Alert March 28, 2013

Second Circuit Vacates Dismissal of Stock Drop Claim As to Plan That Neither Required Nor Encouraged Holding of Employer Stock

In two companion decisions, the Second Circuit Court of Appeals affirmed in part, and vacated and remanded in part, a decision by the United States District Court for the Southern District of New York dismissing all claims as to the inclusion in two 401(k)-style plans that allowed participants to invest in the stock of the sponsoring employer.  Taveras v. UBS AG, 708 F.3d 436, No. 12-1662, 2013 WL 692720 (2d Cir. Feb. 27, 2013).

In Taveras, four former employees of a financial services company sued their former employer and related individuals and entities regarding investments in the employer’s stock made by two company-sponsored retirement savings plans.  The plaintiffs alleged that the stock investments were imprudent due, in part, to the sponsoring employer being on the “brink of collapse” as a result of alleged sub-prime exposure in 2007 and 2008.  The plaintiffs purported to sue on behalf of a class of other participants and former participants of the two plans during a period when the price of the stock fell 74% between April 26, 2007 and October 16, 2008.  The district court dismissed all claims, holding, among other things, that the plans’ fiduciaries were entitled to a presumption of prudence under Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), and that the complaint did not sufficiently plead the “dire circumstances” necessary to meet that standard.  The Second Circuit Court of Appeals affirmed dismissal of the claim of breach of the duty of prudence as to one plan, the 401(k) Plus Plan (“Plus Plan”), but vacated and remanded as to the other, the Savings and Investment Plan (the “SIP”).

As to the Plus Plan, the appellate court held that the presumption of prudence applied given that the plan document stated that one purpose of that plan was to provide employees the opportunity “to acquire” the company’s stock, and elsewhere stated that one of the initial investment options for the Plus Plan “shall be” a fund consisting of the employer’s stock — even though the plan also allowed the fiduciary committee to change options.  Having found that the presumption of prudence applied given that plan language, the court in its companion order held that the presumption was not defeated by the pleaded allegations.  The court acknowledged that it had not “defined precisely the contours of what constitutes a ‘dire’ situation sufficient to defeat the presumption of prudence,” but it made clear that a “showing that the company made bad business decisions is insufficient to show that it was in a ‘dire situation’” (internal quotations omitted).  The court did say that any dire circumstances must be those that would have been “objectively unforeseeable” by the employer when it established the plan.  It held that the pleadings at issue here did not meet that standard.

The Second Circuit, however, vacated dismissal of the prudence claim relating to the SIP and remanded for further proceedings. The SIP only mentioned the existence of an employer stock fund, and neither mandated such a fund nor strongly encouraged it.  Under those circumstances, the court held that no presumption of prudence applies to the holding of employer stock because the policy underlying the Moench presumption, and the Second Circuit’s earlier Citigroup decision (reported previously in the December 14, 2011 ERISA Litigation Update at the link available here), did not apply given that there was no need to balance a tension between a fiduciary’s duty of prudence and an obligation under plan documents (encouraged by ERISA) to offer investment in employer stock. 

As to both plans, the appellate court affirmed dismissal of other claims.  The court held that statements in SEC filings (relating to corporate prospects effecting the company stock value) by the defendants were not actionable under ERISA because they were not made in an ERISA fiduciary capacity.  Similarly, the court followed the settled principle that an “alleged ERISA fiduciary's mere officer or director status, taken alone, is insufficient to state a claim for conflict of interest” that would violate ERISA.