In his ruling dismissing all claims, U.S. District Judge Sidney H. Stein pointed out that the plans unequivocally required that Citigroup stock be offered as an investment option, and thus defendants had no discretion—and could not have been “acting as fiduciaries”—with respect to the plans’ investment in Citigroup stock. Even if defendants did have discretion to eliminate Citigroup stock as an investment option, investment in Citigroup stock was presumptively prudent, as the plans were eligible individual account plans (EIAPs), and plaintiffs failed to allege facts in support of a plausible claim to overcome that presumption, Stein said.
The court rejected participants’ argument that the defendants could have liquidated the stock since the plans allowed the Citgroup Common Stock Fund to hold cash and short-term assets. Stein pointed out that the plan language only allows those holdings for the purpose of paying plan benefits or permitting Citigroup stock to be purchased in a volume that did not disrupt the market, and not for the purpose of limiting the plan’s financial losses due to a potential decline in the price of Citigroup stock.
The court also ruled that the defendants did not have an affirmative duty to disclose financial information to plan participants about Citigroup because Employee Retirement Income Security Act (ERISA) fiduciaries are not required to provide investment advice. In addition, Stein said: “To the extent that some defendants made statements to plan participants regarding Citigroup’s financial situation, those defendants were not acting as fiduciaries when making those statements or, alternatively, plaintiffs have failed to allege facts showing that defendants knew the statements were misleading.”
Stein also found the limited fiduciary responsibilities of Citigroup and its directors did not include a duty to disclose material, non-public information about Citigroup’s financial situation.
The court rejected plaintiffs’ claims of conflicts of interest, saying the participants only argued that defendants’ compensation was tied to the performance of Citigroup stock and that certain defendants sold Citigroup stock during the class period—allegations that are “insufficient to set forth an actionable conflict of interest on defendants’ part.” Finally, Stein said that because plaintiffs’ claims of fiduciary liability fail, so too does their claim of co-fiduciary liability.
The plaintiffs in the case are current or former employees of Citigroup and participants in the Citigroup 401(k) Plan and Citibuilder 401(k) Plan for Puerto Rico who represented all “persons who were participants in or beneficiaries of the Plans at any time between January 1, 2007, and January 15, 2008 … and whose Plan accounts included investments in Citigroup.”
The Nature of the Beast
In a response to all allegations of fiduciary breach by plan sponsors that maintain company stock as an investment option in retirement plans that are required to do so, Stein said a provision in an EIAP or an ESOP requiring that employer stock be offered as an investment option is patently in line with Congress' goal of encouraging employee stock ownership. "It would "thwart" that goal to hold a fiduciary liable for adhering to such a plan provision," Stein said.
He added that EIAPs and ESOPs are "not intended to guarantee retirement benefits" and were not “intended to replace traditional pension arrangements,” but rather, the purpose of EIAPs and ESOPs is to give employees an ownership interest and thus a stake in the financial successes—and failures—of the companies for which they work.
Noting that EIAPs “‘place employee retirement assets at much greater risk' than traditional ERISA plans,” Stein said if the price of employer stock collapses and the value of an EIAP or an ESOP declines, it is a natural result of the plan’s design. "No fault would lie with the plan’s fiduciaries, who were adhering to the mandatory terms of a plan that was designed not to guarantee income but to encourage employee stock ownership," he concluded.
Stein also pointed out that if fiduciaries were to override an EIAP’s mandates about employer stock, they would, in effect, be amending the plan, as they would be altering the plan design as set forth in the plan document.
Stein sympathized with what he called a "confusing, untenable position" that fiduciaries would be in if such claims as those brought by the Citigroup participants succeeded. As the price of employer stock declined, fiduciaries would face two options: adhere to the plan’s mandate regarding employer stock and face liability for a breach of the duty of prudence for failing to divest, or override the plan’s terms and divest the plan of employer stock, leading to liability for violating the terms of the plan agreement.
"[I]f the price of the divested stock rebounded, the fiduciary would almost certainly be sued for having overridden the plan terms," Stein contended.
The opinion in In re Citigroup ERISA Litigation is here.