Court Drops Breach of Fiduciary Duty Claim in Stock Drop Suit

In his decision, U.S. District Judge Edward C. Reed of the U.S. District Court for the District of Nevada used the “Moench” standard formulated by the 3^rd U.S. Circuit Court of Appeals in Moench v. Robertson, and adopted by the 9^th U.S. Circuit Court of Appeals, which provides that an eligible individual account plan fiduciary who invests in employer stock is presumed to have acted consistently with ERISA, which presumption may be overcome by showing that the fiduciary abused his discretion.  

Specifically, Reed cited the case of Quan v. Computer Sciences Corp. (see DoL Blasts 9th Circuit for Prudence Presumption Endorsement ) in which the court found that the presumption of prudence “is fully reconcilable with ERISA’s statutory text” and noted that “[t]here is no bright-line rule as to how much evidence is needed to rebut the Moench presumption;” however, “a guiding principle… is that the burden to rebut the presumption varies directly with the strength of a plan’s requirement that fiduciaries invest in employer stock.”  Reed said the plaintiffs in the IGT case have not alleged facts sufficient to show that the defendants abused their discretion in retaining the IGT Stock fund as an investment option under the plan following a 67% decrease in value of the stock, pointing out that the 9th Circuit has found that more substantial decreases in stock prices coupled with other factors such as “company-wide financial woes,” “widespread accounting violations” or an “ill-fated merger” and reverse stock split are insufficient to rebut the Moench presumption.  

The court let other charges stand. The plaintiffs asserted that IGT and the Committee disseminated the plan’s documents and related materials, which incorporated by reference materials such as IGT’s inaccurate Securities and Exchange Commission filings, which converted such materials into fiduciary communications. They further allege that IGT made misleading communications to plan participants through press releases and other communications with analysts and the press.  

Reed disagreed with defendants reliance on Quan for the proposition that SEC filings are made in a defendant’s corporate capacity even when incorporated into plan documents, noting that “[t]he Quan court merely held that plaintiffs in that case “had not generated any genuine issues of material fact that the alleged misrepresentations and nondisclosures at issue were material,” and did not hold that SEC filings are not fiduciary communications when incorporated into plan documents by ERISA fiduciaries.” Reed also pointed out that the U.S. Supreme Court has held that ERISA liability may be implicated if a defendant intentionally connects its statements about the company’s financial health to statements it makes about the future of plan benefits.  

In addition, Reed concluded that IGT’s Board had the authority to appoint, retain or remove members of the retirement plan committee, which gave rise to a duty to monitor the members of the committee. So, he left intact the charge for failure to monitor plan fiduciaries.