Bank Wins Dismissal of Company Stock Suit

April 4, 2011 ( – Another court has used the “presumption of prudence” standard to rule for the employer in a case where participants allege a breach of fiduciary duty for continuing to offer company stock as a retirement plan investment during a time of corporate financial woes.

In dismissing the case, U.S. District Judge Paul D. Borman of the U.S. District Court for the Eastern District of Michigan decided that the presumption of prudence applied to the Flagstar Bank 401(k) Plan because the plan document says the company stock fund will exist if it is one of the permissible investment options. In addition, Borman found that the plan creates a special type of preference for Flagstar stock, as well as protection for the defendant fiduciaries.   

Borman said the plaintiffs also did not meet their burden to prove Flagstar was on the verge of economic collapse or other “dire circumstances” in order to rebut the presumption and survive the motion, even though the company stock price dropped 95% over the class period. The court noted that Flagstar Bank did not fail; Flagstar’s common stock continues to be traded on the New York Stock Exchange; Flagstar received private capital infusions; and Flagstar participated in the federal TARP Program. Participation in the TARP program, and continued private investment in Flagstar demonstrate that it was, and is, a viable company, according to Borman.   

The plan allowed participants to invest in a variety of investment options, of which Flagstar stock was one. Participants could choose from among 23 investment options that were selected by Flagstar, the Plan Administrator.  

Plaintiffs contended in their suit that the defendants failed to prudently and loyally manage the plan’s investments by continuing to invest plan assets in Company stock when it was imprudent to do so; failing to provide complete and accurate information to plan participants regarding the company’[s] financial condition and the prudence of investing in company stock; and maintaining the plan’s pre-existing heavy investment in Flagstar equity when company stock was no longer a prudent investment for the plan.  

The case is Griffin v. Flagstar Bancorp Inc., E.D. Mich., No. 2:10-cv-10610.

Prudence Presumption Applies to All EIAPs?  

In Griffin v. Flagstar Bancorp Inc., not only did the court decide that the defendents were entitled to a presumption of prudence, but U.S. District Judge Paul D. Borman went on to find that the presumption applies to all Eligible Individual Account Plans, and not just Employee Stock Ownership Plans. Borman said  EIAPs are exempt from the prudent person standard of care’s requirement that plan fiduciaries diversify the plan’s investments, and EIAPs are exempt from ERISA’s general rule that no more than ten percent of a plan’s assets may be invested in employer securities. “These exemptions reflect a strong policy in favor of investment in employer stock,” Borman wrote.  

In addition, the court found that although the term “presumption” often describes evidentiary standards, in stock drop cases the presumption merely indicates the standard required for plaintiffs to state claims. Therefore, Borman concluded that the presumption applies when deciding a motion to dismiss.  

The presumption of prudence has been a controversial issue since first applied in Moench v. Robertson, with some courts rejecting it (see Court Allows Ambac Stock Drop Case to Proceed) and others applying it (see Stock Drop Case against UBS Tossed).  

The Department of Labor has spoken out against the Moench presumption as well, saying it immunizes plan fiduciaries from liability for imprudent investments in employer stock by mischaracterizing prudence claims related to such investments as claims about diversification (see DoL Disputes Home Depot’s Win in Stock Drop Suit and DoL Calls for Stock Drop Ruling Reversal).