Wednesday, June 25, 2014

When A Win Is A Loss: Fifth Third Bank versus Dudenhoeffer

When A Win Is A Loss:  Fifth Third Bank versus Dudenhoeffer


A group of employees of Fifth Third Bancorp sued the bank for failing to reduce the bank’s employee stock ownership plan (ESOP) in the face of the bank’s weakening financial condition and the subsequent plunge in its stock price.  The plaintiffs argued that the bank had violated its fiduciary responsibility under the Employee Retirement Investment Security Act (ERISA).  The lower court had rules that the bank enjoyed a “special presumption of prudence,” since an, by definition, it isn’t investing in a diversified portfolio.  In a unanimous decision[1], the court reversed the lower court ruling and said that there is no special presumption.  The trustees are subject to the same standard of prudence as with any other investment.  If you stopped reading at this point, you’d think that the employees won the case as AP concluded: “Supreme Court sides with bank employees in dispute over retirement investments.”[2]

However, the Supreme Court went on discuss the grounds under which the employees might be able to state a cause of action, which seems to have led Reuters to conclude: U.S. top court rules for bank over class action case.”[3]   In my view, the employees lost their case in the second half of the opinion when the court turned to the question of whether the plaintiffs could come up with a cause of action. 

The employees argued that the senior bank employees who oversaw the ESOP had to know that the bank had significant financial issues because they were privy to inside information.  The bank argued that it couldn’t act on inside information without violating federal securities laws.  The Supreme Court agreed with the bank, and said that ERISA does not require a fiduciary to use inside information in discharging its duty.  Thus the failure to act upon inside information cannot be the basis for a claim.

Alternatively, the plaintiffs argued that the defendant should have taken action to reduce the ESOP’s exposure to Fifth Third’s stock based on publicly available information.  The court ruled that this argument was insufficient to state a cause of action, because the stock price is supposed to reasonably reflect all public information (good or bad).  The court ruled that plaintiffs have to come up with some “alternative action that the defendant could have taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it.”

Perhaps plaintiff’s lawyers are more creative than me and can come up with an alternative action defendant’s could have taken.  I doubt it.  Even though the trustees of Fifth Third’s ESOP are subject to the fiduciary standard of ERISA, there is probably no way to bring a cause of action against them.

I will be devoting part of a future New & Observer column to the question of investing your retirement net egg in your company’s stock.  Hint: it’s a bad idea.





[1] http://www.supremecourt.gov/opinions/13pdf/12-751_d18e.pdf
[2] http://hosted.ap.org/dynamic/stories/U/US_SUPREME_COURT_RETIREMENT_INVESTING?
[3] http://www.reuters.com/article/2014/06/25/usa-court-classaction-idUSL1N0ON1S020140625

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