In Fifth Third v. Dudenhoeffer, the Supreme Court unanimously eliminated the extra “presumption of prudence” granted to fiduciaries of employee stock ownership plans by the Sixth Circuit (and, to varying degrees, several other circuits), holding that Fifth Third employees needed only to allege that their ESOP fiduciaries has acted imprudently to state a claim under ERISA. However, the Court held that, to plead imprudence, “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary . . . would not have viewed as more likely to harm the fund than help it.” The Fifth Third employees had alleged that, on the basis of both public and non-public information, their ESOP fiduciaries should have known the stock was overpriced and, if prudent, would have sold it, stopped buying it, and/or publicly disclosed the pertinent inside information.
Although the Court remanded the case back to the Sixth Circuit for a first-instance evaluation of the latter two alternatives, it left Plaintiffs between a rock and a hard place. With only a tiny bit of wiggle room for “special circumstances,” the Court held that “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule.” As for fiduciaries privy to inside, non-public information, the Court held that selling the stock would have been illegal and strongly implied—despite remanding for the Sixth Circuit to determine—that ceasing to buy Fifth Third stock and/or disclosing the pertinent inside information could, if not illegal, reasonably have been seen by a prudent fiduciary as “do[ing] more harm than good to the fund by causing a drop in the stock price.” In other words, if you find out the stock’s overpriced, continuing to buy simply to keep the price up might be prudent. Sound familiar?
It will be interesting to see how the Sixth Circuit, which had previously held that Plaintiffs stated a viable ERISA claim, applies the Court’s decision on remand.
