Presenting a live 90-minute webinar with interactive Q&A ERISA Stock Drop Suit Defense Tactics Navigating Unsettled Court Treatment of the Moench Presumption, 404(c) Safe Harbor Defense, and Alternative Investment Theory THURSDAY, AUGUST 2, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Azeez Hayne, Partner, Morgan Lewis & Bockius , Philadelphia Russell L. Hirschhorn, Senior Counsel, Proskauer Rose , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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ERISA Stock Drop Suit Defense Tactics - Navigating Unsettled Court Treatment of the Moench Presumption, 404(c) Safe Harbor Defense, and Alternative Investment Claims Azeez Hayne Russell L. Hirschhorn Morgan Lewis Proskauer Rose LLP 215.963.5426 212.969.3286 ahayne@morganlewis.com rhirschhorn@proskauer.com 5 August 2, 2012
Today’s Agenda • Overview of Company Stock Fund Litigation - Types of claims - Types of cases • The presumption of prudence • The future of “hard - wiring” plan terms • Case Studies: Citigroup and State Street • ERISA Section 404(c) Safe Harbor Defense • Alternative Investment Claims Against DB Fiduciaries 6 August 2, 2012
Types of Claims • Prudence claims - Was it a breach of fiduciary duty to fail to diversify? Continue offering an employer stock fund? Continue to invest when the price was artificially inflated? • Monitoring claims - Is there a duty to monitor? Was there a breach of the duty to monitor appointed fiduciaries? • Disclosure claims - Did the plan fiduciaries make a misrepresentation? - Do the plan fiduciaries have an affirmative duty to disclose financial information? 7 August 2, 2012
Types of Cases • Fraud or illegal activities - Enron, WorldCom, HealthSouth, Syncor • Failing business/industry downturn/aging business model, Moench offshoots - Banks, Ford, GM, Legacy Airlines, Telecoms • Stock drop/bad investment - Avaya, IPALCO, Merck • Industry downturn – E.g., financial institutions and 2008 economic meltdown 8 August 2, 2012
The Moench Presumption of Prudence • First espoused by the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), and since followed by every circuit to address the issue, courts have routinely reviewed a plan fiduciary's decision to invest in an employer stock fund for an abuse of discretion. - Lanfear v. Home Depot, Inc., 679 F.3d 1267 (11th Cir. 2012) - In re Citigroup ERISA Litig., 662 F.3d 128 (2d Cir. 2011) - Quan v. Computer Sciences Corp., 623 F.3d 870 (9th Cir. 2010) - Pugh v. Tribune Co. , 521 F.3d 686 (7th Cir. 2008) - Kirschbaum v. Reliant Energy Inc. , 526 F.3d 243 (5th Cir. 2008) - Edgar v. Avaya, Inc. , 503 F.3d 340 (3d Cir. 2007) - Kuper v. Iovenko , 66 F.3d 1447 (6th Cir. 1995) 9 August 2, 2012
Rebutting the Presumption of Prudence • Moench: A plaintiff may introduce evidence that “owing to circumstances not known to the settlor and not anticipated by him [the making of such investment] would defeat or substantially impair the accomplishment of the purposes of the trust.” • Avaya: Plaintiffs’ allegations, even if true, indicated that the company was undergoing corporate developments that were likely to have a “negative effect” on company earnings and thus on the company stock value. This was not the “type of dire situation which would require defendants to disobey the terms of the plan by not offering the Avaya Stock Fund as an investment option . . . .” • Kuper: A plaintiff may rebut the presumption of reasonableness by showing that a prudent fiduciary acting under similar circumstances would have made a different investment decision. • Reliant Energy: “We do not hold that the Moench presumption applies only in the case of investments in stock of a company that is about to collapse. The presumption, however, is a substantial shield. “[T]here ought to be persuasive and analytically rigorous facts demonstrating that reasonable fiduciaries would have considered themselves bound to divest. Less than rigorous application of the Moench presumption threatens its essential purpose.” 10 August 2, 2012
Rebutting the Presumption of Prudence (cont’d) • Tribune: A plaintiff “must show that the ERISA fiduciary could not have reasonably believed that the plan’s drafters would have intended under the circumstances that he continue to comply with the ESOP’s direction that he invest exclusively in employer securities.” • Home Depot: A plaintiff had to “show that the ERISA fiduciary could not have believed reasonably that continued adherence to the ESOP’s direction was in keeping with the settlor’s expectations of how a prudent trustee would operate.” • Computer Sciences: “To overcome the presumption of prudent investment, plaintiffs must therefore make allegations that clearly implicate the company’s viability as an ongoing concern or show a precipitous decline in the employer’s stock . . . combined with evidence that the company is on the brink of collapse or is undergoing serious mismanagement.” • Citigroup: “We believe that only circumstances placing the employer in a ‘dire situation’ that was objectively unforeseeable by the settlor could require fiduciaries to override plan terms.” 11 August 2, 2012
Applying The Presumption On A Motion To Dismiss • Four Circuits and many district courts have applied the presumption of prudence at the motion to dismiss stage. - Lanfear v. Home Depot, Inc., (11th Cir. 2012) - In re Citigroup ERISA Litig., (2d Cir. 2011) - Quan v. Computer Sciences Corp., (9th Cir. 2010) - Edgar v. Avaya, Inc. , (3d Cir. 2007) - But seePfeil v. State Street Bank, 671 F.3d 585(6th Cir. 2012) 12 August 2, 2012
“Hard - Wiring” • To hardwire a plan document means to remove absolutely all discretion from the plan fiduciaries to make any adjustments to the company stock fund - Settlor function? - Moench declined to rule on the issue • Does hard-wiring negate any duty to override – e.g. , district court’s decision in Citigroup ? • Or does hard-wiring impact whether and when there is a duty to “override” or sell – e.g. , Quan v. CSC ? 13 August 2, 2012
The DOL’s View • The duty to diversify is distinct from the duty of prudence • Moench does not apply imprudent selection of stock fund • Moench deviates from ERISA’s explicit prudence requirement, and improperly creates a burden-shifting, heightened pleading standard • If Moench applies, it should be applied as an evidentiary standard, not pleading standard • A stock fund cannot be hardwired because fiduciaries are required to follow plan documents only to the extent consistent with ERISA 14 August 2, 2012
The Disclosure Claims • The DOL and plaintiffs’ bar contend that plan fiduciaries have an affirmative duty to disclose nonpublic financial information • Plaintiffs allege that SEC statements are fiduciary communications that misrepresented the value of the company’s stock 15 August 2, 2012
The Disclosure Claims (cont’d) • No duty to disclose inside information . . . - Several courts have rejected plaintiffs’ theory that, in order to comply with both securities law and ERISA, plan fiduciaries need to disclose to participants certain corporate information that has not been disclosed to shareholders generally. - Several courts have not been willing to facilitate what could be construed as systemic insider trading. In the words of the Ninth Circuit, “fiduciaries are under no obligation to violate the securities laws in order to satisfy their ERISA fiduciary duties.” 16 August 2, 2012
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