Pension & Benefits News Failure of plan fiduciaries to remove rapidly failing stock from plan assets did not violate ERISA
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Thursday, September 5, 2019

Failure of plan fiduciaries to remove rapidly failing stock from plan assets did not violate ERISA

By Pension and Benefits Editorial Staff

Plan fiduciaries did not breach their duties under ERISA by failing to remove a rapidly failing investment option from plan assets despite publicly available information indicating that retaining the stock of the plan sponsor’s former parent company was not prudent, according to the U.S. Court of Appeals in St. Louis (CA-8).

Continued investment in failing stock of former parent company. SunEdison Semiconductor, LLC (Semi), formerly a wholly owned subsidiary of SunEdison, Inc. (Sun), sponsored a defined contribution individual account plan that, beginning in May 2014, offered Sun stock as an investment option. However, Sun shortly began experiencing severe financial distress that resulted in its stock price declining from $31.66 per share in July 2015 to $0.34 per share by the time of its bankruptcy in April 2016. Plan participants who had invested in Sun stock through Semi’s retirement plan effectively lost the entire value of their investment.

A plan participant brought suit, alleging that the plan fiduciaries breached their duties under ERISA by failing to remove Sun stock from the plan’s assets. According to the participants, the fiduciary knew or should have known, based on publicly available information, including announcements from Sun, widely reported in the financial press, that continuing to hold Sun stock during the July 2015 to April 2016 class period was imprudent. A federal trial court dismissed the complaint for failure to state a claim and denied leave to amend. A three-judge panel of the Eighth Circuit affirmed.

Public information did not support claim for breach of duty of prudence. In affirming, the appeals court noted that, under the governing pleading standard articulated by the U.S. Supreme Court in Fifth Third Bancorp v. Dudenhoeffer (573 U.S. 409 (2014), allegations that a fiduciary should have recognized from publicly available information alone that the stock market was over- or undervaluing a publicly traded stock are implausible as a general rule, absent special circumstances. Accordingly, fiduciaries are allowed to prudently rely on a stock’s market price, absent special circumstances rendering such reliance imprudent.

The participant maintained that the publicly reported information should have prompted the fiduciaries, by July 2015, to a determination of the prudence of divesting from the excessively risky Sun stock. As framed by the court, the participant essentially alleged that the plan fiduciaries breached their ERISA duties by failing to outperform the market based on their analysis of publicly available information.

Consistent with the prevailing view in the courts, the Eighth Circuit panel stressed that the participant’s allegations were insufficient to plausibly allege a breach of the duty of prudence. The court agreed with the Fifth Circuit (Singh v. Radio Shack Corp., 882 F.3d 137) that participants cannot evade Dudenhoeffer’s general implausibility rule by disguising claims based on public information as special circumstances undermining market reliance.

Duty to monitor does not negate Dudenhoeffer pleading requirements. Alternatively, the participant contended that the continuing duty of the plan fiduciaries to monitor and remove imprudent trust investments (confirmed by the U.S. Supreme Court in Tibble v. Edison International, 135 S. Ct. (2015) saved the deficient breach of the duty of prudence allegation. The court, however, explained that a fiduciary’s continuing duty to monitor the prudence of plan investments does not negate the pleading requirement under Dudenhoeffer to plausibly identify special circumstances undermining reliance on market prices.

SOURCE: Usenko v. MEMC LLC (CA-8).

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