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Supreme Court declines to hear Lehman Brothers stock-drop case

The U.S. Supreme Court declined to hear an appeal by participants in an employee stock ownership plan of bankrupt Lehman Brothers Holding Inc. that plan executives violated their fiduciary duties.

Participants argued that the Lehman Brothers’ plan fiduciaries failed to provide adequate and timely information to participants about the company’s financial condition that led to Lehman Brothers declaring bankruptcy in September 2008 and the company’s stock becoming worthless.

The Supreme Court, without comment, reported Tuesday that it had declined to hear the case. In court parlance, it denied certiorari in the case, Rinehart et al. vs. Lehman Brothers Holdings Inc. et al.

The participants sued in October 2008, but a U.S. District Court in New York dismissed the complaint in 2011. The 2nd U.S. Circuit Court of Appeals in New York upheld the District Court’s decision in 2013.

The 2011 and 2013 rulings were based on the courts’ interpretation of a legal principle called presumption of prudence that had served as a common, successful defense by companies sued in stock-drop cases.

However, in June 2014, the U.S. Supreme Court struck down presumption of prudence in the case, Fifth Third Bancorp et al. vs. Dudenhoeffer et al.

After the Supreme Court decision, the plan participants asked the Supreme Court to hear their complaint. The court vacated the 2013 judgment by the appellate court, remanding the case and saying it should be reviewed in light of the Dudenhoeffer decision.

The appeals court sent the case back to the District Court, which again dismissed the complaint, saying participants “failed to allege sufficiently” that ESOP plan executives had breached their fiduciary duties.

The participants again appealed, and the appeals court in March 2016 again rejected their arguments, saying “plaintiffs have failed to plead plausibly” that Lehman Brothers’ plan executives breached their ERISA duties.

In October 2016, participants filed another request with the Supreme Court to hear the case, arguing that the appeals court had misinterpreted the fiduciary standard established in the Dudenhoeffer case.