Court Dismisses Stock Drop Claims against Lehman Brothers

A New York district court has ruled that 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.

The U.S. District Court for the Southern District of New York relied on Moench v. Robertson, in which the 3rd U.S. Circuit Court of Appeals held that the fiduciary of an employee stock ownership plan who invests in company stock is “entitled to a presumption that it acted consistently with ERISA by virtue of that decision. Plaintiffs can overcome the presumption only by . . . pleading the fiduciary’s knowledge at a pertinent time of”‘an imminent corporate collapse” or other “dire situation” sufficient to compel an ESOP sell-off. 

U.S. District Judge Lewis A. Kaplan rejected that defendants allegedly knew or should have known that Lehman was in a dire situation on March 16, 2008, when Bear Stearns was sold to JP Morgan Chase for $2 per share. Plaintiffs’ theory is that the combination of Bear Stearns’s collapse, Lehman’s alleged status as the most highly leveraged of the remaining investment banks, and market-wide subprime risks put Lehman in an obviously dire situation (see “Revised Lehman Stock Drop Suit Unsealed“). 

Kaplan said claims that defendants knew or should have known of Lehman’s precarious state by virtue of their respective positions at Lehman – research analyst, senior executive – are entirely conclusory. The allegations do nothing to connect the Plan Committee defendants to anything specific that alerted or should have alerted them to the alleged dire situation at Lehman following Bear Stearns’s collapse. 

In addition, Kaplan found that presentations to the Plan Committee by Mercer Investment Consulting suggesting a limitation on company stock investments and warning of a potential credit crunch were not sufficiently immediate or pointed to warn the Plan 

The complaint also alleges that Mercer made presentations to the Plan Committee in early 2008 detailing the Lehman Stock Fund’s poor performance, that share prices had fallen 18.2% during 2007 and that, “[a]s of March 31, 2008, the [Lehman] Stock Fund had lost nearly one hundred million dollars of retirement savings in just three months” — “mostly [on accountof] the -42% return for the first quarter of 2008.” Kaplan said such allegations do not overcome the Moench presumption. “[M]ere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the Moench presumption,” the opinion said. Companies are expected to undergo periodic swings — even significant ones, according to Kaplan. 

The court also dismissed claims that the Plan Committee defendants breached an affirmative duty to disclose known negative information about Lehman, as well as the duty to refrain from making material misrepresentations or omissions about the company. Kaplan noted that ERISA says an ERISA fiduciary “must discharge his duties . . . for the exclusive purpose of providing benefits to them.”  In light of the specificity with which ERISA describes this obligation, the 2nd U.S. Circuit Court of Appeals has stated that it is “inappropriate to infer an unlimited disclosure obligation on the basis of general provisions that say nothing about disclosure.”  Kaplan said the statute does not require plan fiduciaries to disclose information pertaining to plan investments as opposed to plan benefits. 

The case is In re Lehman Brothers Securities and ERISA Litigation, S.D.N.Y., No. 09 MD 02017 (LAK).