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Tuesday, December 17, 2013
  • On Friday, the Supreme Court granted certiorari in Dudenheofer v. Fifth Third Bankcorp. (U.S., No. 12-751, cert. granted 12/13/13).  This suit was initially filed by participants in Fifth Third Bancorp’s profit sharing plan in a typical “stock drop” case.  Plaintiffs alleged that plan fiduciaries continued to invest in and hold Fifth Third stock despite its decline in value in breach of their fiduciary duties, including their duty to prudently and loyally manage the plan’s investment in company securities.
  • Both the ESOP portion of Fifth Third’s 401(k) plan and its company matching account were required to invest “primarily” in Fifth Third stock, although participants could then redirect any matching contributions into other investment options outside of such stock.  Plan fiduciaries also incorporated by reference Fifth Third’s SEC filings into the summary plan description.  Plaintiffs claimed that such filings contained misstatements and omissions in breach of ERISA’s duty of loyalty.
  • The district court dismissed Plaintiffs’ claims, but the Sixth Circuit reversed.  In its reversal, the Sixth Circuit ruled that:
    • Since  the terms of the plan did not require the ESOP portion of the plan to invest solely in Fifth Third stock and did not limit the ability of the Plan fiduciaries to remove the ESOP or divest its assets, the Moench presumption (i.e., the presumption that a fiduciary’s decision to remain invested in employer stock is reasonable) was inapplicable at the motion to dismiss stage; and
    • Since the fiduciaries “expressly incorporated by reference specifically named SEC filings into the Plan’s summary plan description”, a document ERISA requires to be sent to plan participants to provide specified information about the plan, the action was undertaken in their role as plan administrators.  The incorporation of specific SEC filings was therefore an exercise of discretion on the fiduciaries’ part and actionable under ERISA.
  • The defendants presented two questions for consideration by the Supreme Court:
    1. Whether the Sixth Circuit erred by holding that Respondents were not required to plausibly allege in their complaint that the fiduciaries of an ESOP abused their discretion by remaining invested in employer stock, in order to overcome the Moench presumption (i.e., the presumption that their decision to invest in employer stock was reasonable, as required by ERISA).
    2. Whether the Sixth Circuit erred by refusing to follow precedent of this Court in holding that filings with the SEC become actionable ERISA fiduciary communications merely by virtue of their incorporation by reference into plan documents.
  • The Supreme Court granted certiorari on question 1 only.  While the Office of the Solicitor General urged the Supreme Court to reformulate the first question to consider whether the Moench presumption of prudence should ever apply in employer stock cases (and further advocated for striking down such a presumption), the Supreme Court declined to do so, opting instead to accept the more limited question as presented by Fifth Third.

 

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