By: Mark Casciari and Ada Dolph,

The Court of Appeals for the Sixth Circuit ruled in Pfeil v. State Street Bank & Trust Co., 671 F.3d 585, 591 (6th Cir. 2012) that the presumption that a fiduciary acted reasonably in retaining company stock cannot be applied at the pleading stage of litigation.  Pfiel continues to have an effect on the ability of defendants to sustain dismissals of “stock drop” complaints in that circuit.  On September 5, 2012, in Dudenhoefer v. Fifth Third Bancorp et al., No. 11-3012 (6th Cir. Sept. 5, 2012), the Sixth Circuit followed the rule set forth in Pfeil and reversed yet another dismissal by a district court.  See our prior posting here regarding Pfeil’s role in the Sixth Circuit’s reversal in Griffin v. Flagstar Bancorp Inc., No. 11-1497 (6th Cir. July 23, 2012). 

In Dudenhoefer, the plaintiffs alleged that the defined contribution plan’s fiduciaries were aware that Fifth Third had “switched from being a conservative lender to a subprime lender” and that “its loan portfolio became increasingly at risk due to defaults.”  The plaintiffs alleged further that the fiduciaries failed to disclose and otherwise misrepresented the subprime damage to the company, which caused the company’s stock to be artificially inflated before it plummeted in value.  Over the approximately two-year class period selected by the plaintiffs, the company stock price declined 74 percent.  The court found that the plan document did not “require[]” the company stock fund to be invested solely in company stock.  The plaintiffs alleged that “[a] prudent fiduciary facing similar circumstances would not have stood idly by as the plan’s assets were decimated.”  The defendants argued that the plaintiffs had failed to allege facts to overcome the presumption that they had acted reasonably.  

Noting Pfeil’s holding that the reasonableness presumption “is not an additional pleading requirement and thus does not apply at the motion to dismiss stage,” the Sixth Circuit reiterated that “the proper question” was whether the complaint “pleads facts to plausibly allege that a fiduciary has breached its duty to the plan and a causal connection between that breach and the harm suffered by the plan–that an adequate investigation would have revealed to a reasonable fiduciary that the investment in [Fifth Third Stock] was improvident.”  (internal quotation marks omitted). 

The Sixth Circuit found that the Dudenhoefer plaintiffs stated a claim for fiduciary breach.  The plaintiffs had adequately pled that the defendants had sufficient warning of problems with their investments based on “public information,” including “warnings by industry watchdogs of subprime lending practices, the rise of foreclosures and delinquency rates in real estate loans,” published articles on the same topics, and the closure of other mortgage companies due to their investments in the subprime mortgage industry.  The plaintiffs also pointed to Fifth Third’s participation in the U.S. Government’s Troubled Asset Relief Program (“TARP”) as evidence that the company was in a weakened financial condition and an imprudent investment. 

The plaintiffs also were successful in convincing the Sixth Circuit that a fiduciary decision to incorporate SEC filings into the summary plan description using selected language was sufficient to turn statements made in those SEC filings into a fiduciary act for which liability under ERISA may attach.   

By contrast, on September 4, 2012, the Second Circuit issued a summary order (non-precedential) affirming the dismissal of a “stock drop” complaint in In re Glaxosmithkline ERISA Litigation, No. 11-2289 (2d Cir 2012) reiterating its standard set forth In re Citigroup ERISA Litigation, 662 F.3d 128 (2d Cir. 2011), which we discussed here.  Citigroup allowed courts to apply the reasonableness presumption at the pleadings stage.  The Glaxosmithkline panel found that, where the plan terms “require[e] or strongly favor[]” some investment in employer stock, “plaintiffs must plausibly plead that [the employer] faced a ‘dire situation,’” in order to preclude dismissal.  The Second Circuit found that the Glaxosmithkline plaintiffs had failed in that regard, reciting the oft-cited quote that “mere stock fluctuations, even those that trend downhill significantly, are insufficient to establish the requisite imprudence.”  The Second Circuit also found that the mere incorporation of SEC filings into plan disclosures did not give rise to ERISA liability “absent allegations supporting the inference that individual Plan administrators made intentional or knowing misstatements . . . by incorporating SEC filings into the SPDs.”  The Second Circuit affirmed its Citigroup holding that “[w]e decline to hold that Plan fiduciaries were required to perform an independent investigation of SEC filings before incorporating them into the SPDs.”