ERISA-Seventh Circuit Affirms Dismissal Of Stock Drop Case
In White v. Marshall & Ilsley Corporation, No.11-2660 (7th Cir. 2013), the Seventh Circuit Court of Appeals (the “Court”) faced a “stock drop case”, that is, a case in which the plaintiff alleged that the fiduciaries of an employee retirement savings plan acted imprudently-thereby violating ERISA’s fiduciary requirements- by allowing participating employees to choose to buy and hold an employer’s stock while it declined significantly in price.
The Court said of such cases: In the absence of allegations of misrepresentations or other wrongful conduct not alleged here, plaintiffs in such cases under ERISA must try to hit a very small and perhaps non-existent target. The theory — that the employer and plan fiduciaries violated their duty of prudence under ERISA by continuing to offer employer stock as an investment option — would require the employer and plan fiduciaries, in this case and many similar cases, to violate the retirement plan’s governing documents, which employers and plan fiduciaries are also required to follow under ERISA. The theory also seems to be based often on the untenable premise that employers and plan fiduciaries have a fiduciary duty either to outsmart the stock market, which is groundless, or to use insider information for the benefit of employees, which would violate federal securities laws.
In this particular case, defendant Marshall & Ilsley Corporation (“M&I”) offered its employees participation in an individual account retirement savings plan (the “Plan”). The Plan allowed employees to choose how to distribute their savings among twenty two investment funds with different risk and reward profiles. With one exception, the investment funds offered by the Plan were selected by the Plan’s fiduciaries. One of the investment options in the Plan was the M&I Stock Fund which consisted of M&I stock. The Plan required the fiduciaries to offer this fund to the participants for investment. The portion of the Plan holding the M&I Stock Fund constitutes an employee stock ownership plan or “ESOP”. During the housing market collapse and subsequent market crash in 2008 and 2009, M&I’s stock price dropped by approximately 54 percent, as did the value of employees’ investments in the M&I Stock Fund. This suit followed. Applying a presumption that the fiduciaries acted prudently, the district court dismissed the case. The plaintiffs appealed.
In reviewing the case, the Court agreed that the presumption of prudence-the so-called “Moench presumption”- applies. Plaintiffs in a case involving an ESOP may overcome this presumption by showing that no reasonable fiduciaries would have thought they were obligated to continue offering company stock as a Plan investment. For example, the plaintiffs could show that the company was facing dire circumstances or was nearing collapse, or that, given all relevant circumstances, continuing to offer company stock as a Plan investment imposed excessive risk on the plaintiffs. The Court ruled, however, that in this case the plaintiffs did not offer sufficient evidence to overcome the Moench presumption. The 54 percent drop in M&I’s stock is not significantly worse than drops in stock prices in cases where the courts have found, as a matter of law, no violation of the duty of prudence. Also, the Plan permitted employees to choose from among twenty two options and allowed them to change their investments at any time, mitigating any excessive risk.
The Court said, further, that it agreed with the Second, Third, and Eleventh Circuits that a claim against ESOP fiduciaries alleging a violation of the duty of prudence may be dismissed at the pleading stage-the current stage of this case-if the plaintiffs do not make allegations sufficient to overcome the Moench presumption . Accordingly, the Court affirmed the district court’s dismissal of the case.