By: Ian Morrison, Meg Troy and Sam Schwartz-Fenwick
On May 8, 2012, the Eleventh and Second Circuits affirmed two district court dismissals of “stock drop” cases at the pleadings stage, joining the long line of recent decisions that demonstrate skepticism towards stock drop claims. We have reported on some of those decisions here and here.
In Lanfear v. Home Depot, Inc., No. 10-12002 (11th Cir. May 8, 2012), the Eleventh Circuit joined the Second, Ninth, Fifth and Sixth Circuits in adopting the Moench presumption, holding that a 16.5% drop in stock price over a period of more than two months did not indicate that the company was on the “brink of financial collapse” which would have required defendants to deviate from the Plan.
Plaintiffs alleged that company stock became an imprudent investment when, unknown to the public, company officials engaged in misconduct that artificially inflated the company’s stock price. The Plan required one of the available investment options to be a Company Stock Fund, which was to be invested primarily in company stock. The Court held that because the Plan used the term “primarily” instead of “exclusively,” defendants retained limited discretion over investment decisions and were subject to judicial review consistent with the Moench presumption.
Explaining that the term “presumption” is not an evidentiary presumption, but a standard of review applied to a decision made by an ERISA fiduciary to continue to invest in or hold company stock in compliance with the directions of the Plan, and that “[m]ere stock fluctuations, even those that trend downward significantly, are insufficient to establish that a fiduciary abused its discretion . . . .” Op. at 30-31 (internal quotations omitted), the Court affirmed the district court’s holding that plaintiffs did not plead facts establishing that the defendants abused their discretion by following the Plan’s directions.
In Fisher v. JP Morgan Chase & Co., No. 10-1303-cv (2d Cir. May 8, 2012) (unpublished), the Second Circuit affirmed a district court’s decision granting defendants’ judgment on the pleadings where, between April 1, 1999 and January 2, 2003, JP Morgan stock fell 55%.
Relying on recent opinions that adopted and applied the Moench presumption of prudence, In re Citigroup ERISA Litig., 622 F.3d 128 (2d Cir. 2011) and Gearren v. McGraw-Hill Cos., 660 F.3d 605 (2d Cir 2011), the Court explained that Plan fiduciaries are only required to divest an EIAP or ESOP of employer stock where the fiduciaries know or should know that the employer is in a “dire situation.” The Court found plaintiffs did not meet this burden and emphasized that JP Morgan remained a viable company at all times and that, even when the stock was at its lowest price of $15 per share, it still retained significant value.
The court in Fisher further explained that the Moench presumption applies to “all EAIPs and ESOPs,” even when the Plan does not expressly require fiduciaries to offer company stock as an investment option, but rather when the Plan provisions “strongly favor” employee investment in the company. Op. at 5 (emphasis in original).
Lanfear and Fisher reinforce the increasing degree to which courts are skeptical of ERISA stock drop claims and demonstrate the heightened factual threshold that plaintiffs must overcome at the pleadings stage if the plan at issue is “hard-wired” to provide for an employer stock investment option.
Despite increasing judicial skepticism it is important to recognize that some stock drop claims continue to survive motions to dismiss. For example, in Guididas v. Community Nat’l Bank Corp., No. 11-cv-2545 (M.D. Fla. May 10, 2012), the court denied a motion to dismiss a stock drop claim where plaintiffs alleged that Plan fiduciaries continued to offer company stock as an investment option even after they knew that company stock was worthless in light of the company’s improper business and banking practices. Relying on Lanfear, the court found these allegations sufficient to state a claim because, taken as true, they demonstrate that the Plan fiduciaries abused their discretion by following the Plan’s directions.