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Compliance October 31, 2013
Dismissal of Stock Drop Case Reaffirmed
October 31, 2013 (PLANSPONSOR.com) – A U.S. District Court has reaffirmed its earlier decision to dismiss a stock drop case filed by retirement plan participants.
Reported by Kevin McGuinness
In the case of In re SunTrust Banks Inc. ERISA Litigation, the plaintiffs were participants of SunTrust Bank’s 401(k) retirement plan, who alleged that the bank violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by continuing to permit investment in the bank’s stock when it was no longer prudent to do so. The U.S. District Court for the Northern District of Georgia found that a motion by the defendants, SunTrust Bank, to dismiss the case was valid and did so.
The case was then reviewed by the 11th U.S. Circuit Court of Appeals, who found that a related case, Lanfear v. Home Depot, Inc., resolved the issues brought up by SunTrust. Specifically, Lanfear established that ERISA did not impose a duty for plan fiduciaries to provide participants with nonpublic information that affected the value of the company’s stock. The appellate court then remanded SunTrust back to the district court (see “ERISA Imposes No Duty to Disclose Certain Information”).
The district court pointed out that repeated warnings to plan participants by the plan made it clear that while participants could invest in SunTrust stock, it was understood that “to do so exclusively, or primarily, would expose their assets to great risk.” In addition, plan documents indicated the plan offered other investment options with varying levels of risk.
According to U.S. District Judge Richard W. Story, the problem the district court found with the plaintiff’s claim was, “It would have to rely on one of two impossible theories.” The first is the premise that employers and plan fiduciaries have a duty to outsmart the stock market. The second theory is that employers and plan fiduciaries use insider information for the benefit of employees, which would violate federal securities laws.
Referring back to Lanfear, the district court concluded that since plan fiduciaries must rely on public information to determine the prudence of keeping or discontinuing an investment option, SunTrust Bank acted within prudent standards. As such, it dismissed the plaintiff’s lawsuit again.
The full text of the court’s recent decision can be found here.