Court offers guidelines to determine trial likelihood

The U.S. Supreme Court's decision in Fifth Third Bancorp et al. vs. Dudenhoeffer et al. removed the presumption of prudence standard often used by defined contribution plans to defend their use of employer-stock against fiduciary-breach lawsuits when the company stock sank.

However, the unanimous decision, issued June 25, established several guidelines for lower courts to determine whether stock-drop lawsuits should proceed to trial. The decision, written by Justice Stephen Breyer, provides the following standards:

“Where a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus insufficient to state a claim” under rulings in two previous cases — Ashcroft vs. Iqbal and Bell Atlantic Corp. vs. Twombly — that set standards for whether complaints could go to trial.

“To state a claim for breach of the duty of prudence, a complaint must plausibly allege an alternative action that the defendant could have taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

“ERISA's duty of prudence never requires a fiduciary to break the law, and so a fiduciary cannot be imprudent for failing to buy or sell stock in violation of insider trading laws.”

“Where a complaint faults fiduciaries for failing to decide, based on negative inside information, to refrain from making additional stock purchases or for failing to publicly disclose that information so that the stock would no longer be overvalued, courts should consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider-trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws.”

“Courts confronted with such claims should consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant's position could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”

This article originally appeared in the July 7, 2014 print issue as, "Court offers guidelines to determine trial likelihood".