A so-called stock-drop case involving two Citigroup 401(k) plans, now pending before a federal appeals court, could play a significant role in determining how sponsors offer company stock in defined contribution plans and how companies deal with lawsuits alleging breach of fiduciary duty under ERISA.
The class-action case, In re Citigroup ERISA Litigation, is under review by the U.S. Court of Appeals for the 2nd Circuit in New York. It has attracted attention from attorneys for participants and those representing sponsors in other company-stock cases, as well as from industry interest groups and the Department of Labor.
The appeals court is reviewing a New York district court's summary judgment in August 2009 that dismissed allegations by current and former Citigroup 401(k) participants.
They claimed the plans' administration and investment committees violated their fiduciary duties by continuing to offer Citigroup stock as an investment option while Citigroup's finances deteriorated and its stock price declined in 2007 and early 2008.
There's no indication when the court will rule.
The DOL and AARP filed friend-of-the-court briefs supporting participants. The AARP argued the district court's ruling “eviscerates the plain language of ERISA.” The DOL said the district court incorrectly interpreted existing case law as well the responsibilities of fiduciaries as outlined in the Employment Retirement Income Security Act.
The ERISA Industry Committee and the American Benefits Council jointly filed a friend-of-the-court brief supporting Citigroup, saying current legal standards contain appropriate safeguards and serve to discourage unwarranted legal challenges against DC plans.
In ERISA stock-drop cases, participants contend that DC plan fiduciaries violated their duty by offering a company stock choice when they allegedly knew the stock was a risky investment and/or that the fiduciaries allegedly failed to provide information about the company's financial health that would affect the stock price.
The 2nd Circuit ruling should pack extra legal weight because that circuit oversees federal judicial districts in three states including New York, home of many large corporations.
“A decision for the New York region is going to be influential,” said Thomas L. Cubbage III, a partner at Covington & Burling LLP, Washington, whose firm filed the friend-of-the-court brief for ERIC and ABC.
“When a district court decides (a case), it's not binding in other lawsuits,” Mr. Cubbage explained. “When the 2nd Circuit Court of Appeals decides a case, it establishes controlling law for similar cases in New York, Connecticut and Vermont, and will likely influence cases elsewhere.”