By: Ian Morrison and Abigail Cahak
The first (or second) question to ask in any ERISA breach of fiduciary duty case is whether the acts in question are even fiduciary acts.
On appeal in an ERISA “stock drop” case, the Second Circuit focused on that basic question, resulting in a clean win for the defendants.
Participants in the Morgan Stanley 401(k) and Employee Stock Ownership Plans (“Plans”) sued after the great recession caused the value of 2007 and 2008 contributions to the Plans in Morgan Stanley stock to crater, allegedly dropping in value from $2.2 billion to $675 million. The participants sued alleging that the drop was the result of an imprudent investment because Morgan Stanley’s exposure to subprime and mortgage-backed securities had caused the value of the stock to drop.
On March 28, 2013, the U.S. District Court for the Southern District of New York dismissed the cases because, although the named defendants were de facto fiduciaries under ERISA, the plaintiffs had not alleged enough to overcome the so-called Moench presumption that employer stock investments in plans that require such investments are presumed prudent unless plaintiffs can show the plan sponsor’s impending collapse or other “dire” circumstances.
On appeal, the Second Circuit took a back to basics approach to the case. In a May 29, 2014 opinion, the court ruled that the defendants were not fiduciaries at all, at least not for purposes of anything at issue in the case. (Coulter v. Morgan Stanley & Co. Inc., No. 13-2504 (2d Cir. May 29, 2014).) The Court held that establishing and funding the Plans were “settlor functions” not subject to challenge under ERISA’s fiduciary duty rules. The Court said that the fact that the Plans were already in existence was irrelevant because at the time the decisions were made, the company stock was not an asset of the Plans. The Court cautioned that fiduciary status does not exist “simply because an employer’s business decision proves detrimental to a covered plan or its beneficiaries.”
With aspects of the Moench presumption subject to review by the Supreme Court, with a decision expected in Fifth Third Bancorp v. Dudenhoeffer later this month, the Court’s move may have been calculated to avoid any need for reconsideration in light of the high court’s ruling. But the Third Circuit’s decision did rely on a view employee benefits practitioners have long held: the act of plan funding (the amount as well as the nature of payment) is not a fiduciary act. That’s not to say that funding a plan with employer stock is free of risk after the Second Circuit ruling, but Coulter certainly gives the defense another tool to fight back against stock drop claims.