In attacking what has come to be known as the “Moench presumption” – after the 1995 3rd U.S. Circuit Court of Appeals case that first articulated it – the government’s position could, if granted, change a central legal underpinning to a large body of federal cases that has developed in the years since Moench.
The Labor Department lawyers asserted in the friend of the court brief filed with the 2nd U.S. Circuit Court of Appeals in two consolidated stock drop cases against the McGraw-Hill Companies that 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. The lower court decision throwing out the two suits should be reversed, the government argued (see Judge Dismisses Ratings Agency Lawsuit).
Moenchcontended that, based on the diversification exemption applicable to company stock, an employee stock ownership plan (ESOP) fiduciary that invested plan assets in employer stock is entitled to a rebuttable presumption that he acted consistently with ERISA.
“ERISA does not support application of a presumption of prudence with respect to employer stock held by a defined contribution plan,” the Labor Department lawyers argued. “There is no textual basis for otherwise relaxing ERISA’s strict fiduciary obligations with regard to employer stock and, given Congress’s evident concern with the management of employer stock expressed elsewhere in the statute, the district court’s application of a presumption relaxing ERISA’s prudence standard was inappropriate.”
Noting that plaintiffs in the two McGraw-Hill cases alleged company stock was an imprudent and overpriced investment in light of allegations the company had released “improper and flawed” ratings of mortgage-backed securities, the government lawyers declared: “It is never prudent to overpay for plan assets and a presumption to the contrary is wholly unwarranted.”
The Solis brief is at http://www.dol.gov/sol/media/briefs/gearren%28A%29-6-4-2010.htm .