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Appeals court affirms ruling in favor of RJR Tobacco in ‘reverse stock-drop’ case

A U.S. appeals court in Richmond, Va., affirmed an earlier District Court ruling that executives of the RJR Tobacco Capital Investment Plan — a 401(k) plan — performed their fiduciary duties properly in selling certain stocks.

The 2-1 decision on April 28 is the latest to support plan executives in a “reverse stock-drop” case that has gone on since May 2002, when participants in the tobacco company's 401(k) plan sued, arguing that plan executives breached their fiduciary duty by selling shares in Nabisco too quickly.

The Nabisco share sale refers to the 1999 decision by RJR Nabisco Holdings to split into a tobacco company (R.J. Reynolds) and a food company (Nabisco). After the split, the tobacco company offered its own 401(k) plan, whose investment options included the publicly traded tobacco company stock as well as shares of the new food company and shares of the former parent, whose primary asset was its take in the food company.

Executives of the tobacco 401(k) plan sold the shares of the food company and the old parent company in January 2000. Later that year, a bidding war erupted for the food company, and Philip Morris Cos. acquired it in December 2000. During that period, the old parent company stock rose 247% and the food company stock rose 82%.

Judge Diana Gribbon Motz, who wrote the majority opinion, said in the court filing said that “a fiduciary cannot be required to predict the future,” affirming a February 2016 ruling by N. Carlton Tilley Jr., a U.S. District judge in Greensboro, N.C.

Mr. Tilley had previously ruled in favor of RJR in February 2013, and participants appealed. In August 2014, a panel of judges for the 4th U.S. Circuit Court of Appeals in Richmond, Va., voted 2-1 to reverse the judge's ruling and sent the case back to him. The appeals court said the judge didn't apply the correct legal standard in determining RJR's liability.

The case is Tatum et al. vs. R.J. Reynolds Tobacco Co. et al.