Court Tosses Sallie Mae Stock Drop Action

September 28, 2010 ( – The price of student loan provider Sallie Mae’s stock may have gotten hammered during the economic downturn, but the decline was not severe enough to overcome a prudence presumption in having a stock option in its plan.

With that ruling, U.S. District Judge William H. Pauley III of the U.S. District Court for the Southern District of New York dismissed a participant stock drop suit, alleging an Employee Retirement Income Security Act (ERISA) fiduciary breach by Sallie Mae for keeping the company stock option after it was no longer prudent to do so.

Pauley ruled that while the 85% share price plunge experienced by the SLM Corp. was certainly severe, it could not overcome a presumption of prudence typically given to plans; plaintiffs needed to show essentially that Sallie Mae was on its last corporate legs and they couldn’t do so, Pauley contended.

In their suit, plaintiffs alleged that Sallie Mae should not have offered its stock as an option from January 18, 2007, to September 10, 2009, because the company had begun offering its student loan products to riskier borrowers.

While he agreed to toss out the suit, Pauley rejected the plan’s argument that it had no other choice because it was required by the plan document to offer a company stock option; Pauley contended that would not effectively shield plans from ERISA breach suits.

The case is In re SLM Corp. ERISA Litigation, S.D.N.Y., No. 08 Civ. 4334 (WHP).

The often-cited prudence presumption has become a controversial part of company stock case law in recent years (see IMHO: Prudent Mien?).