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(Article from Securities Law Alert, December 2014)

For more information, please visit the Securities Law Alert Resource Center.

On June 25, 2014, the Supreme Court clarified the requirements for pleading an Employee Retirement Income Security Act (“ERISA”) breach of the duty of prudence claim involving Employee Stock Ownership Plans (“ESOPs”), employee benefit plans that invest primarily in employer stock. Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014) (Breyer, J.). The Court concluded, in a unanimous opinion, that ESOP fiduciaries are not entitled to a special presumption of prudence. The Court found that ERISA Section 1104, which discusses the duty of prudence, “makes no reference to a special ‘presumption’ in favor of ESOP fiduciaries.” Rather, the only modification permitted under ERISA for ESOP fiduciaries is an exemption from ERISA’s diversification requirement (i.e., ESOPs can make undiversified investments in employer stock). “[A]side from that distinction,” the Court found that “ESOP fiduciaries are subject to the duty of prudence just as other ERISA fiduciaries are.”

The Court then clarified the requirements for pleading an ERISA breach of the duty of prudence claim. First, the Court held that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” Second, “[t]o state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”


For more information please visit the Securities Law Alert Resource Center.