It’s that time of year again. Final exams are almost over, the school year is ending, and summer recess is almost here. With graduations looming, May often serves as a time to reflect on the past and look to the future. Inspired by the sense of nostalgia this time of year brings, we thought it would be a good time to reflect on how ERISA stock drop class actions have fared in the Circuit Courts of Appeal during this spring semester of 2012.
In re Citigroup ERISA Litigation and Gearren v. McGraw-Hill Cos., Inc.
Last fall, the Second Circuit joined the Third, Fifth, Sixth and Ninth Circuits in holding that the presumption of prudence is the applicable standard in reviewing breach of fiduciary duty claims related to investments in employer stock. In re Citigroup ERISA Litig., 662 F. 3d 128 (2d Cir. 2011). On December 6, 2011, plaintiffs-appellants petitioned for rehearing or rehearing en banc, asking the Second Circuit to reconsider this significant decision, purporting to raise three questions of law of exceptional importance: (1) Is a judicially created presumption of prudence for employer securities offered in defined contribution plans mandated by or consistent with ERISA? (2) If such a presumption exists, what is its strength? (3) Does ERISA’s duty of loyalty impose upon defined contribution plan fiduciaries a duty to disclose to plan participants material adverse information about company stock which the fiduciaries know but plan participants do not?
Despite the additional support of an amicus curie brief submitted by the Secretary of Labor, plaintiffs-appellants were unsuccessful in challenging the decision. In a summary order, the Second Circuit denied the petition on February 23, 2012, thereby confirming that the presumption of prudence is here to stay in the Second Circuit. This marks the bitter end of plaintiffs’ class action bid arising from the drop in the price of McGraw Hill and Citigroup stock held in their 401(k) plans after the financial crisis of 2008. Grade: Fail.
Our advisory, summarizing these two cases in more detail, can be accessed through the link below: http://www.alston.com/files/Publication/deab45d0-83ff-4d0c-8d89-51566395f06a/Presentation/PublicationAttachment/d4496700-04ac-43ba-a328-56734bc91745/Citigroup%20Advisory.pdf
Pfeil v. State Street Bank & Trust Co.
The Sixth Circuit recently took the opportunity to resolve a district court split on the issue of whether the “Kuper/Moench presumption” may be applied when considering a motion to dismiss, holding that the presumption of “reasonableness” adopted in Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995) is not an additional pleading requirement and, thus, does not apply at the motion to dismiss stage. Pfeil v. State Street Bank & Trust Co., No. 10-2302, 2012 WL 555481 (6th Cir. Feb. 22, 2012).
In Pfeil, plaintiffs alleged that State Street Bank and Trust – as the fiduciary for the two primary retirement plans offered by General Motors – breached its fiduciary duty under ERISA by continuing to allow participants to invest in GM common stock, even though public information indicated that GM was headed for bankruptcy. The district court dismissed the complaint, holding that State Street’s alleged breach of duty could not have plausibly caused the losses to the plan.
After acknowledging that State Street was entitled to the Kuper/Moench presumption, the Sixth Circuit noted that it had not addressed whether the presumption applies at the pleading stage and, therefore, took the “opportunity to address whether a plaintiff must plead enough facts to overcome the Kuper presumption in order to survive a motion to dismiss.” In this regard, the Sixth Circuit held that the presumption does not apply at the pleading stage because the plain language of Kuper stated that a plaintiff could rebut the presumption of reasonableness by “showing” that a prudent fiduciary acting under similar circumstances would have made a different investment decision. Further, in Kuper, the presumption was cast as an evidentiary presumption and the Sixth Circuit applied the presumption to a fully developed evidentiary record, and not merely the pleadings. Moreover, the Court noted that this holding is consistent with the standard for motions to dismiss in general because application of the presumption necessarily concerns weighing questions of fact that would be inconsistent with the Rule 12(b)(6) standard. Apparently, the Court never grasped the notion that since all of the alleged facts are assumed to be true, the standard can and should be applied to see if the claims alleged are “plausible.”
The Sixth Circuit has thus set itself apart as the only Circuit to affirmatively reject the Kuper/Moench presumption as a standard that may be applied at the pleading stage. The plaintiffs’ bar undoubtedly views this as a major victory, and courts in the Sixth Circuit will likely see a rise in ERISA stock drop suits, now that plaintiffs are far more likely to advance to the long (and costly) discovery phase of litigation. Grade: Pass.
The Class of 2013?
Two other potential class actions are worth noting and (we expect) may resurface in the fall semester, if not sooner:
Lanfear v. Home Depot
In Lanfear, the Northern District of Georgia concluded that plaintiffs failed to plausibly plead that Home Depot stock was an imprudent investment during the proposed class period. Although the district court refused to explicitly adopt the Moench presumption, it nonetheless analyzed the facts under the Moench presumption and determined that plaintiffs’ stock drop claim would still fail. Now on appeal, the Eleventh Circuit is expected to either explicitly adopt (or reject) the Moench presumption in its opinion. The Lanfear case was argued on October 7, 2011. Lanfear v. Home Depot, 11th Cir. Case No. 10-13002.
Harris v. Amgen, Inc. et al.
Likewise, in the first stock drop case following its adoption of the Moench presumption in Quan v. Computer Sciences Corp., 623 F.3d 870 (9th Cir. 2010), the Ninth Circuit will address whether plaintiffs have alleged sufficient facts to overcome the presumption in a case arising from a temporary drop in Amgen’s stock price following negative publicity surrounding one of its products. Because Quan was decided on a summary judgment motion, the Amgen panel may take the opportunity to opine on whether the Moench presumption should apply at the pleading stage. The Amgen case was argued on February 17, 2012. Harris v. Amgen, Inc., et al, 9th Cir. Case No. 10-56014.