ERISA-Second Circuit Applies Moench Presumption To Deny Claim That Plan Fiduciaries Imprudently Allowed Participants To Purchase And Hold Employer Stock In Their Accounts

In Fisher v. JP Morgan Chase & Co., No. 10-1303-cv (2nd Cir. 2012) (Summary Order), the plaintiffs were appealing an order from the district court granting defendants’ motion for judgment on the pleadings. The plaintiffs were participants in a 401(k) plan (the “Plan”), which was maintained by their employer, JP Morgan Chase & Co. (“JP Morgan”), and whose individual accounts in the Plan held shares of JP Morgan common stock between April 1, 1999 and January 2, 2003 (the “Class Period”). The plaintiffs’ complaint asserts, among other things, the following two claims: (1) that the defendants negligently permitted Plan participants to purchase and hold shares of JP Morgan common stock when it was imprudent to do so (the “Prudence Claim”) and (2) that the defendants failed to disclose and negligently misrepresented material facts to Plan participants (the “Communications Claim”).

The Second Circuit Court of Appeals (the “Court”) noted that, in October 2011 (in In re Citigroup ERISA Litig., 662 F. 3d 128 (2nd Cir. 2011) and Gearren v. McGraw-Hill Cos., 660 F. 3d 605 (2nd Cir. 2011)), it had adopted the “Moench Presumption” for the Second Circuit. This presumption requires that courts apply a presumption of prudence when reviewing ERISA fiduciaries’ decisions to not divest a plan of employer stock, or to not impose restrictions on participants’ investment in employer stock. The Court also held that ERISA fiduciaries have no duty to provide Plan participants with non-public information that could pertain to the expected performance of Plan investment options.

The Court said that, in accordance with the Moench Presumption, since the investment in JP Morgan stock was in accordance with the Plan’s terms, the Court will review the plaintiffs’ Prudence Claim for an abuse of discretion. It further said that ERISA fiduciaries are required to divest an individual account plan-such as the Plan-of employer stock only when they know or should know that the employer is in a dire situation. Mere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the presumption. Here, the plaintiffs have not sufficiently alleged that the defendants knew or should have known that JP Morgan was in a dire situation. JP Morgan’s stock price fell approximately 55% over the course of the Class Period. However, even when the stock was at its lowest price — $15 per share — it still retained significant value and by the end of the Class Period, the stock had rebounded to $25 per share. Moreover, throughout the Class Period, JP Morgan remained a viable company. As such, the Court concluded that the plaintiffs’ Prudence Claim fails.

As to the plaintiffs’ Communications Claim, the Court said that, per its October 2011 decisions, ERISA fiduciaries have no duty to provide Plan participants with non-public information that could pertain to the expected performance of Plan investment options. Further, the only false or misleading statements identified by the plaintiffs are in SEC filings that the plaintiffs contend were incorporated into the Plan’s summary plan description. ERISA, however, holds fiduciaries liable solely to the extent that they were acting as a fiduciary when taking the action complained of. In this case, the defendants were acting in a corporate, not a fiduciary, capacity when making these statements, and thus those statements cannot give rise to a breach of duty under ERISA. As such, the Court concluded that the plaintiffs’ Communications Claim fails.

Based on the above, the Court affirmed the district court’s decision.

Posted in:
Updated:

Comments are closed.