Two recent decisions from the U.S. Court of Appeals for the Second Circuit (encompassing New York, Connecticut and Vermont) highlight the benefit of keeping plan fiduciaries and high-level corporate decision-makers separate and distinct in order to limit fiduciary liability under the Employee Retirement Income Security Act of 1974 (“ERISA”) for retirement plans offering investments in employer stock.
InJune 2013,the Court, in Majad v. Nokia Retirement Savings and Investment Plan, upheld the dismissal of a class action claim alleging a breach of fiduciary duty for failing to divest the Nokia Retirement Savings and Investment Plan (the “Plan”) of the stock of Nokia Corp. (the “Corporation), the Finnish parent company. The plaintiffs specifically alleged that undisclosed information, including an internal memorandum from the Corporation’s chief executive officer, rendered the Plan’s investment in the Corporation’s stock imprudent.
The Court deemed the allegations insufficient to support the complaint, as the Plan’s fiduciaries could not be imputed with nonpublic knowledge of the Corporation’s global financial outlook. Crucially, only employees of Nokia Inc. – not the Corporation – comprised the Plan’s committee and had authority over Plan investments.
More recently and in a far more complicated case, In re Lehman Bros. ERISA Litigation, the Court affirmed the dismissal of ERISA fiduciary claims against, among others, the Employee Benefit Plans Committee (the “Committee”), which was charged with administering the Lehman Brothers Savings Plan (the “Savings Plan”). The Savings Plan permitted participants to invest in Lehman Brothers stock through the employee stock ownership plan contained within the Savings Plan. In their complaint, the plaintiffs argued, among other things, that the Committee members knew or should have known that the Lehman Brothers stock was an imprudent investment because of their position within the company. Additionally, the plaintiffs alleged that the Committee had an affirmative duty to make a reasonable investigation into the financial condition of the company.
In support of its decision, the Court noted that many of the facts alleged by plaintiffs in support of their claim were nonpublic information that the Committee members did not know “by virtue of their corporate insider status.” The Committee members corporate functions only exposed them to knowledge that a comparable market analyst or investor would possess. Moreover, the Court wrote “[f]iduciaries are under no obligation to either seek out or act upon inside information in the course of fulfilling their duties under ERISA.” To do otherwise could result in securities law violations.
Quite often stock drop cases, including the Lehman case, involve an analysis of the Moench presumption, under which investments in employer stock may be deemed prudent. (See the Employer’s Law Blog entry SDNY Relies on Moench and In Re CitiGroup ERISA Litigation to Find for Fiduciaries in Stock-Drop Cases dated April 17, 2013 for a discussion of the Moench presumption). However, the Moench presumption can be overcome if plaintiffs plead “facts sufficient to show that [fiduciaries] either knew or should have known” that an employer was in dire circumstances that would compel the diversification from employer stock. This risk, coupled with securities law hurdles and the fact that Moench applies in limited circumstances, supports the notion that careful selection of plan fiduciaries may improve an employer’s position in the unfortunate event of litigation.