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Further Developments in the Presumption of Prudence

On August 9, 2013 by Schnader in Finance

By Stephen A. Fogdall

The case law on ERISA’s “presumption of prudence” continues to develop. Previously, we reported on decisions by the Second and Ninth Circuits that refused to give plan fiduciaries the protection of the presumption where plan documents provided only that the plans “may” offer an investment option in company stock.

As we discussed there, courts are much more willing to apply the presumption if a plan provides that an employer stock fund “shall” be an available investment option, although Schnader has successfully argued that the presumption can apply even if this word is not used in plan documents (see here).

In the most recent decision in this area, Kopp v. Klein, the Fifth Circuit upheld application of the presumption where plan documents mandated a company-stock fund option using the word “shall.” The plaintiff in Kopp alleged that plan fiduciaries should have liquidated the company-stock fund because they allegedly knew that the company’s accounts receivable were overstated and the company was facing a liquidity crisis. Rejecting that argument, the court explained that plan fiduciaries could not violate the securities laws by selling the stock in the fund based on insider information.

To rebut the presumption of prudence, the plaintiff was required to plead publicly known facts that would show that plan fiduciaries were aware that “the viability of the employer was threatened or the employer’s stock was in real danger of becoming worthless.” The plaintiff could not do this. Indeed, because the company allegedly had “misrepresented its financial health in financial disclosures, the public did not have reason to be concerned that [the company’s] stock would become essentially worthless.” Thus, there were no public facts that could rebut the presumption of prudence.

The court also rejected the plaintiff’s argument that, short of liquidating the fund, the fiduciaries should not have allowed further investments in it. The court rejected this argument as well because the mere allegation that “fiduciaries were aware an employer was engaged in unscrupulous conduct or facing financial difficulties does not alone suffice to prove the fiduciaries were aware the employer was in a dire situation.”

For more information regarding this or other financial services issues, please contact Stephen Fogdall of Schnader’s Financial Services Team. 

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Category: Finance