Reliant Wins 2nd Stock Drop Case Ruling

April 29, 2008 ( - A federal judge was correct in dismissing a 401(k) participant's company stock suit because the plaintiff had not put on a strong enough case that a Houston energy firm had violated its fiduciary duties in handling the company stock fund, an appellate court has ruled.

The 5 th  U.S. Circuit Court of Appeals upheld a lower court ruling that plaintiff Brad Kirschbaum had not shown that his allegations against Reliant Energy Inc. were serious enough to overcome the legal presumption that Reliant and its officers had met their fiduciary duties by implementing provisions of the plan document which called for a company stock fund option. The appellate court said judges have to be careful in modifying the legal presumption that fiduciaries with a company stock plan are meeting their duties if they are obeying the dictates of the plan document.   

The 5 th  Circuit explained: ” ( case law establishing the company stock legal presumption) concluded that a fiduciary of this sort of plan is entitled to a presumption that his decision to invest in the employer’s securities was prudent. A plaintiff may rebut the presumption only by showing that ‘owing to circumstances not known to the settlor and notanticipated by him [the making of such investment] would defeat or substantially impair the accomplishment of the purposes of the trust.’.”

In May 2002, the value of the Common Stock Fund fell when the price per share of Reliant common stock dropped about 40% in a week from $24.60 to $14.50 per share. K irschbaum alleged in his suit that a drop in Reliant’s share price was caused by senior executives artificially increasing the company’s trading volume.

The appellate court turned away Kirschbaum’s contention that Reliant had an obligation to terminate its Company Stock Fund, stop buying company stock for the fund, and liquidate the fund’s current shares. In writing for the appellate court, Chief Judge Edith H. Jones asserted:”One cannot say that whenever plan fiduciaries are aware of circumstances that may impair the value of company stock, they have a fiduciary duty to depart from [employee stock ownership plan] or EIAP (Eligible Individual Account Plan) plan provisions. Instead, there ought to be persuasive and analytically rigorous facts demonstrating that reasonable fiduciaries would have considered themselves bound to divest.”

The problem, the appellate judges claimed, was that a plan fiduciary would be liable if he or she deviated from the plan’s requirements and sold the stock, only to have the stock price rebound.

In 2006, the U.S. District Court for the Southern District of Texas granted summary judgment to the Reliant defendants (See Energy Firm Cleared of Co Stock Fiduciary Breach ). The district court reasoned that Reliant and members of the plan’s administrative committee had no authority to remove Reliant stock as an investment option because the plan clearly stated that Reliant stock must at all times remain an investment option

The 5th Circuit ruling is available here .