Stock Drop Litigation Cases and COVID-19: Retirement Plans Beware!

During times of stock market volatility, there is typically an increase in the number of ERISA claims filed seeking recovery of investment losses. The COVID-19 pandemic certainly qualifies as a market volatility event, giving plaintiffs an opportunity to bring breach of fiduciary claims based on company stock losses in qualified retirement plans.

In these cases, plaintiffs typically assert that, based on information that plan fiduciaries had about the value of company stock, they should have reduced or eliminated a plan’s investment in company stock or disclosed that information so the stock would be properly valued. However, doing so would most likely expose those fiduciaries and employers to securities law violations since company insiders may not trade on inside information and making any potentially negative company information public may cause additional losses to a stock’s value.

Legal Landscape

A 2014 Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer governs ERISA claims against plan fiduciaries based on inside information. In Dudenhoeffer, the Court ruled that the plaintiff must assert a plausible alternative action that a fiduciary could have taken that (1) was consistent with securities laws, and (2) that a prudent fiduciary in the same circumstance would not have viewed as more likely to harm than help the fund.

The Court eliminated the presumption of prudence for plan fiduciaries under a 1995 decision by the Third Circuit Court of Appeals in Moench v. Robertson and replaced it with a three-factor test lower courts should use in assessing such complaints:

  1. ERISA’s duty of prudence never requires a fiduciary to break the law, so a fiduciary cannot be imprudent for failing to buy or sell stock in violation of the insider trading laws.
  2. Where a complaint faults fiduciaries for failing to decide, based on negative inside information, to refrain from making additional stock purchases or for failing to publicly disclose that information so that the stock would no longer be overvalued, courts should consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws.
  3. Whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.

On January 14, 2020, the U.S. Supreme Court remanded Retirement Plans Committee of IBM v. Jander back to the Second Circuit Court of Appeals to determine whether to address the SEC’s views on the standard to allege breach of fiduciary duty involving inside information under ERISA.

The Second Circuit invited the parties as well as the federal government to submit supplemental briefs. The SEC and Department of Labor argued, in sum, that, “absent extraordinary circumstances, ERISA’s duty of prudence requires an ESOP fiduciary to publicly disclose inside information only when the securities laws require such a disclosure.”

After reviewing the supplemental briefs from all parties, the Second Circuit reinstated its original judgment that reversed a district court’s granting of defendants’ motion to dismiss.

Considering continued market volatility due to COVID-19, fiduciaries of retirement plans should prepare for ERISA stock drop litigation by seeking legal counsel to ensure that objective decision-making processes are in place and well-documented.

Hall Benefits Law’s vision is to provide every client with the peace of mind that comes from the confidence that HBL has addressed all possible compliance vulnerabilities. To learn more, call our team of responsive, experienced ERISA and employment counsel at 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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