When the Supreme Court’s decision first came down in Fifth Third v. Dudenhoeffer, many thought participants would have an easier time winning damages for “stock-drop” claims filed against Employee Stock Ownership Plans (ESOPs).
The idea is that employers, post-Dudenhoeffer, can no longer rely on a blanket presumption of prudence that previously said it was always the right move to continue to offer employer stock within an ESOP—rather than say, freeze or entirely drop the company stock as a potential investment for employees when the attractiveness of the investment waned. It was believed, as a result, that plaintiffs could more easily challenge the decisions of ESOP fiduciaries to continue offering employer stock that had lost value or was likely to lose further value in the future, for example. This would especially be the case when ESOP fiduciaries decided to continue offering the stock while also being in possession of insider knowledge that could eventually be disclosed and harm the market valuation of the company.
While the argument has some logic to it, this hasn’t exactly played out, due the difficult nature of successfully pleading an alternative course of action that defendants should have known to take were they acting as prudent fiduciaries under the Employee Retirement Income Security Act (ERISA).
Take the latest ESOP-focused decision out of the U.S. Court of Appeals for the D.C. Circuit, Coburn v. Evercore. The appellate decision affirms a lower court’s ruling that determined the plaintiffs “failed to plead a plausible alternative course of action their ESOP trustees could have taken rather than continuing offering company stock that would not have ended up hurting more than helping.”
Plaintiffs in the case include former J.C. Penney employees and investors in a J.C. Penney employee stock ownership plan now managed by Evercore. The lead plaintiff claimed that Evercore breached its fiduciary duties of prudence and loyalty when it failed to take preventative action as the value of J.C. Penney common stock tumbled between 2012 and 2013, thereby causing significant losses.
As the appellate decision explains, despite clear factual similarities, plaintiffs argued that the tough pleading requirements in place even after Fifth Third v. Dudenhoeffer should not apply in this circumstance because the “challenge is centered on Evercore’s failure to appreciate the riskiness of J.C. Penney stock rather than Evercore’s valuation of its price.”
In short, the appellate court rejected the argument, because to appreciate the riskiness of a stock intimately involves its market valuation, and to argue that the ESOP fiduciaries should have been able to outguess the market’s valuation is inherently unfair absent special circumstance, such as fraud: “We disagree and therefore affirm the district court’s judgment.” Previously in the case, the district court also specifically rejected the argument that the plan’s fiduciaries should have known from publicly available information alone that the stock’s price was over or underpriced such that it was imprudently risky to hold.
NEXT: Details from the text of the complaint