Lehman Again Granted Victory in Stock Drop Suit

A federal appellate court has again affirmed a 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.

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 the case of 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 sent the case back to the 2nd Circuit, which then sent the case back to the district court.

In 2015, the district court again found the plaintiffs failed to allege sufficiently that the Lehman Brothers’ plan committee violated their Employee Retirement Income Security Act (ERISA) duties. The 2nd Circuit affirmed the district court’s decision.

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.

The plaintiffs in Rinehart argued 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 2nd Circuit rejected this argument, saying the orders speak only conditionally about potential market effects resulting from short-sales and do not purport to describe then-existing market conditions. It agreed with the district court that the only plausible inference supported by the plaintiffs’ complaint is that the market processed any risks identified in the SEC’s orders as it would have any public information.

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. The court said the case includes no specific allegations about what lines of inquiry would have revealed this information, or who would have disclosed it.

In addition, the 2nd Circuit agreed with the district court that the complaint does not plausibly plead facts that show a prudent fiduciary would not have viewed disclosure of non-public information or ceasing to buy Lehman stock as more likely to harm the plan than help it, as dictated by the Fifth Third decision.

The latest opinion in Rinehart v. Akers is here.