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.
In June 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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.