In a recent case, Griffin v. Flagstar Bancorp, Inc., No. 11–1497, 2012 WL 2989231 (6th Cir. July 23, 2012), the Sixth Circuit stuck with its position that the presumption of prudence does not apply at the pleadings stage, when it reversed an order dismissing a putative ERISA class action.
In Pfeil v. State Street Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012), decided on February 22, 2012, the Sixth Circuit held that the presumption that the investment in employer stock is prudent and in accordance with ERISA requirements is a presumption that is evidentiary in nature and thus does not apply at the pleading stage.
The plaintiffs in Griffin brought their putative class action in the United States District Court for the Eastern District of Michigan, on behalf of themselves and the other participants in and beneficiaries of the Flagstar Bank 401(k) Plan. The key allegations in the complaint were the assertions that it was imprudent for the Plan to have offered Flagstar stock as an investment option to Plan participants during the class period.
The defendants moved to dismiss, and the motion was granted. The district court found that the dismissal was warranted because (1) the plaintiff had not overcome the presumption of prudence, established by the Sixth Circuit in Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995); and (2) even in the absence of the presumption, the plaintiffs had not met the pleading standards set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009).
After the district court dismissed the case, the Sixth Circuit clarified its position regarding the application of the presumption of prudence in the Pfeil case.
On appeal, the Sixth Circuit reiterated its position from Pfeil regarding the inapplicability of the presumption at the pleading stage. The Sixth Circuit also returned to a second issue that it addressed in Pfeil, regarding the applicability of a statutory safe harbor for fiduciaries of plans in which the participants exercise control over their individual accounts, per 29 U.S.C. § 1104(c) and 29 C.F.R. § 2550.404c–1. In Pfeil, the Sixth Circuit held that, even when plan participants control the allocation of their pension assets among an array of investment options offered by their plan, the safe harbor does not exempt fiduciaries from their duty to use “prudence when designating and monitoring the menu of different investment options that [are] offered.” Pfeil, 671 F.3d at 597.
Therefore, because the defendants in the Griffin case offered Flagstar stock to plan participants, the Sixth Circuit’s precedent in Pfeil led the Court to conclude yet again that ERISA’s safe harbor provision was not available to the defendants and, therefore, could not support the defendants’ motion to dismiss under Rule 12(b)(6).
The Sixth Circuit also rejected the district court’s finding that the plaintiffs’ amended complaint did not satisfy the pleading standards of Iqbal and Twombly. The Sixth Circuit noted that the plaintiffs included in their amended complaint “a chronology of events during the class period laid out in some forty-seven separate paragraphs spread over sixteen pages.” Griffin, 2012 WL 2989231, at *5. The Court went on to note that, “[a]fter reviewing the factual allegations in the complaint-which go far beyond documenting a simple drop in stock price to recite announcements from Flagstar itself, statements by analysts and financial media publications, and actions taken by Flagstar suggesting a precarious financial situation-we must conclude that the complaint raises a plausible claim for breach of fiduciary duty.” Id. at *6.
The Griffin case is significant because it reaffirms the Sixth Circuit’s stance (a minority position) that the presumption of prudence does not apply at the pleading stage. The Sixth Circuit’s decision in Griffin makes it more likely that the district courts in the Sixth Circuit will see a rise in the number of ERISA stock drop suits, now that plaintiffs are far more likely to survive the pleading stage and have the chance to pursue lengthy (and expensive) discovery.
Moreover, as the plaintiffs from In re Citigroup ERISA Litigation, 662 F.3d 128 (2d Cir. 2011) await the determination on the fate of their petition for certiorari (filed June 22, 2012), the Sixth Circuit’s decision here is certainly adding emphasis to the circuit split on this issue.
For more information regarding Pfeil v. State Street Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012), please review our blog entry entitled “ERISA Stock Drop Actions: The Class of 2012,” accessible here.