SCOTUS Takes Up Presumption of Prudence Issue

December 16, 2013 ( — The U.S. Supreme Court has agreed to hear a case raising fiduciary issues and questions about what constitutes prudent investment decisionmaking within employee stock ownership plans (ESOP).

The court agreed to hear Fifth Third Bancorp v. Dudenhoeffer (docket number 12-751)—a case that the U.S. Solicitor General had advised the Supreme Court justices to review, according to the Supreme Court of the United States Blog (SCOTUSblog), which is sponsored by Bloomberg Law.  

The case comes to the high court on an approved petition for a writ of certiorari—a document which a losing party files with the court asking it to review the decision of a lower court—after an extended appeals process. Earlier iterations of the case have been argued in the 6th U.S. Circuit Court of Appeals, as well as the U.S. District Court for the Southern District of Ohio, case documents show.

Although the Solicitor General urged the Supreme Court to rewrite the questions of the case, the court did not do so, according to the SCOTUSblog post, and instead accepted only one of the two standing questions as raised by Fifth Third Bancorp: “Whether the Sixth Circuit erred by holding that respondents were not required to plausibly allege in their complaint that the fiduciaries of an employee stock ownership plan abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable, as required by the Employee Retirement Income Security Act of 1974 . . . and every other circuit to address the issue.”

According to SCOTUSblog, the Supreme Court chose to bypass a second question about the effect on fiduciary duties of statements that a financial institution makes in filings with the Securities and Exchange Commission (SEC).

Fifth Third Bank has an employee profit-sharing plan, defining various contribution options for the company’s employees. Plan employees make voluntary contributions from their salaries and direct the purchase of investments for their individual account from options that the plan trustee has selected. In the time period at issue in the case, the trustee offered the option to invest in the company’s own stock through various mutual fund and collective fund vehicles.

Two former employees of the bank filed suit in September 2008 over investment option decisions made by various officials at the bank and its holding company during the period before July 10, 2007. The lawsuit contended, according to SCOTUSblog, that the company switched from being a conservative bank lender to a lender in the subprime mortgage market. The lawsuit also contended that the president and other top officials within the bank knew the new investment strategy was far riskier, because of a high potential for defaults, and yet failed to do anything about the continued investment in company stock.

Between July 2007 and September 2009, the company’ stock price dropped significantly, causing the employee plan to lose tens of millions of dollars on its investments. The investments, the workers’ lawsuit argued, continued long after it was prudent to maintain them.

A federal district judge dismissed the lawsuit, finding that the company was entitled to a presumption that its continued investment in company stock was reasonable. However, the 6th Circuit revived the lawsuit, finding it could proceed on the claim that the officers had violated their fiduciary duty and caused the losses to the plan by failing to divest the plan of stock in the company and failing to remove company stock as an investment option for the employees (see "Court Revives Fifth Third Stock Drop Suit"). The 6th Circuit ruled the presumption is not to be applied at the pleading stage of such a lawsuit.

In asking the Supreme Court to review the case, Fifth Third Bancorp asked for clarification of the kind of proof that is required to overcome the presumption that such an investment was a reasonable one. The 6th Circuit, the petition contended, was wrong in failing to require proof that continued investment in company stock was not prudent.

The case is likely to be heard in March 2014, according to SCOTUSblog.