You may have noticed that there aren’t nearly as many ERISA stock drop cases being filed as of late. It’s hard to imagine that the ERISA plaintiffs’ bar has simply decided to take it easy, so we thought we would look at a few possible explanations for this phenomenon:
“It’s the economy, stupid.” The famous one liner from Bill Clinton’s presidential campaign certainly has some teeth here. The likely culprit? The relative strength of the stock market. According to one recent study by Cornerstone Research, there has been a precipitous drop off in securities fraud filings, due in part to the strong stock market. Similarly, since a sharp drop in a company’s stock price is a prerequisite to a traditional ERISA stock drop suit, less volatility probably is a significant driver of the trend.
The decline in filings is also likely attributed to the application of the so-called “Moench presumption.” Since the Third Circuit’s decision in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1994), The “Moench presumption” has become a key defense successfully used by employers defending breach of fiduciary duty claims in ERISA cases. The Second, Third, Fifth, Sixth, Seventh, Ninth, and Eleventh Circuits have all applied some version of the “Moench presumption,” making it nearly impossible to mount a stock drop claim where the plan at issue specifies that there will be an employer stock fund. As a result, this may act as a deterrent to those thinking of filing a stock drop case. Notably, however, the Supreme Court is currently considering a petition for a writ of certiorari in Dudenhoeffer v. Fifth Third Bancorp to decide the applicability of the Moench presumption, a case that if taken would give the Supreme Court a chance to either set aside or adopt this vital rule of law for ERISA plan sponsors and fiduciaries.
Plan design trends may play yet another role in the recent decline of ERISA stock drop cases. According to one study by Callan Research, fewer plans have employer stock funds and some of those that did have these funds are phasing them out. Fewer employer stock funds means a less target rich environment than was present even five, and certainly ten, years ago.
Lastly, the Supreme Court’s decision in Wal-Mart v. Dukes, 131 S. Ct. 2541 (2011), has raised the barrier for class certification, and at least as to stock drop claims premised on failure to disclose risk (as most of them are), individual issues as to what disclosures were heard and reliance may preclude class certification. Courts have already denied class certification in similar circumstances, including Groussman v. Motorola, Inc., 2011 WL 5554030 (N.D. Ill. Nov. 15, 2011), a decision we blogged about here.
All in all, these trends add up to a sharp drop off in ERISA stock drop cases. This is good news for plan fiduciaries and plan sponsors, but if you are one and have an employer stock fund in your plan, you should take advantage of this lull in filings to review the plan design and operation to make sure you will be well positioned for defense if a claim should arise in the future.