In October 2011, the district court found that financial services firm Lehman Brothers did not violate its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by continuing to offer company stock as a retirement plan investment (see “Court Dismisses Stock Drop Case against Lehman Brothers”). The appeals court affirmed the district court’s citing of ERISA Rule 12 (b)(6), since the plaintiffs “did not allege sufficient facts to show that members of the [plan’s] Employee Benefits Plan Committee knew or should have known that continued investment in Lehman stock was imprudent.”
The appeals court also made its decision based on the answer to the following questions: (1) Can the plaintiffs claim that the Benefits Committee defendants knew or should have known that Lehman stock was an imprudent investment based on material, nonpublic information?; and (2) How specific must the plaintiffs be with regard to when the defendants knew or should have known that Lehman was in a dire situation?
In addressing the first question, the court cited several cases including Harris v. Amgen, Inc. The court said fiduciaries are “under no obligation to either seek out or act upon inside information in the course of fulfilling their duties under ERISA.” The court further stated that given the conflicted state of the law with regard to using inside information to investigate the financial condition of a plan asset, “the duty of prudence must not be construed to include an obligation to affirmatively seek out material, nonpublic information pertaining to plan investments.”
With regard to the second question, the court found the plaintiffs’ allegations did not overcome the presumption standard put forth in Moench v. Robertson of fiduciaries having knowledge of an imminent corporate collapse or dire situation that would necessitate a sell-off of the company stock. “Market fluctuations and an above-water price immediately in advance of bankruptcy would not have put a prudent investor on notice that Lehman had reached a dire situation,” said the court.
The plaintiffs in this case were former employees of Lehman Brothers, or its subsidiaries, who participated in the Lehman Brothers Savings Plan and were specifically invested in the Lehman Stock Fund. They filed suit in October 2008 after the firm declared bankruptcy during the previous month and the stock was “rendered essentially worthless.”
The full text of the appeals court decision can be found here.
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