While U.S. District Judge Joan Humphrey Lefkow of the
U.S. District Court for the Northern District of Illinois admitted a one-day
drop in the company's stock price is not enough on its own to state a claim for
imprudent investment, and Stephen Patten has not alleged that the decline in
stock price was persistent or indicated that Northern Trust was on the verge of
collapse – "and cannot do so as Northern Trust Corp.’s common stock consistently
outperformed the market during the class period" – she said the court
cannot go so far as to conclude that Patten can prove no set of facts that
would entitle him to relief.
"Because prudence is considered in light of the
fiduciaries’ balancing of competing interests and it is plausible that Northern
Trust Corp.’s common stock was not a prudent investment for purposes of the
Plan, the court cannot conclude that Patten cannot state a plausible claim for
imprudent investment on this basis," Lefkow wrote in her opinion. However,
she warned that Patten still must allege enough facts to indicate that
defendants knew facts indicating that the Northern Trust stock was an imprudent
investment for the plan or that "red flags" triggered their duty to
investigate.
Lefkow rejected Northern Trust's argument that Patten was
not injured since he cashed out of the plan on September 15, 2008, when Northern
Trust’s stock closed at $84.09, near its all-time high, and thus had no
standing to sue. Lefkow said the alleged breaches themselves constitute
injuries for which redress may be sought, and that his allegations that the plan
suffered losses because of defendants’ actions are sufficient.
"Whether Patten actually benefited from the
breaches, thus barring recovery, is an issue of damages, not of injury,"
Lefkow said, although she noted that discovery may show that Patten cannot
establish that he was damaged by defendants’ alleged breach, as no alternative
investment would have provided him with a greater return.
Lefkow also found that Patten sufficiently alleged that
all defendants were functional fiduciaries with respect to investment decisions
for the plan.
While an Employee Stock Ownership Plan fiduciary is
generally entitled to a presumption of prudence where investment in company
stock is required, Lefkow found that the plan itself does not require that the
Stock Fund be offered as an investment option, making the presumption
inapplicable. She rejected defendants argument that the plan's requirement that
matching contributions are first to be made to the Stock Fund, that the Thrift
Trust indicates that the plan "shall be composed of the Northern Trust
Stock Fund and any other Investment Funds," and that the plan has
extensive provisions related to the Stock Fund all reflect Northern Trust Co.’s
intent that the Stock Fund be a required plan investment option.
Patten alleges that during the proposed class period, the
market price of Northern Trust Corp. common stock was artificially inflated as
Northern Trust Corp. was undertaking excessively risky investments in structured
investment vehicles (SIVs) and offering auction rate securities. He claims these
practices led to financial losses, a decline in the market price of Northern
Trust Corp. common stock, and tens of millions of dollars of reductions in plan
participants’ accounts.
Specifically, Patten said the result was an almost 19%
drop in the value of Northern Trust stock from $79.90 to $64.87 per share on September
29, 2008, after the third quarter charges were publicly announced.
Lefkow did dismiss Patten's misrepresentation and
nondisclosure claim, saying the defendants had no duty to disclose information
concerning Northern Trust’s involvement in auction rate securities or
investment in SIVs unless they provided participants with materially misleading
information in their fiduciary capacities that they had to correct.
The case is Patten v.
Northern Trust Co., N.D. Ill., No. 08-CV-5912, 3/9/10.