In Fifth Third Bancorp v. Dudenhoeffer,1 a
unanimous Supreme Court rejected the presumption of prudence
doctrine (also known as the Moench doctrine)2,
which is applicable to claims against fiduciaries of benefit plans
that invest in the sponsoring employer's stock. The elimination
of the presumption of prudence is expected to make it easier for
plaintiffs to pursue claims for breach of fiduciary duty when there
is a significant drop in the value of employer stock held in an
employee benefit plan.
In Dudenhoeffer, the defendant, Fifth Third Bancorp (the
"Bank"), maintained an employee stock ownership plan
("ESOP") that was largely invested in the Bank's
stock. The plaintiffs alleged that the ESOP's fiduciaries
breached their fiduciary duties under ERISA by continuing to hold
Bank stock and continuing to offer Bank stock as an investment
option. Following a 74% drop in the Bank's stock price, the
plaintiffs sued claiming that the publicly available information
provided early warning signs that the Bank's stock was inflated
due to the Bank's exposure to sub-prime mortgage loans.
The plaintiffs also claimed that the fiduciaries were aware of
nonpublic information that the Bank had deceived the market by
making material misstatements about its financial prospects.
Under the Moench doctrine, fiduciaries of employee benefit
plans that offer investments in employer stock were entitled to a
presumption of prudence. The presumption of prudence created
a significant burden for plaintiffs to overcome in pursuing claims
against fiduciaries for imprudent investments in employer
stock.
In Dudenhoeffer, the Supreme Court unanimously concluded
that the law does not create a special presumption favoring
fiduciaries that invest in employer stock. As a result, such
fiduciaries are subject to the same standards of prudence as all
ERISA fiduciaries. The Supreme Court further noted that a
plan sponsor may not reduce or waive the prudent man standard by
including specific language in the plan document. In response
to the claim that the fiduciaries of the ESOP were aware of
nonpublic information about the material misstatements about the
Bank's financial prospects, the Supreme Court explained that
the duty of prudence does not require fiduciaries to take actions
that would violate securities laws, such as insider trading
requirements.
While the rejection of the presumption of prudence may lessen the
burden for plaintiffs to pursue claims for breach of fiduciary duty
when the value of an employer's stock drops, the
Dudenhoeffer case indicates that plaintiffs must show
special circumstances as to why reliance by a fiduciary on the
public market price is imprudent. In addition, plaintiffs
must plausibly allege an alternative course of action that the
fiduciary could have taken that would have been consistent with
securities laws, and that a prudent fiduciary would not have viewed
as more likely to harm the benefit plan than to help it.
1 2014 BL 175777 (US, June 25, 2014).
2 See Moench v. Robertson, 62 F.3d 553 (3d
Cir., 1995).
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