The US Supreme Court recently declined to review the “stock drop” cases decided late last year by the US Court of Appeals for the Second Circuit involving Citigroup and McGraw-Hill. Patrick L. Gearren, et al. v. The McGraw-Hill Companies, Inc., et al., No. 11-1550 and Stephen Gray, et al. v. Citigroup Inc., et al., No. 11-1531. This allows to stand two decisions which are very favorable to the defense of fiduciaries of certain retirement plans that invest in company stock.
In those Second Circuit decisions, the court affirmed the dismissal of participants’ claims of breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended (ERISA), involving the company stock fund option in a 401(k) plan. Each case involved a motion to dismiss based upon a presumption that the fiduciaries acted properly in maintaining the company stock fund absent an allegation that the company was in dire financial straits raising doubts about its viability and/or solvency.
The court there also affirmed the District Court’s dismissal of plaintiff’s claims alleging that the employer and other plan fiduciaries breached their duty of loyalty by failing to provide complete and accurate information about the employer to the plan participants. This is because plan fiduciaries have no duty to provide plan participants with nonpublic information that might pertain to the future performance of plan investment options.
It is noteworthy that earlier this year the US Court of Appeals for the Sixth Circuit, in Pfeil v. State Street Bank and Trust Company, held that the presumption that the fiduciary has acted properly with respect to company stock held in a 401(k) plan applies only for a motion for summary judgment, not for a motion to dismiss. This is clearly contrary to the holding of the Second and Fifth Circuits (but consistent with the Third, Seventh and Tenth Circuits), prompting many to believe that the Supreme Court might review the Second Circuit decision in order to resolve the conflict as to at what stage of the legal proceedings the presumption is to be applied. By declining to hear the cases, the Supreme Court leaves a split among the Circuits; this encourages plaintiffs to forum shop to those Circuits where the presumption does not apply until a motion for summary judgment is introduced after discovery and the defendants incur substantial expense.