In Gray v. Citigroup Inc., the 2nd U.S. Circuit Court of Appeals found Citigroup fiduciaries did not abuse their discretion in continuing to offer company stock as an investment in two of its employee retirement plans. (See “2nd Circuit Affirms Dismissal of Citigroup Stock Drop Charges.”) The appellate court also held that defendants did not have an affirmative duty to disclose to plan participants nonpublic information regarding the expected performance of Citigroup stock, and that the complaint did not sufficiently allege that defendants, in their fiduciary capacities, made any knowing misstatements regarding Citigroup stock.
The 2nd Circuit noted that many courts have recognized employee stock ownership plans (ESOPs), by definition, are “designed to invest primarily in qualifying employer securities.” The appellate court relied on the 3rd Circuit’s decision in Moench v. Robertson in saying that accordingly, Congress has encouraged ESOP creation by, for example, exempting ESOPs from ERISA’s “prudence requirement (only to the extent that it requires diversification)” and from the statute’s “strict prohibitions against dealing with a party in interest, and against self-dealing.”
In Gearren v. The McGraw-Hill Companies Inc., charges were dismissed in two consolidated stock drop cases against the McGraw-Hill Companies, also based on the presumption of prudence. Secretary of Labor Hilda Solis asked the 2nd U.S. Circuit Court of Appeals to reverse the decision.
In a legal brief filed with the court, lawyers representing Solis attacked the Moench presumption saying the Employee Retirement Income Security Act (ERISA) does not carve out any exceptions to its mandates that fiduciaries act strictly with prudence and due care in carrying out their duties on behalf of participants and beneficiaries. (See “Solis Makes the Case for Change in Stock Drop Case Law.”)