ERISA-Second Circuit Rules That Plaintiffs In A Stock Drop Case Fail To State A Claim Of Breach Of Fiduciary Duty Under ERISA

The case of In Re: Lehman Bros. Sec. and ERISA Litig., No. 15-2229 (2d Cir. 2016) has returned to the Second Circuit Court of Appeals (the “Court”) for the second time since 2013. After the September 2008 bankruptcy of Lehman Brothers Holdings, Inc. (“Lehman”), the plaintiffs (“Plaintiffs”) brought suit on behalf of a putative class of former participants in an employee stock ownership plan (“ESOP”) invested exclusively in Lehman’s common stock. Plaintiffs alleged, among other things, that the defendants (“Plan Committee Defendants”), who were fiduciaries of this ESOP, breached their duty of prudence under ERISA by continuing to permit investment in Lehman stock in the face of circumstances arguably foreshadowing its eventual demise. The District Court had ruled in favor of the Plan Committee Defendants.

The Court reviewed the case history and noted that on June 25, 2014, the Supreme Court of the United States held in Fifth Third Bancorp v. Dudenhoeffer (“Fifth Third”) that ESOP fiduciaries are not entitled to any special presumption of prudence when the plan invests in employer stock, abrogating the so called Moench presumption of prudence. Nevertheless, even without this presumption, the Court ruled that the Plaintiffs have failed to state a claim of breach of fiduciary duty.

After reviewing the case, the Court stated that it agreed with the District Court that, even without the presumption of prudence rejected in Fifth Third, Plaintiffs have failed to plead plausibly that the Plan Committee Defendants breached their fiduciary duties under ERISA by failing to recognize the imminence of Lehman’s collapse. Plaintiffs have not adequately shown that the Plan Committee Defendants should be held liable for their actions in attempting to meet their fiduciary duties under ERISA while simultaneously offering an undiversified investment option for employees’ retirement savings.

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