United States: SDNY Relies On Moench And In re CitiGroup ERISA Litigation To Find For Fiduciaries In Stock-Drop Cases

Last Updated: April 20 2013
Article by Frank A. Rubinetti

In two recent decisions issued by the Southern District of New York, the court held that the decision to offer company stock in a 401(k) Plan during an economic downturn or despite the fact that the stock's value was artificially high, will be afforded the Moench presumption of prudence that may be overcome only by proving that the employer was in a "dire situation" that was objectively unforeseeable by the plan sponsor. The Moench presumption provides that ERISA fiduciaries of an ESOP or an Eligible Individual Account Plan, e.g. ß401(k) Plan, that offers company stock as an investment are presumed to have acted prudently where the plan language requires or strongly favors investing in company stock. This presumption was adopted in 2011 for cases arising in Connecticut, New York and Vermont in In re Citigroup Litigation.

The plaintiffs in Coulter v. Morgan Stanley & Co. filed a class action complaint alleging, among other things, that the Defendant breached their fiduciary duties under ERISA by funding all company contributions to its 401(k) and ESOP plans solely in company stock despite knowing that the Defendant had $9.4 billion in mortgage-related write-downs as a result of the deteriorating subprime housing market.

In In re Pfizer Inc. ERISA Litigation, plaintiffs were current or former participants in defined contribution plans sponsored by Pfizer that provided for investment in Pfizer securities through participant contribution, employer matching contributions or both. After the stock price dropped 52%, Plaintiffs filed a class action lawsuit claiming that the Defendant imprudently continued to offer company stock even though they were aware that the stock price was artificially inflated because two of Pfizer's drugs presented substantial risks of which the market was unaware.

In both cases the company stock funds were mandated or strongly favored by the plans to be included as an investment option. Plaintiffs alleged the respective plan fiduciaries breached their duties of prudence and loyalty by continuing to make contributions in, and refusing to divest the plans of, company stock, even though the company stock had become an imprudent investment option. Plaintiffs also alleged a fiduciary breach resulting from the fiduciaries' failure to provide complete and accurate information to participants regarding the stock's risks.

In both cases, Defendants moved to dismiss the breach of fiduciary claims by arguing that they were entitled to a presumption of prudence as set forth by Moench. As noted above, this presumption may be overcome. Although proof of an employer's impending collapse may not be required to establish fiduciary liability, mere stock fluctuations, even those that trend downhill significantly, are insufficient to establish the requisite imprudence to rebut the presumption. Rather, only circumstances placing the employer in a dire situation that was objectively unforeseeable by the plan sponsor could require fiduciaries to override the Plans' terms.

Applying the abuse of discretion standard, the court concluded that plaintiffs failed to allege facts sufficient to show that the plans' fiduciaries either knew or should have known that the Defendants were in the sort of dire situation that required them to override the plan terms to limit participants' investments in company stock. Plaintiffs were therefore unable rebut the Moench presumption and state a claim for breach of ERISA's duty of prudence for maintaining the company stock in the Plans. In addition, the court held that fiduciaries have no duty to provide plan participants with non-public information that could pertain to the expected performance of plan investment options.

These cases reinforce the significance of careful plan drafting regarding investment options and the degree of discretion given to fiduciaries regarding company stock. Although each situation is fact sensitive, these recent cases show that cases arising in Connecticut, New York and Vermont should see the Moench presumption applied in the early stages of the case. This approach could save employers substantial legal fees in the event plan participants challenge the use of company stock as an investment under a plan.

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