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11.22.2011 Second Circuit Rules in Favor of Retirement Plan Administrators Where Plan Requires Investments in Company Stock
11.23.2011

In re: Citigroup ERISA Litigation, No. 09-3804 (2d Cir. October 19, 2011)

BY: MARK S. THOMAS  


In a year that has seen several important court decisions defining the responsibilities of retirement plan fiduciaries for plan investment options, the U. S. Court of Appeals for the Second Circuit has joined several other circuits in holding that plan fiduciaries are entitled to a presumption that they acted prudently in continuing to allow plan participants to invest in the plan sponsor’s stock.  In addition, the Second Circuit held that the plan fiduciaries had no duty to disclose to plan participants any non-public information relating to specific plan investment options.  The court’s decision in In re Citigroup ERISA Litigation, No. 09-3804 (2d Cir. Oct. 19, 2011), adds the Second Circuit to the ranks of federal circuit courts limiting the grounds on which participants may challenge plan fiduciaries as to plan investment option decisions.

The case involves two ERISA-regulated retirement plans, the Citigroup 401(k) plan and the Citibuilder 401(k) plan (“the Plans”).  Citigroup sponsored the Citigroup plan.  A subsidiary, Citibank, sponsored the Citibuilder plan and also served as trustee for Citigroup’s plan.  Each plan was managed by the same two committees:  the Administration Committee charged with administering the Plans and construing plan terms, and the Investment Committee responsible for selecting the plan investment fund options offered to plan participants.

 

In all material respects, the Plans were the same. Participants could allocate their funds among 20 to 40 investment options selected by the Investment Committee. Both Plans offered an option to invest in the Citigroup Common Stock Fund (“CSF Fund”), comprised of shares of Citigroup Common Stock. Both Plans required the CSF Fund to be included as an option.

 

 

Beginning in 2007 and continuing into 2008, Citigroup stock experienced a sharp drop in price.  The plaintiffs in the Citigroup case were participants in the Plans who had allocated some of their investments into the CSF Fund.  They alleged that Citigroup’s overexposure to the sub-prime mortgage market caused the sharp decline in Citigroup stock prices and asserted that the defendants knew or should have known by 2007 that Citigroup stock was an imprudent investment, but nonetheless permitted and encouraged the Plans to acquire Citigroup stock. The plaintiffs alleged that, as Citigroup’s “dire financial condition” became known, its stock price declined by more than 74% in a little more than a year.

 

Filing their class action lawsuit in September 2008, the plaintiffs charged the defendants with two main ERISA fiduciary violations.  First, they alleged that the defendants breached their fiduciary duty of prudence by refusing to divest the Plans of Citigroup stock.  Second, they alleged that the Administration Committee and others breached their fiduciary duty of loyalty by failing to give the participants full and accurate information regarding Citigroup’s situation and by “conveying material inaccurate information regarding the soundness of Citigroup stock”.  The plaintiffs alleged other causes of action, all derivative from these two main claims.

 

Ruling against the plaintiffs, the federal district court granted the defendants’ motion to dismiss the case for failure to state a claim on which the court could grant relief.  The court held that the Plans’ requirement to include the CSF Fund option left the defendants no discretion to eliminate that fund.  If the defendants had any such discretion, they were entitled to a presumption that investment in the stock was prudent, and the facts alleged by the plaintiffs were insufficient to overcome this presumption.  The district court also held that nothing alleged by the plaintiffs showed knowingly false statements by the defendants about the Citigroup stock.

 

Appealing to the Second Circuit, the plaintiffs contested each of the district court’s rulings, but the Second Circuit affirmed the district court’s decision in its entirety. In particular, the Second Circuit joined four other federal circuits in ruling that, where the plan fiduciaries acted in accordance with the plan documents to allow investment of plan assets in an employee stock option fund, the fiduciaries were entitled to a presumption that continued investment in employer stock was prudent. This rule, known as the “Moench rule” after the decision of the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), recognizes that stocks are inherently volatile but that ERISA favors investment in company stock. The Second Circuit held that the presumption of prudence was applicable where, as in the Plans here, the plan terms required the option to invest in company stock.  The presumption of fiduciary prudence could be overcome only in circumstances where the employer was in a “dire situation” that the plan sponsor objectively could not have foreseen.  The Second Circuit found nothing in the plaintiffs’ complaint to show such a situation facing the two Committees.

 

The Second Circuit also affirmed the dismissal of the claims alleging that the fiduciaries failed to provide complete and accurate information and made misrepresentations regarding the CSF Fund to the plan participants.  The court held that the Plans’ fiduciaries had no duty to provide the participants with non-public information that pertained to expected performance of the Plans’ investment options, including the performance of the stock in the CSF Fund. Noting the long-standing rule that ERISA fiduciaries can be liable for misstatements when the fiduciaries know the statements are false or lack a reasonable basis in fact, the court found no allegations that the Plans’ fiduciaries had made such statements. The Second Circuit refused to transform the fiduciaries into “investment counselors” by requiring them to give investment advice or opine as to the condition of the CSF Fund.

 

The Second Circuit’s Citigroup decision is the latest in a series of federal decisions dealing with the aftermath of the sharp stock market declines following the collapse of the sub-prime mortgage market.  Citigroup has provided rulings that will limit future stock-drop fiduciary breach cases in the Second Circuit and influence such cases in other circuits.  The vigorous dissent in Citigroup asked what circumstances would constitute the “dire situation” necessary to require plan fiduciaries to divest company stock, if not the facts alleged in Citigroup – and what protections exist for participants in cases “just shy of ‘dire’”.  Future cases will be required to answer those very relevant questions.

 

For more information about this topic, please contact the authors or any member of the Williams Mullen ERISA Litigation Team.
 


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