In multiple preceding cases, the Seventh Circuit had noted the Moench presumption (which readers of this blog will know is named after the seminal Third Circuit case which created the presumption, Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995)). Most recently, the Seventh Circuit noted with approval that “courts apply a presumption of prudence where the fiduciary in charge of the plan is directed by the plan to invest in the company’s stock.” Howell v. Motorola, Inc., 633 F.3d 552, 568 (7th Cir. 2011). However, the Court had always stopped short of actually applying the presumption. That has now changed.
In White v. Marshall & Ilsley Corp., No. 11-2660, __ F.3d, __, 2013 WL 1688918 (7th Cir. Apr. 19, 2013), the plan at issue was an eligible individual account plan (“EIAP”), as defined by ERISA § 407(d)(3), sponsored by M&I Bank, which provided participants with 22 investment options, including the M&I Stock Fund, which like most such funds, consisted entirely of M&I common stock and small amounts of cash. The Stock Fund was an Employee Stock Ownership Plan (“ESOP”), as defined by ERISA § 407(d)(6). With the exception of the Stock Fund, selection of the funds available to plan participants was left to the discretion of the Investment Committee (the “Committee”). However, participants could decide which funds in which to place their investments.
The plaintiff’s claims involved a 54% decline in the value of M&I stock, coupled with various other issues, such as a downgrade in stock, M&I’s receipt of TARP funds, and six consecutive losing quarters.
The formulation of the presumption that the Seventh Circuit adopted is similar to that from other circuits, as the Court held that in order to overcome the presumption “plaintiffs must show that no reasonable fiduciaries would have thought they were obligated to continue offering company stock.” 2013 WL 1688918, at *11. Thus, there was nothing atypical about the specific test imposed.
What was particularly noteworthy was not the test itself, but what followed. As the court noted, these cases typically arise in one of two contexts, either: (1) where plaintiffs “claim that the stock is overvalued and that investors are bound to lose money when the market inevitably corrects the price downward;” or (2) where it is alleged that “the stock is excessively risky because, even if the market is pricing it correctly, the stock may be subject to price swings that certain investors cannot tolerate.” Id.
The Seventh Circuit expressed “fundamental doubts about the viability of ESOP prudence claims based on either theory, at least where (a) the employer’s stock is publicly traded in an efficient market (meaning participants could have observed the dire circumstances themselves and acted accordingly) and (b) the employer’s stock is only one investment option for employees who can shift their investments with relative ease (and thus the stock imposes little risk upon employee-investors).” Id.
The Court further noted that in cases involving an overvaluation, claims tend to be based upon one or more of three theories, namely that the plan’s fiduciaries: (1) failed to anticipate how the stock would fare; (2) failed to use non-public information; or (3) failed to outsmart the rest of the market. The Court held that none of these amounted to an actionable claim. The first was found to be “simply a lack of omniscience and foresight.” The second “would require insiders to engage in investment transactions on the basis of material nonpublic information, which would violate federal securities laws.” The third would require fiduciaries “to outsmart a presumptively efficient market.” Id. at *11-12.
With respect to an “excessive risk” claim, the Court noted that M&I’s plan gave participants the freedom to choose their investments and to tailor their portfolios to fit their risk tolerance. The Court held that while there was reason to worry that employees would not understand the risks of investing in employer stock, “ERISA does not require fiduciaries of an EIAP to act as personal investment advisers to plan participants, nor could they do so.” Id. at *13.
The Court specifically noted that “this logic points in the direction of never recognizing challenges to ESOP fiduciaries’ decisions to offer and to continue offering publicly traded employer stock as one of several investment options in an individually directed retirement or other savings plan.” Id. However, the Court deemed it unnecessary to issue that broad of a decision, given that the facts of the case did not overcome the presumption, assuming that it could be overcome. Id. In reaching that conclusion, the Court pointed to the fact that M&I’s situation was not “dire” as the company was not near collapse, and that the drop in M&I’s stock was not extraordinary compared to other banks and the broader market during the same period. Id. at *14-15.
The Court concluded that while “[w]e do not hold that it is impossible to allege a viable imprudence claim against ESOP fiduciaries or that near demise or excessive risk are the only circumstances under which a fiduciary will be obligated to abandon a plan's directions, though for reasons set forth above, it will be difficult for a plaintiff to meet that standard.” Id. at *16.
Thus, stock drop cases are not yet completely dead in the Seventh Circuit. However, the Court’s decision makes it difficult to see how any claim could realistically survive. Indeed, the Seventh Circuit noted as much. Thus, as this case is applied by Seventh Circuit courts, time will tell if there is any remaining viability for these cases. Also, it will be interesting to see if any other circuits adopt what likely amounts to the strongest presumption yet stated by any circuit.