"The court of appeals correctly determined" that Mr. Quatrone's allegation "states claims for breach of ERISA's duties of prudence and diversification," said the federal government's brief, written by Ms. Prelogar and supported by Seema Nanda, the solicitor for the Department of Labor.
The brief described as plausible the allegation that Gannett and its fiduciaries "acted imprudently by failing to investigate red flags about the plan's TEGNA stock holdings and to divest that stock within an appropriate time."
TEGNA Inc. was the former parent of Gannett, which spun off Gannett as an independent company in June 2015. The Gannett 401(k) plan offered both Gannett stock and TEGNA stock.
Although the plan eventually sold the TEGNA stock in mid-2018, Mr. Quatrone complained that the fiduciaries didn't move fast enough. He argued that they should have sold the TEGNA stock "on or shortly after" the spinoff when he sued in March 2018, seeking class-action status.
Mr. Quatrone alleged that the plan's holding of two single-stock funds violated ERISA's rules for investment diversification. Gannett responded that a plan's investment lineup should be assessed in its totality for diversification — not that each investment should be diversified. (ERISA allows defined contribution plan sponsors to offer company stock through an employee stock ownership plan as an exception to its diversification rules.)
U.S. District Judge Anthony J. Trenga in Alexandria, Va., dismissed the case in September 2018, agreeing with Gannett. "The duty to diversify requires diversity among the full set of funds offered in the menu of plan offerings but does not compel every individual fund in a plan to be diversified," Mr. Trenga wrote.
Mr. Quatrone appealed, and the 4th Circuit, in a 2-1 vote, reversed the District Court ruling in August 2020. "Because defendants did not monitor the merits of the fund, they did not uncover that it was an imprudent fund," said the majority opinion, referring to the TEGNA stock. "As the fund was a single-stock fund with inherent concentration risk, it is plausible that the fund was, in fact, imprudent."
Gannett asked the Supreme Court in October 2020 "to clarify fiduciaries' obligations and ERISA's requirements" and to determine "whether the duty of diversification applies at the fund level." The Supreme Court asked the solicitor general's office in April this year for the government's view. The justices periodically ask for the solicitor general's opinion about pending cases.
"As an undiversified single-stock fund, the TEGNA Stock Fund was significantly riskier than other potential investments that petitioners could have selected for the plan," Ms. Prelogar wrote.
In her reading of ERISA, Ms. Prelogar said Mr. Quatrone "plausibly" alleged that Gannett and its fiduciaries "acted imprudently by failing to investigate red flags about the plan's TEGNA stock holdings and to divest that stock within an appropriate time."
Mr. Quatrone had "plausibly" alleged that "the plan as a whole was not adequately diversified" because the TEGNA stock and Gannett stock were in the same asset category, she wrote.
"The court of appeals' decision does not create any clear conflict with the decision of another federal court of appeals that warrants this Court's review," Ms. Prelogar added in recommending that the Supreme Court decline to hear the Gannett case.
The Gannett Retirement Plan, McLean, Va., had $1.9 billion in assets as of Dec. 31, 2020, according to the latest Form 5500.
