Court Moves Forward Claims against Northern Trust over ESOP

March 12, 2010 (PLANSPONSOR.com) – A federal court judge has moved forward claims by a participant in the Northern Trust Company Thrift Incentive Plan that plan fiduciaries breached their duties by continuing to offer company stock as an investment when it was no longer prudent to do so.

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.

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