Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. DEFINED CONTRIBUTION
October 30, 2017 01:00 AM

Huge hurdle established for stock-drop suits

High court ruling cited as factor in fewer filings

Robert Steyer
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    David Levine said the barrier is higher than just contending the stock should have been sold.

    More than three years after a unanimous U.S. Supreme Court ruling offered guidance on stock-drop lawsuits, plaintiffs are encountering a high bar for challenging the use of company stock as an investment option in defined contribution plans.

    Several settlements of stock-drop cases have been made since the June 2014 ruling in Fifth Third Bancorp et al. vs. Dudenhoeffer et al., but the litigation landscape has been dominated by dismissals in federal district courts.

    Among the stock-drop cases this year, federal district court judges have dismissed complaints against IBM Corp., Wells Fargo & Co., Target Corp., Peabody Energy Corp. and Arch Coal Inc., citing the Supreme Court ruling.

    The Dudenhoeffer ruling has made it harder for plaintiffs, said Kivanc Kirgiz, a vice president at Cornerstone Research, a Washington-based economic and financial consulting firm that tracks stock-drop cases. "The number of cases being filed is much lower than four or five years ago," he said.

    Lawsuits against DC plan sponsors of publicly traded companies have been in single digits since 2012, with only two filed in 2016, the latest year for which Cornerstone Research data are available. Five were filed in 2014 and two were filed in 2015.

    However, in each year between 2002 and 2011, the number of stock-drop lawsuits reached double digits, with peaks of 37 in 2008 and 34 in 2002.

    Mr. Kirgiz said the decline in ​ recent years could be attributed in part to a rising stock market as well as to the barriers erected by the Supreme Court.

    Path for challenges

    After the Dudenhoeffer ruling, some members of the defined contribution plan community feared the court had created a path for more successful challenges to DC plans that had kept company stock as an option even when the stock and company performance plunged.

    The Supreme Court ruling invalidated a key legal principle — the Moench presumption — that gave sponsors the benefit of the doubt in offering company stock in a DC plan investment lineup. The Moench presumption was based on a 1995 decision by a federal appeals court in Philadelphia, in Moench vs. Robertson, saying that because Congress encouraged employee stock ownership, DC sponsors are entitled to a presumption that they acted prudently in offering it.

    "The Moench presumption made sponsors feel better," said Thomas Clark Jr., a St. Louis-based partner for the Wagner Law Group. "When the court took that away, people were scared."

    However, the Supreme Court's guidelines "got to the same place using existing legal theories," said Mr. Clark, referring to hurdles that plaintiffs' attorneys face in getting a stock-drop case to trial.

    Mr. Clark, like others interviewed for this article, represents defendants in ERISA cases.

    "There was a knee-jerk reaction to losing Moench," said Andrew Oringer, New York based partner of Dechert LLP. "Dudenhoeffer was misunderstood when it was decided. It's clear to me that Dudenhoeffer is not a panacea for the plaintiffs' bar. This is not going to be an easy path."

    The Supreme Court has consistently rebuffed efforts to reopen or expand upon the Dudenhoeffer ruling. Since last year, the justices have declined to hear appeals of lower-court dismissals involving State Street Bank & Trust Co. as the fiduciary for General Motors Co. stock in two GM 401(k) plans, Lehman Brothers Holding Inc. and Citigroup Inc.

    In January 2016, the Supreme Court reversed a pro-plaintiff ruling by the 9th U.S. Circuit Court of Appeals involving company stock in two plans run by Amgen Inc. The appeals court had reversed a federal district court's dismissal of the complaint. Commenting on the case originally filed in 2007, the justices wrote that plaintiffs did not produce "sufficient facts and allegations to state a claim for breach of the duty of prudence."

    Same strategy

    Although each case is different, the strategy for sponsor-defendants is the same — convince a judge to dismiss a stock-drop complaint to avoid extra expenses of pre-trial discovery, a trial, a settlement or a pro-plaintiff ruling.

    Some settlements reached in recent years represent lawsuits that had been filed five or more years ago. The Dudenhoeffer case, for example, was settled last year for $6 million with no admission of wrongdoing by Fifth Third Bancorp. Participants sued in August 2008.

    "Don't assume that if a company settles that it had a bad case," said Mr. Oringer, noting that he, like other ERISA attorneys, wasn't commenting on a specific case. "Companies have different levels of risk aversion. Each sponsor has a different risk appetite."

    ERISA attorneys say the Supreme Court left it up to lower courts to interpret guidelines that have proven to be as strict as, if not stricter than, the Moench presumption.​

    "Simply pleading that the stock went down and the plan should have sold it is not enough" to convince judges, said David Levine, a partner in the Groom Law firm. "There's a high barrier."

    One hurdle is the requirement that plaintiffs prove "special circumstances" to convince lower courts to let a lawsuit proceed. As noted in the Arch Coal case, even impending bankruptcy isn't automatically considered a special circumstance.

    "Plaintiffs' allegations of Arch Coal's 'serious deteriorating condition' and 'overwhelming debt' are evidence of the company's slide into bankruptcy but do not establish a special circumstance under Dudenhoeffer," St. Louis-based U.S. District Judge Carol E. Jackson said in an Aug. 4 opinion dismissing the complaint against Arch Coal and the plan's trustee, Mercer Fiduciary Trust Co.

    The biggest hurdle for plaintiffs is convincing lower courts that an alternative action by a prudent fiduciary to keeping company stock in a DC plan wouldn't do more harm than good.

    For example, the "more harm than good" standard was cited by U.S. District Judge William H. Pauley III in New York on Sept. 29 in dismissing a suit against IBM. "The complaint is bereft of context-specific details to show how a prudent fiduciary would not have viewed the proposed alternatives as more likely to do more harm than good," he wrote.

    The standard also was cited by U.S. District Judge Joan Ericksen of Minneapolis on July 31 in dismissing a complaint against Target, in which 401(k) plaintiffs said managers could have taken other steps to keeping company stock.

    "Nobody knows what 'special circumstances' mean and what 'more harm than good' means," said Nancy Ross, a Chicago-based partner at the Mayer Brown law firm, adding the Dudenhoeffer standards make it "exceptionally difficult to get things past the motion to dismiss."

    The "more harm than good" is especially vexing, she added, because "that's asking fiduciaries to be prescient" in assessing alternatives to keeping company stock in a 401(k) plan.

    None of her clients has dropped company stock from their 401(k) plans due to fears of litigation. "I tell clients to listen to their employees" because they "are still providing company stock if their employees want it," she said.

    Related Articles
    Preliminary settlement reached in Dudenhoeffer case
    Supreme Court holding firm on its Dudenhoeffer ruling
    Judges throw out Target, Arch Coal stock-drop lawsuits
    District Court dismisses stock-drop claim against IBM for second time
    Company stock remains in plans, but at lower levels
    Company stock remains in plans, but at lower levels
    Judge dismisses General Cable stock-drop suit
    Recommended for You
    parliament 1550_i.jpg
    U.K. considers CDC model for multiemployer plans
    British-Union-Jack-Parliament_i.jpg
    New U.K. regulations allow DC plans to increase illiquid investments
    ONLINE_180109908_AR_0_OXQTDCTVBIGZ.jpg
    Inadvertent error in SECURE 2.0 legislation prevents 401(k) catch-up contributions
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing