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The Second Circuit Applies the Moench Presumption to the Administration of a Lehman Brothers Retirement Savings Plan

On September 4, 2013 by Schnader in Finance

By Eric A. Boden

The United States Court of Appeals for the Second Circuit is the latest appellate court to apply the Moench “presumption of prudence” under ERISA to protect plan fiduciaries from liability despite the total collapse of the plan’s investment in company stock.  (For more discussion of the Moench presumption, see here and here.)

In Rinehart v. Akers, the Second Circuit affirmed the dismissal of claims brought by former employees who participated in the Lehman Brothers Savings Plan against members of Lehman’s Employee Benefit Plans Committee and the individual directors who appointed them.  The thrust of the plaintiffs’ claims was that the defendants failed to divest the plan’s holdings in Lehman securities despite signs of Lehman’s impending demise, beginning with the fall and subsequent fire sale of Bear Stearns in March 2008.

Under the terms of the plan, an employee could elect to allocate as much as 20% of his or her contributions to a Lehman Stock Fund.  Plan fiduciaries were authorized “to eliminate or curtail investments in Lehman Stock . . . if and to the extent that [they] determine[d] that such action [was] required in order to comply with [their fiduciary duty rules of ERISA].” The plaintiffs contended that “by no later than the collapse of Bear Stearns, Defendants knew or should have known that the Plan’s heavy investment in [Lehman] Stock was imprudent” given several red flags, including Lehman’s alleged leveraged ratio of 30:1; its questionable accounting practices; and its potential losses from trading in subprime mortgage-backed derivatives.  The plaintiffs further argued that, given plan fiduciaries’ position within the Lehman organizational framework, they were or should have been privy to non-public information portending the imminent downfall of Lehman and, as a result, should have reduced participants’ holdings in the Lehman Stock Fund.

The Second Circuit rejected these arguments, reasoning that plan fiduciaries “are under no obligation to either seek out or act upon inside information in the course of fulfilling their duties under ERISA.”  The court noted that none of the information publicly available to plan fiduciaries during the class period — the forced sale of Bear Stearns, the “general climate for financial firms in 2008,” public articles and reports, Lehman’s financial disclosures and its declining (but positive) stock price — demonstrated that their decision to remain invested in Lehman stock was imprudent.

The Second Circuit also rejected the plaintiffs’ argument that the plan’s provision of a “right” to “eliminate or curtail investments in Lehman Stock” “equate[d] to [the] ‘discretion’ to divest from the” Lehman Stock Fund.  That provision required plan fiduciaries to divest the plan’s investment in Lehman Stock only when necessary to comply with their duties under ERISA.  Because the plaintiffs had failed to plead the requisite “dire situation” auguring the employer’s collapse, the Moench presumption still applied.

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