Two new, noteworthy stock-drop decisions were recently published. In Swetic v. Community Nat’l Bank Corp. (M.D. Fla., 2010), a federal trial court granted the defendant/plan sponsor’s motion to dismiss a stock-drop lawsuit commenced by two plan participants who claimed plan fiduciaries breached their ERISA duty in connection with an ESOP’s continued investment in stock of the plan sponsor that allegedly resulted in enormous plan losses. The court granted the motion to dismiss because the plaintiffs failed to exhaust their administrative remedies and could not prove that exhaustion would have been futile. It is noteworthy that not all federal courts would agree that exhaustion should be required in fiduciary breach claims. But this court, guided by precedent in the Eleventh Circuit, decided that the exhaustion of administrative remedies is required.
In Lanfear v. Home Depot Inc. (N.D. Ga., 2010), a federal trial court granted the defendant/plan sponsor’s motion to dismiss a stock-drop lawsuit in which the plaintiffs claimed plan fiduciaries breached their ERISA duty in connection with a defined contribution plan’s investment in company stock. The company stock suffered a 16 percent drop in price, which the plaintiffs allege could be traced to improper backdating of stock options and engaging in improper accounting practices. Although the court dismissed the lawsuit, it did not apply the Moench presumption of prudence (i.e., the presumption that a fiduciary’s decision to retain or offer company stock as a plan investment is prudent under ERISA, unless the plaintiff can show that the fiduciary knew of dire economic circumstances or an imminent corporate collapse) — the court expressed an opinion that the presumption “runs afoul of ERISA’s plain provisions.” Instead, the court recharacterized the plaintiffs’ prudence claim as essentially being “a claim for a failure to diversify” and then ruled the plan is an eligible individual account pension investing in company stock that is not subject to ERISA’s diversification requirements.