After the 2nd U.S. Circuit Court of Appeals agreed with a lower court’s decision that participants in Lehman Brothers’ retirement plan did not plausibly argue that the company breached its fiduciary duty by keeping company stock in the plan when it was not prudent to do so, the Supreme Court now says it will not review the appellate ruling.
An updated docket sheet on the SCOTUS website confirms the high court will not offer another review to the long-running case. This lets stand a lower court ruling that effectively rejected plaintiffs' arguments that fiduciary breaches had occurred.
By way of background, in 2013, the 2nd U.S. Circuit Court of Appeals upheld an earlier ruling by the U.S. District Court for the Southern District of New York to dismiss this case, Rinehart v. Akers. That ruling was based on the presumption of prudence established in a 1995 decision in Moench v. Robertson. However, following the U.S. Supreme Court’s decision in Fifth Third v. Dudenhoeffer, invalidating the presumption of prudence, the Supreme Court retroactively sent current case back to the 2nd Circuit, which then sent the case back to the district court.
Subsequent to a district court ruling and appeal, the appellate court noted that, while the Supreme Court made clear in Fifth Third that there should be no special presumption of prudence for employee stock ownership plan (ESOP) fiduciaries, “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valuing stock are implausible as a general rule, at least in the absence of special circumstances.” In addition, for claims alleging a fiduciary breach based on non-public information, the high court held that plaintiffs must plausibly allege an alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.
As in the courts’ earlier decisions, the 2nd Circuit rejected the plaintiffs’ argument that their case included “special circumstances,” pointing to Securities and Exchange Commission (SEC) orders issued in July 2008 prohibiting the short-selling of securities of certain financial institutions, including Lehman. The appellate court also rejected the plaintiffs’ argument that had the retirement plan committee conducted an appropriate independent investigation into the riskiness of Lehman stock, it would have uncovered non-public information revealing the imprudence of investing in the stock.
It seems that the final decision form the appellate court was indeed sound, as the Supreme Court will let it stand.