In Re: Citigroup ERISA Litigation: Has The Death Knell Sounded For Stock Drop Cases?

Following the spectacular collapse of Enron in 2001, a cottage litigation industry was created, in which a handful of plaintiffs' firms now routinely rush to bring ERISA class actions whenever a pension plan invests in the stock of the corporate sponsor and the stock price declines significantly. Known in the trade as "stock drop cases," these actions allege that the affected company, and its officers and directors, breached their ERISA fiduciary duties of care and loyalty by permitting employees who were 401(k) and ESOP plan participants to continue to hold and invest plan assets in company stock during the period of decline. In the vast majority of these cases, the litigation pattern is the same. Defendants respond to the complaint with a motion to dismiss for failure to state a claim. If the motion is denied in whole or in substantial part, most defendants promptly settle. Class counsel are only too happy to oblige, and they frequently litigate with an eye solely on muscling a settlement. Thus, successfully defending such suits at the 12(b)(6) stage has become crucial. In recent years, district courts have been more willing to grant such dismissals, but there have been few appellate decisions examining the propriety of a grant of 12(b)(6) relief.1

This is perhaps why the Second Circuit's decision in In Re: Citigroup ERISA Litigation, ---F.3d---, 2011 WL 4950368 (2d Cir. Oct. 19, 2011) (as well as in Gearren v. McGraw-Hill Co., Inc. (Case No. 10-792))2 was so highly anticipated. This respected appeals court was not simply being asked to articulate the standard of review applicable to ERISA fiduciary conduct in the context of stock drop claims, but also to determine the pleading requirements sufficient to allow such complaints to proceed. And it would do so in connection with a stock drop case involving a significant player in the subprime mortgage crisis, and where it had received the views of the U.S. Department of Labor, which had filed an amicus brief setting forth its position on the governing legal standards.

On October 19, 2011, in a 2–1 opinion, the Second Circuit affirmed the lower court's dismissal of the complaint. The decision is very favorable to the employer-fiduciary community. First, the Second Circuit officially adopted the Moench presumption, becoming the fifth appellate court to do so. The so-called Moench presumption was established by the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), and it provides that there is a presumption of compliance with ERISA when a fiduciary invests ESOP assets in the employer's stock. Second, the court held that the Moench presumption applies not just to ESOPs but to defined contribution individual account retirement plans. Third, the court held that the Moench presumption is a standard of review and not an evidentiary presumption, and therefore applies at the pleading stage. Fourth, the court held that the presumption is a "substantial shield" against ERISA fiduciary attack, and that a stock drop complaint must allege facts sufficient to show that the employer was in a "dire situation" in order to overcome the presumption. Finally, the court held that there is no ERISA fiduciary requirement to provide plan participants with nonpublic information pertaining to an employer stock investment option, or any other investment option, and it affirmed dismissal of fiduciary claims relating to failure to provide adequate investment information to participants.

The Citigroup decision is unquestionably significant. Plaintiffs' counsel in stock drop litigation invariably take these cases on a contingent fee basis, and it is crucial they be confident they'll overcome a motion to dismiss. Indeed, it is the threat of long and expensive discovery, and the prospect of burdening senior corporate...