Court Decides More Facts Needed in Stock Drop Suit

April 4, 2011 ( – The U.S. District Court for the District of Maryland has ruled that the presumption of prudence is not enough to dismiss claims a company breached its Employee Retirement Income Security Act fiduciary duties relating to offering company stock as an investment option.

U.S. District Judge Alexander Williams, Jr. noted that despite the prevalence of the presumption established in Moench v. Robertson, it is not universally accepted, and several courts have found that the application of the presumption is inappropriate at the Motion to Dismiss stage.   

Williams found that the plan document for the retirement plan sponsored by Coventry Healthcare permitted the fiduciaries to freely add or eliminate investment funds, including the Coventry Stock, from the group of Investment Funds offered in the plan. Accordingly, nothing in the plan documents prevented the fiduciaries from taking corrective action to prevent erosion of the plan assets stemming from the plan holdings of Coventry Stock during the class period.   

Williams decided that “at this juncture, the Court cannot dismiss Plaintiffs’ claims based on breach of fiduciary duty on the grounds that Defendants did not have discretion to alter the Plan’s investment options. Factual development of the record is necessary for just determination of this claim.”  

In addition, the court found that whether the company’s alleged knowledge of claims processing problems as of April 2008 actually made further investment imprudent is an issue necessitating further factual development.  

Williams ruled that the plaintiffs adequately alleged that their financial loss under the plan resulted from the defendants’ breach of fiduciary duties, and accordingly, reliance was sufficiently alleged. In addition, Williams said plaintiffs sufficiently alleged that public statements made about the claims processing problems were materially misleading.  

Williams also refused to dismiss claims that certain defendents failed to “ensure that their fiduciary appointees appreciated the true extent of Coventry’s highly risky and inappropriate business practices, and the likely impact of such practices on the value of the Plans’ investment in Coventry’s Stock.” The Court found plaintiffs have stated a cognizable claim for failure to monitor.   

Williams said the benefit of discovery is necessary for a just determination of the extent to which the monitoring defendants possessed a fiduciary duty over plan investments. However, at this juncture, dismissal of this claim is inappropriate.  

However, the court did dismiss conflict of interest claims. Williams noted that the plaintiffs appear to base their conflict of interest allegations on the fact that the defendants sold a substantial amount of stock during the class period. However, the time in which plaintiffs allege that this stock was sold was from May 2007 to February 2008, and the complaint alleged defendants were not aware of the claims processing issues until April 2008, so any conflict of interest that the plaintiffs allege cannot have arisen until April 2008. Since it did not appear as though any named defendant sold any stock after April 2008, the court dismissed this count.  

The case is In reCoventry Healthcare Inc. Securities Litigation, D. Md., No. 8:09-cv-02850-AW.  

At the same time the Maryland court was deciding the presumption of prudence was not appropriate at the Motion to Dismiss stage, a federal court in Michigan was ruling the opposite (see Bank Wins Dismissal of Company Stock Suit).