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ERISA Fiduciaries Must Prove Prudence – Presumption Popped: Fifth Third Bancorp v. Dudenhoeffer
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Dkt. No. 12-751 (U.S., 6/25/14). Culpability Standards (Prudent Man) * ERISA * Fiduciary Standards (ESOP) * Misrepresentations/Omissions * Pension/Profit Sharing Plans * Pleading Requirements/Issues * Trusts & Estates * U.S. Statutes Interpreted (29 U.S.C. §1104). An ESOP fiduciary’s decision to buy or hold company stock is not entitled under ERISA to a defense-friendly presumption of prudence requiring plaintiff to make a showing that would not be required in an ordinary duty-of-prudence case.
Participants in the Fifth Third Employee Stock Options Plan (“ESOP”) brought a class action against the Plan’s fiduciaries. Claiming that both public and non-public information that the fiduciaries allegedly knew had led the market to overvalue the ESOP’s Fifth Third stock, the complaint asserted that a prudent fiduciary would have either sold the stock, refrained from purchasing more, cancelled the plan’s ESOP or disclosed to the market the negative inside information they possessed about the company so that the market price would adjust accordingly. Finding that the ESOP fiduciaries were entitled to a presumption of prudence when investing in company stock, the District Court dismissed the complaint. On appeal, the Sixth Circuit reversed, holding that the presumption was only evidentiary in nature and did not apply at the pleading stage. After accepting the fiduciaries’ appeal, a unanimous Supreme Court reverses, but not as the fiduciaries hoped; the Court holds that no such presumption exists under ERISA.
Petitioners had advanced four arguments in support of the presumption: (1) because Congress expressly embraced ESOPs to promote employee ownership of employer stock, both as an investment opportunity and as a source of company capital, absent a serious threat to the company’s viability, ESOP fiduciaries should be entitled to a presumption of prudence; (2) under the common law of trusts, a trust settlor may always waive the prudent man standard; (3) the threat of meritless and expensive duty-of-prudence litigation, resulting both from under- and over-investment in company stock, would deter companies from offering ESOPs; and (4) absent a presumption of prudence, ESOP fiduciaries might find themselves in conflict with the legal prohibitions on insider trading.
The Court rejects each. First, non-financial goals cannot trump the statute’s express duty to manage the plan prudently and solely in the interest of the plan’s participants and beneficiaries, especially given the statute’s exemption of ESOP fiduciaries from the duty to diversify, which the presumption would render superfluous. Secondly, the statute expressly prohibits trust documents from excusing trustees from their duties under ERISA. Though sympathetic to Petitioners’ final two arguments, the Court deems the properly applied pleading standards of Twombly and Iqbal, rather than a judicially created presumption, the better solution to both. For example, absent special circumstances, allegations that the ESOP fiduciaries should have known from publicly available information that the market was over- or under-valued are, as a general rule, implausible; they may rely on the integrity of the market to the contrary. Similarly, any allegation that ESOP fiduciaries had a duty to sell or disclose if aware of inside information will require plaintiff to plausibly allege an alternative action they could have taken consistent with the securities laws, and which a prudent fiduciary would have viewed as doing less harm than good; ERISA does not require them to violate the law. The Court remands the matter to the Court of Appeals to consider these pleading issues.
(ed: The Court’s opinion is entirely consistent with a number of its recent trends and decisions: use of strict pleading standards to eliminate frivolous lawsuits; strict adherence to Congressional intent through a plain and narrow reading of statutory language; rejection of judicially-created rules, claims and presumptions (but see Halliburton v. Erica P. John Fund); and acceptance of efficient market theory and reliance on the integrity of the market for accurate price information (see Halliburton).) (SLC Ref. No. 2014-25-01)