On October 15, 2012, the U.S. Supreme Court denied petitions from plan participants who pursued two putative “stock drop” class actions against their respective employers. The cases in question—In re Citigroup ERISA Litigation and Gearren v. McGraw-Hill Cos., Inc.—were argued in tandem before the Second Circuit, which affirmed on October 19, 2011 the dismissal of both employer-stock drop cases and joined several sister circuits in officially adopting the Moench presumption of prudence.
The lawsuits arose from 401(k) retirement plans sponsored by Citigroup Inc. and The McGraw-Hill Cos. The plaintiffs are participants in the respective 401(k) plans who contended, inter alia, that it was imprudent to continue to offer company stock as an investment option in the plans. The plaintiffs also alleged that they were misled by material misrepresentations that were made regarding the soundness of the investment in company stock.
The plaintiffs’ respective complaints were dismissed by United States District Court for the Southern District of New York and were upheld by the Second Circuit for the plaintiffs’ failure to overcome what is commonly referred to as the Moench presumption—the presumption that investing in company stock is presumed to be a prudent selection, absent dire circumstances. For additional information regarding the Second Circuit’s October 19, 2011 decisions in Citigroup and Gearren, please read our advisory by clicking here.
The Supreme Court denied the cert petitions without comment. See Gray v. Citigroup Inc., No. 11-1531, 2012 WL 2375361, at *1 (U.S. Oct. 15, 2012) (“The petition for writ of certiorari is denied.”); Gearren v. McGraw-Hill Cos., No. 11-1550, 2012 WL 2460351, at *1 (U.S. Oct. 15, 2012) (“The petition for writ of certiorari is denied.”)
As the high court denied cert for the plan participants in Citigroup and Gearren, the battle for writ of certiorari continues for the defendants in the matter of Pfeil v. State Street Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012). Decided on February 22, 2012, the Sixth Circuit held in Pfeil 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 Sixth Circuit’s rejection of the application of the presumption at the pleadings stage is unique among the Circuit Courts of Appeals, as both the Third Circuit (in Edgar v. Avaya, Inc., 503 F.3d 340 (2007)) and the Eleventh Circuit (in Lanfear v. Home Depot, Inc., 679 F.3d 1267 (11th Cir. 2012)) are agreed with the Second Circuit on this issue. For more on the Sixth Circuit’s decision in Pfeil, please click here.
Since Pfeil, the Sixth Circuit has continued to reject the application of the presumption of prudence at the pleadings stage in Griffin v. Flagstar Bancorp, Inc., No. 11–1497, 2012 WL 2989231 (6th Cir. July 23, 2012), and most recently in Dudenhoefer v. Fifth Third Bancorp, 692 F.3d 410 (6th Cir. 2012) (decided Sept. 5, 2012).
The defendants in Pfeil submitted their petition for a writ of certiorari on August 24, 2012. The time for the Pfeil plaintiffs to submit their response to the petition for a writ of certiorari has been extended through October 29, 2012.
At this point, it is still possible that the Supreme Court will turn to the question of whether the presumption of prudence can be applied at the pleadings stage in employer stock drop litigation. Certainly, the Sixth Circuit’s decision in Pfeil is more controversial than the Second Circuit’s decision in Citigroup and Gearren, as the Sixth Circuit effectively stands alone in its wholesale rejection of the Moench presumption at the pleadings stage.