Case Sensitive:"Moench" Mete?

Illustration By David Plunkert

In re Computer Sciences Corp. ERISA Litigation, No. CV 08-02398 SJO  

 U.S. District Court for the Central District of California

The Question:  Did an employer breach its fiduciary duty under the Employee Retirement Income Security Act (ERISA) by maintaining a company stock option in its 401(k) plan despite a 12% decline in its share price related to publicity over the company's potential stock option backdating problems?

The Ruling:  U.S. District Judge S. James Otero of the U.S. District Court for the Central District of California cleared Computer Sciences Corp. (CSC) of wrongdoing and dismissed a participant fiduciary breach lawsuit against the company. In making that determination, Judge Otero cited Department of Labor Bulletin 2004-03, which asserted that, "because stock prices fluctuate as a matter of course, even a steep drop in a stock's price would not, in and of itself, indicate that a named fiduciary's direction to purchase or hold such stock is imprudent."

The Case:  The participant plaintiffs alleged that a drop in CSC's share price from $55.88 to $48.56 was caused by a June 2006 announcement by the firm that it had received a Securities and Exchange Commission (SEC) demand for documents about its stock option pricing practices, and that CSC "breached the fiduciary duties imposed by ERISA § 404(a) by: (1) imprudently investing plan assets in CSC stock; (2) negligently misrepresenting and failing to disclose material infor­mation about CSC's finances and operations; and (3) failing to properly appoint, monitor, and inform the Committee and its members." Specifically, in the CSC case, plaintiffs alleged fiduciaries should have known about the company's lack of internal accounting controls to prevent stock option backdating problems, and that continuing to offer CSC stock was, therefore, imprudent. Moreover, CSC's accounting problems also led to tax issues at the same time, the plaintiffs alleged.

As Otero explained in his ruling, plaintiffs' focus on whether fiduciaries were prudent grows out of a 1995 federal appellate decision, Moench v. Robertson, which stated that "fiduciaries of employee stock ownership plans are presumed to have acted consistently with ERISA in their decisions to invest assets in employer stock." The Moench fiduciary protection is based on a desire by Congress to encourage companies to field employee stock ownership plans, Otero said. He noted that plaintiffs must overcome the Moench presumption by showing the fiduciary's decisions represented an abuse of discretion and that a prudent person would have ignored the plan document's mandate to invest in company stock. "Mere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the Moench presumption," Otero noted, going on to explain that "a plaintiff must show a causal link between the failure to investigate and the harm suffered by the plan."