply unless compliance would be
impossible or illegal. Presages hard wiring debate of later
cases.
• Where fiduciary not absolutely required to invest, abuse of
discretion review. Investments presumptively prudent. To
rebut presumption, plaintiff must show that continued
investment would defeat or substantially impair the
purposes of the trust.
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Background to and Sixth Circuit’s
Ruling in Fifth Third
• The Moench love fest.
– Most Circuit courts adopted something akin to a “dire
circumstances” test, fiduciaries presumed to act prudently
unless the employer’s viability as a going concern is in
doubt or other dire circumstances are present.
• White v. Marshall (CTA7)(claim failed to show extreme risk)
• Lanfear v. Home Depot (CTA11)(short term events and market
fluctuations insufficient)
• In re Citigroup (CTA2)(employer not in dire situation)
• Quan v. Computer Science (CTA9)(employer’s viability as going
concern not in doubt, nor precipitous drop in stock price)
• Kirshbaum v. Reliant (CTA5)(no indication doubt as to going
concern)
• Edgar v. Avaya (CTA3)(no dire situation)
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Background to and Sixth Circuit’s
Ruling in Fifth Third
• Timing of the application of the presumption.
– Second, Third, Fifth, Seventh and Eleventh Circuits
agree that prudence claims challenging investments in
employer stock may be dismissed on 12(b)(6) if the
plaintiff fails to make allegations sufficient to rebut
the presumption.
– According to CTA2 in Citigroup -- “There is no reason
to permit a case to proceed to discovery where the
facts, even if proven true, would not establish that
defendants abused their discretion in failing to divest
employer stock.”
– Result often turns on the plan language speaking to
the level of discretion, if any, enjoyed by fiduciaries.
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Background to and Sixth Circuit’s
Ruling in Fifth Third
• Moench presumption in the Sixth Circuit, let the games
begin.
– Pfeil v. State Street, 671 F.3d 585 (6th Cir. 2012).
• Citing to its earlier opinion in Kuper, to rebut presumption, plaintiff
must demonstrate that “a prudent fiduciary acting under similar
circumstances would have made a different investment decision.”
• But still a “demanding burden.”
– Uh oh. “Today, we hold that the presumption of
reasonableness adopted in Kuper is not an additional pleading
requirement and thus does not apply at the motion to dismiss
stage.”
– “As such, a plaintiff need not plead enough facts to overcome
the presumption in order to survive a motion to dismiss.”
– Supreme Court denied certiorari.
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Fifth Third Bancorp v. Dudenhoeffer (CTA6).
• Facts
– Matching contributions may be moved to other
options.
– Hard wired – “in all events, the Fifth Third Stock
Fund . . . shall be an investment option.”
– SEC filings incorporated by reference into the SPD.
– Complaint generally alleged that bank switched
from being a conservative to subprime lender.
– Stock price “artificially inflated” and, when “truth
revealed,” fell 74%.
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Fifth Third Bancorp v. Dudenhoeffer (CTA6).
• Prudence holding
– Court revisits application of presumption at the
pleading stage. Standard should only be applied to a
“fully developed evidentiary record.”
– Again, plaintiff need only prove that a prudent
fiduciary acting under similar circumstances would
have made a different investment decision.
– “we are not free to limit the standard set by the
statute by imposing conditions not present in the
statutory language.”
– Complaint “plausibly alleges a breach of fiduciary
duty.”
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Fifth Third Bancorp v. Dudenhoeffer (CTA6).
• Misrepresentation/omission holding
– Distinguishes Kirschbaum (CTA5) ruling that incorporation
of SEC filings into plan prospectus and Form S-8
registration not fiduciary activity because obligated to do
so under securities law.
– “The Amended Complaint plausibly alleges Defendants
breached their fiduciary duties by intentionally
incorporating Fifth Third’s SEC filings into the Plan’s SPD
and thereby conveying misleading information to Plan
participants. ERISA requires the issuance of an SPD, but
does not require the incorporation of a company’s SEC
filings into the SPD.”
– Consideration of efficient market theory/loss causation
“speculative” and “inappropriate” on 12(b)(6).
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Fifth Third Bancorp v. Dudenhoeffer (CTA6).
• Brief of the United States as Amicus Curiae
– Game on – “in the view of the United States,
ERISA’s text and purposes do not call for
application of a presumption at any stage of the
proceedings.”
• But no Circuit split on incorporation by reference.
– Exemption from duty to diversify cannot justify
the presumption of prudence.
– Insider trading concerns misplaced, fiduciaries can
disclose then trade.
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Fifth Third Bancorp v. Dudenhoeffer (CTA6).
• Supreme Court order granting certiorari:
– “Whether the Sixth Circuit erred by holding that
respondents were not required to plausibly allege in
their complaint that the fiduciaries of an employee
stock ownership plan abused their discretion by
remaining invested in employer stock, in order to
overcome the presumption that their decision to
invest in employer stock was reasonable, as required
by the Employee Retirement Income Security Act of
1974 . . . and every other circuit to address the issue.”
– Rejected government suggestion to change/narrow.
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Supreme Court Guideposts
• Primacy of the statutory language:
– ERISA a comprehensive and reticulated statute. Mertens v.
Hewitt Assocs.
• Role of the plan document.
– Cigna Corp. v. Amara; USAirways v. McCuthcen.
• Borrow from trust law.
– Courts to develop a federal common law of rights and
obligations under ERISA-regulated plans. Varity v. Howe.
• But common law must yield to the statute, its structure or purpose.
• Securities laws.
– Efficient market hypothesis and prohibitions against insider
trading.
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Statutory Guideposts
• Duty of prudence informed by the goal of the
trust/plan. ERISA defines the duty of
prudence on how prudent person would act
“in the conduct of an enterprise of a like
character and with like aims.”
– EIAPs “designed to invest primarily in qualifying
employer securities.” 29 U.S.C. § 1107(d)(6)(A).
– And, as noted, relaxation of diversification
standard and ten percent limit on investments in
employer stock.
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Life Goes On . . .
• Harris v. Amgen (CTA9 Oct. 23, 2013).
– Plan states that it “may” include company stock fund.
Falls short of “encouragement.” “The normal prudent
man standard therefore applies to defendants’
investment decisions as fiduciaries under the Plans.”
• Violation of standard may occur if fiduciaries retain
artificially inflated stock.
– Viable misrepresentation/omission claims.
• The plan sponsor’s current prospects irrelevant and speaks
nothing to whether stock was artificially inflated.
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Life Goes On . . .
• Harris v. Amgen (CTA9 Oct. 23, 2013).
– Viable misrepresentation/omission claims.
• The relatively small decline in stock price also irrelevant
particularly given fact that district court had given
green light to companion 10b-5 claims.
• Rejects argument that forced sale of stock when
inflated, would have caused drop in stock price per
efficient market theory.
• Rejects detrimental reliance argument – applies
rebuttable presumption of reliance from 10b-5.
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404(c) . . . The Retreat Continues
• Kopp v. Klein (CTA5 2013).
– “Even where the safe harbor provision does apply,
the safe harbor defense does not relieve
fiduciaries of the responsibility to screen
investments.”
– Ignores previous ruling in Langbecker v. IDS.
• Tibble v. Edison Int’l (CTA9 2013).
– Defers to DOL’s most recent interpretation.
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Best Practices in an Uncertain and Unruly World
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