Industry Groups Ask 2nd Circuit to Uphold Dismissal of Citigroup Stock-Drop Case

The ERISA Industry Committee (ERIC), joined by the American Benefits Council, have filed a friend of the court brief urging the 2nd U.S. Circuit Court of Appeals to uphold the dismissal of a case alleging Citigroup violated its fiduciary duties by continuing to hold company stock in its retirement plans when it was no longer prudent.

The brief rebuts plaintiffs’ allegations by addressing the fact that compliance with a plan document that mandates offering employer stock does not constitute a discretionary and therefore fiduciary action, and that such compliance with the plan document is properly presumed to comply with the Employee Retirement Income Security Act’s (ERISA) standard of care in almost all circumstances.  The brief said both ERISA and the Internal Revenue Code encourage employers to offer employer stock funds and exempt employer stock programs from requirements that would otherwise hamper their operation.        

As to the duty of prudence claims, the brief argues that the plaintiffs mistakenly challenge the “prudence” of company stock as an investment, rather than the prudence of the plans’ fiduciaries. “This is not a mere question of semantics. The difference between prudent investors and prudent investments is substantial. ERISA defines and mandates the former, but not the latter,” according to the brief. Therefore, allegations about the intrinsic quality of an investment fail to establish entitlement to relief under ERISA, the brief argues.     

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The groups contend that litigation of this kind “places the fiduciaries of [ESOPs] on the horns of a dilemma.” They can be sued if they follow the terms of the plan and allow the plan to continue investing in employer stock, or they can be sued if they override the terms of the plan by forbidding the purchase of additional employer stock or liquidating the plan’s current holdings of employer stock.   
In addressing the Department of Labor’s contention that there is no rationale for applying the Moench presumption of prudence where the fiduciaries should have known that the stock was artificially overpriced, the brief argues that the fact that a stock has been “overpriced” can only be known in retrospect after a change in circumstance causes the price to drop.        

Finally, the groups contend that since Congress addressed “strike suits” in the securities law arena, abusive ERISA “stock-drop” litigation has become commonplace, and that ERISA’s goals will be undermined if the statute is misapplied to make retirement plans that invest in employer stock more a source of litigation than of retiree income and employee stakeholding.     

“The district court ruling must be allowed to stand, otherwise you will continue to see a deluge of litigation from participants merely second guessing plan fiduciary decisions, further jeopardizing the employer-sponsored retirement system,” said ERIC President Mark Ugoretz.
Last September, the U.S. District Court for the Southern District of New York ruled that participants in two retirement plans sponsored by Citigroup failed to state a claim that defendants breached their fiduciary duties by offering Citigroup stock as an investment option (see “Court Dismisses ERISA Fiduciary Breach Claims against Citigroup”). 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 wrote.