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ESOP Prudence Stock Drop Fifth Third Supreme Court Trust Regulatory News Garbo ESOPs Fiduciaries—No Special Presumption of Prudence; Potential for Dismissing Lawsuits Remains

(June 26, 2014 --Chicago, IL) -- All ERISA fiduciaries are subject to the same standard of prudence, the U.S. Supreme Court unanimously ruled yesterday in Fifth Third Bancorp v. Dudenhoeffer. However, the high court stressed several times, ESOP fiduciaries are exempt from the duty to diversify. While rejecting the bank's arguments, the high court also rejected plaintiffs' core allegations. This, say industry sources, leaves the bar for stock-drop lawsuits against ESOP fiduciaries fairly high, reducing the risk of a flood of new lawsuits in the wake of yesterday's ruling.

The ruling settles a split among federal appeals court. With the exception of the Sixth Circuit Court of Appeals, federal courts were increasingly dismissing stock-drop ESOP cases. Though the Sixth Circuit in Fifth Third v. Dudenhoeffer recognized a presumption of prudence for ESOP fiduciaries, it concluded that there was no heightened pleading requirement. Where the Sixth Circuit differed then was in allowing lawsuits against an ESOP fiduciary to progress to a hearing on the evidence before deciding whether a presumption of prudence existed. To reach this stage, plaintiffs generally have the right to request discovery, which significantly raises the costs and risks for fiduciaries.

In rejecting the concept of a "special presumption of prudence," the high court also rejected plaintiffs' allegations regarding what the fiduciaries "should have known" and how they should have acted on that knowledge.

Plaintiffs, former employees of Fifth Third and ESOP participants, alleged fiduciaries, some of which were Fifth Third executives, should have known the stock was overpriced. The value of Fifth Third stock dropped by 74 percent between July 2007 and September 2009. With this "insider" knowledge, plaintiffs asserted, the fiduciaries should have stopped buying Fifth Third stock and/or sold existing holdings.

"ERISA's duty of prudence cannot require an ESOP fiduciary to perform an action--such as divesting the fund's holdings of the employer's stock on the basis of inside information--that would violate the securities laws," according to Justice Stephen Breyer, writing for the high court.

Breyer adds, for plaintiffs to state a claim of breach of prudence, they must show alternative action could have been taken that would be legal and prudent.

The high court has remanded the case to the Sixth Circuit. In returning the case, the Supreme Court instructs, "a fiduciary usually is not imprudent to assume that a major stock market provides the best estimate of the value of the stocks traded."

For more on this topic, see the upcoming issue of Trust Regulatory News. For a copy of the U.S. Supreme Court ruling Click Here.

No statement in this issue is offered as or should be construed as legal opinion or advice or as an indicator of future performance.
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