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On July 10, 2015, following a remand from the Supreme Court in light of its decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014),[1] the Southern District of New York dismissed for a third time an action brought by participants in the Lehman Brothers Savings Plan (the “Plan”) under the Employee Retirement Income Security Act (“ERISA”). In re Lehman Bros. Sec. & ERISA Litig., 2015 WL 4139978 (S.D.N.Y. July 10, 2015) (Kaplan, J.) (Lehman III).[2] The court found that Dudenhoeffer forecloses ERISA breach of fiduciary duty claims based on publicly available information unless there are “special circumstances” warranting an exception to this “general rule.” The court further held that plaintiffs’ complaint failed to state a claim based on non-public information, where, inter alia, plaintiffs failed to plead how a hypothetical investigation would have uncovered alleged inside information. Finally, the court held that appointing fiduciaries have no obligation under ERISA to keep their appointees apprised of material nonpublic information.

Background

After Lehman Brothers filed for bankruptcy in September 2008, Plan participants brought suit against Lehman’s former directors (the “Director Defendants”) and former members of the company’s Employee Benefit Plans Committee (the “Plan Committee Defendants”). Plaintiffs contended that defendants had violated ERISA “by [allegedly] imprudently continuing to keep Plan assets invested in Lehman stock despite Lehman’s deteriorating condition.” Plaintiffs claimed that, during the class period, defendants knew or should have known that the Plan’s investment in Lehman stock was imprudent. Defendants moved to dismiss.

On February 2, 2010, the Southern District of New York dismissed plaintiffs’ ERISA claims in their entirety. In re Lehman Bros. Sec. & ERISA Litig., 683 F. Supp. 2d 294 (S.D.N.Y. 2010) (Kaplan, J.) (Lehman I). Plaintiffs filed an amended complaint, and defendants again moved to dismiss. On October 5, 2011, the Southern District of New York once again dismissed plaintiffs’ ERISA claims. In re Lehman Bros. Sec. & ERISA Litig., 2011 WL 4632885 (S.D.N.Y. Oct. 5, 2011) (Kaplan, J.) (Lehman II).[3] Among other grounds, the court found that plaintiffs had failed to allege facts sufficient to overcome the presumption of prudence set forth in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). On July 15, 2013, the Second Circuit applied the presumption of prudence and affirmed dismissal of plaintiffs’ complaint. Rinehart v. Akers, 722 F.3d 137 (2d Cir. 2013) (Wesley, J.).[4]

A year later, on June 25, 2014, the Supreme Court unanimously held that “the law does not create a special presumption” of prudence for fiduciaries of Employee Stock Ownership Plans (ESOPs). Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014). The Supreme Court subsequently vacated the Second Circuit’s decision in Rinehart and remanded the action for further consideration in light of Dudenhoeffer. The Second Circuit, in turn, granted plaintiffs’ motion to vacate the district court’s judgment and remanded the action to the Southern District of New York for further proceedings. Defendants thereafter moved for the third time to dismiss plaintiffs’ complaint. In response, plaintiffs opposed defendants’ motions and moved to further amend their complaint to, inter alia, “narrow their claims against the Plan Committee Defendants” and Richard S. Fuld, Lehman’s former chairman and CEO (and the only remaining Director Defendant in this action). On May 20, 2015, the court granted plaintiffs’ motion to amend and file their third consolidated amended complaint “without prejudice to [d]efendants’ arguments in favor of dismissal.”

Lehman III Court Finds Dudenhoeffer Requires Dismissal of Plaintiffs’ Public Information-Based Breach of Fiduciary Duty Claims Against the Plan Committee Defendants

On July 10, 2015, the Southern District of New York found that plaintiffs’ third amended complaint “fail[ed] plausibly to allege that public information about Lehman was so clearly negative in mid-to-late 2008 that the Plan Committee Defendants [had] acted imprudently.” While this amended complaint included “scattered changes,” such as “new descriptions of allegedly ominous news articles” and “volatility in Lehman’s stock price,” the court found that “[t]hese new bits of information [did] no more than add marginally to the cacaphony of ‘mixed signals’ described in” plaintiffs’ earlier complaint. The court concluded that “[t]hey [did] not nudge the allegations of the [third consolidated amended complaint] across the plausibility threshold.”

Significantly, the court found that “Dudenhoeffer appears to have ‘raised the bar for plaintiffs seeking to bring a claim based on a breach of the duty of prudence’” in connection with publicly available information (quoting In re UBS ERISA Litig., 2014 WL 4812387 (S.D.N.Y. Sept. 29, 2014)). In Dudenhoeffer, the Court stated that “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.” The Lehman III court determined that “Dudenhoeffer seemingly has foreclosed any such claim against the Plan Committee Defendants.”

Finding their distinction to be “illusory,” the court rejected plaintiffs’ contention “that Dudenhoeffer’s limitation on claims based on public information applies only to assertions ‘that the market was over- or undervaluing the stock’” (quoting Dudenhoeffer, 134 S. Ct. 2459) and not to allegations “that a stock has become excessively risky.” Thus, in the absence of “factual allegations justifying a conclusion that ‘reliance on the market price [was] imprudent,’” the Lehman III court found that Dudenhoeffer “foreclose[s] breach of [the duty of] prudence claims based on public information irrespective of whether such claims are characterized as based on alleged overvaluation or alleged riskiness of a stock.”

The court found equally meritless plaintiffs’ attempt to rely on Tibble v. Edison International, 135 S. Ct. 1823 (2015), to argue that the Plan Committee Defendants should have conducted a “substantive review . . . of the prudence of continued investment in Lehman stock” following the collapse of Bear Stearns.[5] The court recognized that the Tibble decision reiterated that “ERISA fiduciaries bear a ‘continuous duty’ to monitor the prudence of investments.” However, while “changed circumstances can trigger a fiduciary’s obligation to review the prudence of an investment,” the court explained that “plaintiffs must allege that circumstances actually have changed sufficiently and that the failure to make such a review injured the plan.” The court found that plaintiffs had failed to do so here. Notably, the court rejected plaintiffs’ apparent “view . . . that once Bear Stearns collapsed, the ERISA fiduciaries of every major financial institution’s ESOP bore a fiduciary duty to re-evaluate the prudence of continued investment in a sponsor’s securities.” Moreover, the court pointed out that plaintiffs did not allege that any such review “would have averted the injury that ultimately occurred when Lehman later collapsed.” The court stated that “[n]either Dudenhoeffer nor Tibble permits ERISA claims to withstand challenge based on such threadbare allegations.” 

Finally, the court determined that plaintiffs had failed to allege any “special circumstances” required for alleging a breach-of-fiduciary-duty claim based on publicly-available information under Dudenhoeffer. The court specifically rejected plaintiffs’ contention that SEC orders issued in July 2008 placing short-selling restrictions on the securities of certain financial-services companies, including Lehman, amounted to such “special circumstances.” The court underscored that “the SEC never announced that the market for Lehman stock had ceased to function efficiently.” Rather, the SEC stated that “rumor-mongering ‘may artificially and unnecessarily’ depress security prices and that it was acting to ‘eliminate any possibility that naked short selling’ could contribute to such disruption.” The Lehman III court explained that “[a]ction taken to prevent a negative effect is not the same thing as declaring that such an effect already had become manifest.” Moreover, the court noted that, if anything, the SEC orders indicated that the SEC believed that Lehman stock was actually worth more, not less, and was “less risky than its artificially depressed market price had made it appear.” The court determined that “[t]he only plausible inference supported by the [complaint] is that the market processed any risks identified in the SEC’s orders as it would have processed any other public information.” The Lehman III court explained that “Dudenhoeffer bars claims based on such public information precisely because the market is competent to react to it.”

Court Finds Plaintiffs Failed to Allege a Breach of Fiduciary Duty Claim Based on the Plan Committee Defendants’ Failure to Investigate Whether Lehman Was a Sound Investment

The court next turned to plaintiffs’ claim that “the Plan Committee Defendants were obligated to undertake an investigation into Lehman’s soundness as an investment and that, had they done so, they would have uncovered” “negative inside information about Lehman.” The Lehman III court acknowledged that, after Dudenhoeffer, “some claims of breach of fiduciary duty based on nonpublic information may be cognizable.” The court stated that Dudenhoeffer “altered the landscape by making clear that claims based on nonpublic information ― at least where defendants are corporate insiders ― no longer may be rejected out of hand solely because of concerns born of the insider trading laws.”

However, the Lehman III court found a “significant difference” between the facts at issue in Dudenhoeffer and the allegations here. In Dudenhoeffer, plaintiffs alleged that defendants had “‘behaved imprudently by failing to act on the basis of nonpublic information that was available to them because they were Fifth Third insiders’” (quoting Dudenhoeffer, 134 S. Ct. 2459). Here, on the other hand, plaintiffs alleged that “the Plan Committee Defendants [had] breached their fiduciary duty by failing to pursue insider information held by others.” The Lehman III court declined to reach the question of “whether [such] a duty to investigate nonpublic information [held by others] even exists,” because it found that plaintiffs’ allegations were “otherwise insufficient.” The court noted that plaintiffs did not adequately allege “how [this] hypothetical investigation would have uncovered the alleged inside information” or “that any such investigation would have resulted in averting the harm that ultimately befell the Plan when Lehman suddenly collapsed.”

Court Dismisses Duty to Inform Claim Against Fuld, Finding That ERISA Does Not Impose a Duty on Appointing Fiduciaries to Keep Appointees Informed of Material Nonpublic Information

The court then considered plaintiffs’ contention that Richard Fuld, Lehman’s former chairman and CEO, “had inside information about the precariousness of Lehman’s position and failed to disclose it to the Plan Committee Defendants so that they could evaluate the prudence of continuing to invest in Lehman on a fully-informed basis.”  The Lehman III court found this “duty to inform” claim against Fuld “impermissible as a matter of law” because “ERISA does not impose a duty on appointing fiduciaries to keep their appointees apprised of nonpublic information.”

First, the court explained that “Fuld was an ERISA fiduciary only to the extent that he appointed others to manage the Lehman Plan.” The court rejected plaintiffs’ attempt to “transform Fuld’s limited obligations under ERISA into all-encompassing ones” that would have applied “[w]henever Fuld received information in any business capacity.” The court further found that appointing fiduciaries do not have “an ongoing obligation to share inside information” under ERISA.

Second, the court pointed out that the Second Circuit has “consistently . . . rejected efforts to impose additional disclosure obligations upon ERISA fiduciaries.” The Lehman III court found that, if appointing fiduciaries were obligated to disclose nonpublic information to their appointees, “the result would be ceaseless conflict between duties of officers, directors and other company employees, which run to the company and its shareholders, and the duties of ERISA plan fiduciaries, which run to plan beneficiaries.”

Finally, the court determined that the guidance set forth in the Second Circuit’s prior decisions in In re Citigroup ERISA Litigation, 662 F.3d 128 (2d Cir. 2011), and Rinehart, 722 F.3d 137, “remains persuasive even after Dudenhoeffer.” The court explained that the Second Circuit in Citigroup had held that “ERISA fiduciaries have no obligation to disclose nonpublic information to plan beneficiaries,” based, inter alia, on its finding that “ERISA [does] not require fiduciaries to act as investment advisors.” The court also noted that the Second Circuit in Rinehart had found that it “‘would be unlikely’” to impose on appointing fiduciaries a duty to disclose inside information (quoting Rinehart, 722 F.3d 137). The Lehman III court acknowledged that the Court in “Dudenhoeffer contemplated that the duty of prudence might be breached based on nonpublic information, so long as plaintiffs allege[d] ‘an alternative action that the defendant could have taken that would have been consistent with the securities laws’” (quoting Dudenhoeffer, 134 S. Ct. 2459). However, the Lehman IIII court determined that the language in Dudenhoeffer was “not dispositive of whether an appointing fiduciary has a duty to disclose inside information.”

The court therefore dismissed plaintiffs’ duty to inform claim against Fuld, and separately dismissed plaintiffs’ duty to monitor claim against Fuld because plaintiffs failed to allege a predicate breach of fiduciary duty by the Plan Committee Defendants.

[1]           Please click here to read our prior discussion of the Dudenhoeffer decision.

[2]           Simpson Thacher represents the former members of the Lehman Brothers Employee Benefit Plans Committee (the “Plan Committee Defendants”) in this action.

[3]           Please click here to read our prior discussion of the Lehman II decision.

[4]           Please click here to read our prior discussion of the Second Circuit’s decision.

[5]           Please click here to read our prior discussion of the Tibble decision.