ERIC memorandum template


<nobr>Mar 26, 2010</nobr>

ERIC Urges Appeals Court to Uphold District Court's Dismissal of "Stock Drop" Case

Washington, D.C. -- The ERISA Industry Committee (ERIC), the Washington, D.C.-based trade association representing America's major employers, on March 26 filed with the U.S. Court of Appeals for the Second Circuit an amicus curiae ("friend of the court") brief urging the Court to uphold a district court's dismissal of a case alleging violations of fiduciary duties for holding company stock as a permitted investment option in its section 401(k) plan. The case is Gray v. Citigroup Inc. (In re: Citigroup ERISA Litigation). The American Benefits Council joined ERIC on the brief.

ERIC Counsel John Vine and T.L. Cubbage of Covington & Burling, LLP, drafted the brief.

The case arose when plaintiffs claimed that defendants breached fiduciary duties by, among other things, offering company stock as an investment option to Plan participants even though defendants knew, or should have known, that the stock was an imprudent investment.

The brief rebuts plaintiffs' allegations by addressing the fact that compliance with a plan document that mandates offering employer stock -- as Congress encouraged -- does not constitute a discretionary and therefore fiduciary action, and that such compliance with the plan document is properly presumed to accord with the Employee Retirement Income Security Act's (ERISA) standard of care in almost all circumstances.

The brief explains that the prevalence of employer stock investment options in defined contribution plans is not accidental. 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. The brief cites the Seventh Circuit in Steinman v. Hicks, saying "Congress, believing employees' ownership of their employer's stock a worthy goal, has encouraged the creation of ESOPs [Employee Stock Ownership Plans] both by giving tax breaks and by waiving the duty ordinarily imposed on trustees by modern trust law (including ERISA [...]) to diversify the assets of a pension plan."

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," the brief explains. Therefore, allegations about the intrinsic quality of an investment fail to establish entitlement to relief under ERISA, the brief argues.

The brief further contends that "[l]itigation of this kind places the fiduciaries of EIAPs [eligible individual account plans] 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; 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." As the Seventh Circuit observed in a case involving the trustee of United Airlines' ESOP, "if State Street had sold earlier and the stock had then bounced back, as American Airlines' stock did, State Street might well have been sued by the same plaintiffs [...]" (Summers v. State St. Bank & Trust Co.).

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. "The contention that fiduciaries should allow plan investment in employer stock only when that stock is not going to fall in value would not require them to be careful; it would require them to be clairvoyant," the brief argues.

Finally, the brief points out 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.

Indeed, ERIC President Mark Ugoretz said "the Second Circuit must uphold the district court ruling, otherwise we will continue to see a deluge of litigation from participants merely second guessing plan fiduciary decisions, further jeopardizing the employer-sponsored retirement system."

A link to the brief appears below.


For more information:
Ted Godbout
Manager, Communications
The ERISA Industry Committee
1400 L Street, NW, Suite 350
Washington, DC 20005
Phone: (202) 789-1400
Fax: (202) 789-1120


The ERISA Industry Committee (ERIC) is a non-profit association committed to representing the advancement of the employee retirement, health, and compensation plans of America's largest employers. ERIC's members provide benchmark retirement, health care coverage, compensation, and other economic security benefits directly to tens of millions of active and retired workers and their families. ERIC has a strong interest in proposals affecting its members' ability to deliver those benefits, their cost and their effectiveness, as well as the role of those benefits in the American economy.
Text Files:

Amicus Brief in Gray v. Citigroup Inc.

Back to Previous Page