2 years later, stock-drop plaintiffs still face tough road
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July 11, 2016 01:00 AM

2 years later, stock-drop plaintiffs still face tough road

Robert Steyer
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    Goodwin Procter's James Fleckner: 'We haven't had a significant (stock market) correction since Dudenhoeffer. That will be the test.'

    The guidelines in a landmark Supreme Court ruling on stock-drop cases are turning out to be almost as tough on plaintiffs as the standard the court nullified.

    Two years after the U.S. Supreme Court's ruling in Fifth Third Bancorp et al. vs. Dudenhoeffer et al., ERISA attorneys say plan executives' fears of a flood of lower court decisions against plan sponsors and new lawsuits hasn't been realized.

    Relatively few stock-drop lawsuits have been filed since the court issued its 9-0 opinion in June 2014, striking down what one attorney called an “almost bulletproof defense” by companies to defeat fiduciary-breach allegations when company stock funds fell in value.

    In its place, the court issued guidance to lower courts to determine whether they should accept or dismiss a stock-drop case based on fiduciaries' administering company stock funds in defined contribution plans. So far, ERISA attorneys say, the ruling appears to have been stricter than originally believed.

    “Any notion it would cause an avalanche of cases has not been proven,” said Richard McHugh, the Washington-based vice president for the Plan Sponsor Council of America, referring to the aftermath of the Supreme Court's ruling. “I don't think the doom and gloom is as bad as people thought. I'm not sure this case has changed the landscape all that much.”

    In a string of high-profile cases decided since the Supreme Court's decision, many federal district courts and federal appeals courts have dismissed participants' claims of fiduciary breaches under the new guidelines. Among rulings in favor of plan sponsors were complaints against Delta Air Lines Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc. and Citigroup Inc.

    Lower courts also have applied the new guidelines in dismissing complaints against third-party fiduciaries of company-stock funds within DC plans, such as Evercore Trust Co., for a J.C. Penney Co. stock fund, and State Street Bank & Trust Co., for a General Motors Co. stock fund.

    “From a plan sponsor perspective, I think this is a happy anniversary despite the initial concern,” said Meaghan VerGow, a Washington-based counsel for O'Melveny & Myers LLP, referring to the two-year anniversary of the Dudenhoeffer ruling.

    In that ruling, the Supreme Court nullified a defense known as the “presumption of prudence,” which was based on a 1995 Philadelphia federal appeals court ruling. This defense enabled sponsors to convince most judges that lawsuits should be dismissed at the initial pleading stage rather than at the trial stage. In doing so, companies avoided the heavy expenses of pretrial discovery and/or the trial itself.

    In some instances, companies have settled stock-drop suits since the Dudenhoeffer decision, including Eastman Kodak Co. and Avon Products Inc.

    Still, the impact of the court's decision “is not as troubling as people thought,” said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, Washington, a trade group of large corporations. “Many employers were concerned when Dudenhoeffer was decided.”

    Focus on fiduciary risk

    ERISA attorneys said the Dudenhoeffer ruling added complexities for sponsor-defendants in stock-drop cases, but it didn't reduce their responsibility for prudent management. They said the case focused attention for some companies to add or expand best practices to reduce fiduciary/litigation risk.

    For example, some have hired independent fiduciaries to manage a company-stock plan within a 401(k) lineup — a practice other sponsors initiated before the Supreme Court ruling.

    “If they hadn't done so before Dudenhoeffer, most sponsors are responding by seeking to protect fiduciaries from insider knowledge,” said James P. McElligott Jr., a Richmond, Va.-based partner for McGuireWoods LLP. “We have seen a client trend of removing persons with insider knowledge from investment committees.”

    The Supreme Court's guidelines cover two broad areas of fiduciaries' stock-fund management responsibilities — publicly available information and non-public/insider information. “I expect to see more complaints articulating insider information,” Ms. VerGow said.

    “Insider information remains more challenging than public information” for sponsors defending stock-drop suits, said James Fleckner, a partner at Goodwin Procter LLP, Boston.

    Mr. Fleckner and several other attorneys said the ultimate impact of the Supreme Court's ruling might depend on the next economic crisis. “We haven't had a significant (stock market) correction since Dudenhoeffer,” he said. “That will be the test.”

    Even before the Supreme Court decision, sponsors had been acting to reduce the impact of company stock on plan asset allocation. They increased communication and education about allocating too much money to a single volatile investment. Some placed caps on participants' allocations to company stock, while others froze the amount of company stock available in a DC plan.

    “It's my sense that before Dudenhoeffer, fiduciaries were comforted by the presumption of prudence (standard) and were not evaluating employer stock like (they would) other investments,” said Jeremy P. Blumenfeld, a Philadelphia-based partner for Morgan Lewis & Bockius LLP. “That has changed.”

    Mr. Blumenfeld said plan executives are talking more with consultants about company-stock management and looking to reduce fiduciary risk. “I don't think you will see a mass exodus” of plans offering employer-stock funds, he said.

    “The more people have thought about Dudenhoeffer, (the more) they think it's not an unfavorable decision in the litigation end — but it's more complicated in the front end,” said Mr. Blumenfeld, referring to sponsors' efforts to improve managing of company-stock funds and reduce fiduciary risk.

    Since June 2014, six stock-drop cases have been filed — four in 2014 and two so far in 2016, said Kivanc Kirgiz, a principal at Cornerstone Research, a Washington-based economic and financial consulting firm that tracks stock-drop cases.

    The record was 36 lawsuits in 2008, according to Cornerstone Research. The number had been decreasing even before the Supreme Court ruling — nine in 2011, six in 2012 and two in 2013.

    The Dudenhoeffer ruling “certainly has caused the plaintiffs to think twice and be more conservative in their decisions” to sue sponsors, said Nancy Ross, a partner at Mayer Brown, Chicago. n

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