Second Circuit Adopts Presumption Of Prudence For Holding Of Employer Stock; Determines Fiduciaries Have No Affirmative Duty To Disclose Adverse Information

In a much anticipated decision, the Second Circuit Court of Appeals affirmed dismissal of a stock-drop suit involving two 401(k) plans sponsored by Citigroup, Inc. ("Citigroup") entities. The court also affirmed dismissal of a parallel stock-drop case involving two 401(k) plans sponsored by The McGraw–Hill Companies, Inc. ("McGraw–Hill"). In these decisions, the Second Circuit joins the Third, Fifth, Sixth and Ninth Circuits in adopting a presumption of prudence for the holding of employer stock in plans designed to hold such stock; to date, no circuit court has rejected this presumption.

The facts of the cases are similar to each other and to other stock-drop cases that have emerged in the last decade. The plans all required offering participants the ability to invest in a company stock fund ("Stock Fund"). The Stock Funds were offered to participants along with other, diversified investment options. In the Citigroup case, the price of the employer stock fell from $55.70 to $26.94 between January 1, 2007 and January 15, 2008. In McGraw-Hill, the stock price declined from $68.02 to $24.23 between December 3, 2006 and December 5, 2008. These price drops were alleged to have resulted from events in the sub-prime mortgage market.

The Defendants included the plans' corporate sponsors, the committees responsible for the plans' operation, and corporate directors and officers. Each suit alleged that continued holding of the employer stock violated the fiduciary duties of loyalty and prudence under ERISA Section 401(a)(1)(A) and (B), and that the failure to provide greater disclosure about the corporate financial condition was also a breach of the duty of loyalty. The cases also included subsidiary claims: that directors breached duties in appointing and monitoring plan fiduciaries, that fiduciaries placed their own interests and corporate interests ahead of the interests of participants, and that defendants had co-fiduciary liability for the breaches of others. The district courts dismissed the complaints on August 31, 2009 (Citigroup) and February 10, 2010 (McGraw-Hill). The appeals were argued together on September 28, 2010, and were decided by the same panel.

A two-to-one majority of the panel adopted the Moench v. Robertson, 62 F.3d 553 (3d Cir.1995), presumption of prudence for holding employer stock where the plan contemplates holding employer stock. Under this presumption, "[p]lan fiduciaries are only required to divest [employer stock from...