Participants in employee stock ownership plans will have a harder time bringing stock-drop cases after a Supreme Court ruling.
A stock-drop case involves plan participants suing plan fiduciaries when company stock prices drop, often times claiming that the company should have sold the stocks based on information it had about the value of the stock itself.
A recent class action suit involves Amgen Inc., a pharmaceutical company based in California, and former employees. The plaintiffs alleged the fiduciaries breached their duties, including their duty of prudence, because they knew the stock price was inflated. While the district court granted a motion to dismiss, the 9th US Circuit Court of Appeals reversed the ruling.
In Fifth Third Bancorp vs Dudenhoeffer, the Supreme Court made a ruling that said there is no presumption of prudence for fiduciaries. The court also noted, however, that the lower courts facing stock-drop claims should always consider “whether the complaint was plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases - which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment - or publicly disclosing negative information would do more harm than good to the fund.”
The high court ended up vacating the 9th Circuit’s Amgen ruling and actually sent the case back to the lower court for proceedings more consistent with Fifth Third. Ultimately, the Supreme Court felt that the lower court did not accurately assess whether the complaint plausibly alleged that stopping stock purchases would do more harm than good. The 9th Circuit ended up reversing the dismissal of the complaint, again. At this point, the Supreme Court granted review, yet again.
The Fifth Third case isn’t necessarily bad for fiduciaries, according to human resource experts. It may actually be good for them since plaintiffs must plausibly allege that selling the stock would not do more harm than good. This, in and of itself, is an extremely difficult feat.
There has yet to be a resolution in Amgen v Harris. The case has, most recently, been sent back to the district court.
