Dudenhoeffer v. Fifth Third:
Presumption – Shmeshumption
Jeremy P. Blumenfeld
Brian T. Ortelere
Morgan, Lewis & Bockius LLP
Gregory Y. Porter
Bailey & Glasser LLP
Background
• ERISA Employer Stock Claims
– Fiduciary breach claims challenge plan
investments in employer stock of public
companies.
– More than 200 suits brought since the
Enron/WorldCom scandals of 2001 and 2002.
– Two primary prudence claims:
• Failed to act on public information.
• Failed to act on material non-public information.
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The Supreme Court’s Ruling
• No Presumption of Prudence
– 9-0 decision.
• The policy oriented members of the Court and the
statutory text oriented members of the Court on the
same page were all able to agree.
• Doesn’t happen every day.
– Every Court of Appeals to have addressed the
issue was wrong.
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The Supreme Court’s Ruling
• Statutory basis for presumption—None
• “In our view, the law does not create a special
presumption favoring ESOP fiduciaries. Rather, the
same standard of prudence applies to all ERISA
fiduciaries, including ESOP fiduciaries, except that an
ESOP fiduciary is under no duty to diversify the ESOP’s
holdings.”
• Non-pecuniary purposes such as favoring employee
ownership do not impact analysis.
• The only purpose that matters is protecting and
enhancing benefits?
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The Supreme Court’s Ruling
• Plan basis for presumption—None.
– “[T]he duty of prudence trumps the instructions
of a plan document, such as an instruction to
invest exclusively in employer stock even if
financial goals demand the contrary.”
– Broader implications.
• Primacy of plan document doctrine cannot diminish
statutory duties
• Hard wiring for investments of any kind creates no
presumption
• Other plan terms?
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The Supreme Court’s Ruling
– Recognized Tensions in Context of Publicly traded securities
• Provided pleading guidance
• Absent “special circumstances,” cannot state a claim based only on
public information because fiduciaries have no duty to second-guess
efficiency/price of market with respect to public information
• Maybe state a claim arising from non-public material information
– But no duty to trade on material inside information
– But no duty to violate insider trading law
– But ERISA cannot compel disclosures that conflict with securities disclosure
requirements
• What does that mean?
– Claims on behalf of holders not viable
– Claims that should have stopped new purchases are viable
– But court recognized that halting purchases might lead to disclosure problems
and loss causation problems by signalling to market
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The Supreme Court’s Ruling
– Litigation
• The new complaint
– Companion securities fraud lawsuit
– Substantial plan purchases during fraud
– A theory that stopping new purchases would not
have caused the stock to settle to the true, nonfraud price
– Explain why stopping new purchases would not
require a securities disclosure
– Allege that a prudent fiduciary could not have
concluded that stopping purchases would have
done more harm than good because...
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The Supreme Court’s Ruling
– Litigation
• The new 12(b) motion
–
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The Supreme Court’s Ruling
– Litigation
• Special considerations
– Special circumstances a two-edged sword for defendants because
presenting evidence early in the securities fraud case to rebut the
presumption of market efficiency may give plaintiffs the facts
they need to plead special circumstances based on public
information only
– Do plaintiffs really need to plead causation given forgiving
pleading standards in most circuits on causation in fiduciary
breach cases
– Circuit variations on burdens of proof on causation may be critical
if a defendant is required to prove that had the plan stopped
trading, the price would have fallen instead of a plaintiff having to
prove that the price would not have been impacted
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The Supreme Court’s Ruling
– Conclusions
•
•
•
•
•
Stock drop cases are dead
Hardwiring is dead
Cases like Enron, Worldcom, and the like will come back
Loss causation may be the new frontier
Burdens of proof may be critical
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Additional Questions
• Just shoot one/all of us an email:
– bortelere@morganlewis.com
– jblumenfeld@morganlewis.com
– GPorter@baileyglasser.com
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