Within days – practically hours – of the decision concerning the duties of fiduciary plan administrators towards pension investors, there is immediate proof available that defenses available to fiduciaries of employee stock option plans (ESOPs) will no longer provide an effective shield against suits by shareholder groups. In Fifth Third Bancorp v. Dudenhoeffer, the U.S. Supreme Court unanimously did away with the long-standing presumption of prudence by fiduciaries of an employee stock ownership plan (ESOP) who invest in employer securities.
Many lawsuits by investors have sought to show that such fiduciaries acted improperly when certain conditions caused the value of a particular stock – which is part of an ESOP’s portfolio – to plummet. Because fiduciaries enjoyed a presumption of prudence with regard to investment decisions made in their administration of such funds, it became difficult to establish securities fraud claims against these parties even when official assertions set forth in company circulars and prospectuses appeared to lack credibility in hindsight.
But with the declaration by the United States Supreme Court that “ESOP fiduciaries are not entitled to any special presumption of prudence…. and they are subject to the same duty of prudence that applies to ERISA fiduciaries in general,” a ripple effect has already been set in motion influencing the decisions of other courts. The 5th U.S. Circuit Court of Appeals in New Orleans revived a lawsuit in which participants in four BP, Plc employee retirement savings plans alleged they were deceived into buying and holding BP stock prior to and after the 2010 Deepwater Horizon disaster. The plaintiffs in that case had previously sought to argue that BP had fraudulently issued assertions that its deep sea drilling operations had sufficient security systems in place to prevent disaster. But when the value of the BP stock fund in which the money was invested dropped by $1.85 billion in the months after the now-infamous Deepwater Horizon rig explosion in the Gulf of Mexico, these investors contended that they had been fraudulently misled.
In 2012 U.S. District Judge Keith Ellison dismissed the case. While he is now required to reopen the litigation in his court, the eventual outcome of the case remains to be seen. But the speed with which the Fifth Circuit Court of Appeals rendered this decision in the wake of the holding in Dudenhoeffer makes it likely other courts will be also compelled to take notice in short order. The ultimate long-term effect may be that companies become more circumspect before making bold statements in their offering literature and fiduciaries may exercise greater caution in finalizing investment decisions.
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