Over the past decade, there has been an insurgence of Employee Retirement Income Security Act (ERISA) stock drop class actions. The Private Securities Litigation Reform Act (PSLRA), passed by Congress in 1995, set heightened standards for pleading securities fraud claims. ERISA stock drop cases became more prevalent after the passage of the PSLRA because they did not impose these heightened pleading requirements and could more easily survive motions to dismiss.

ERISA stock drop cases frequently follow securities fraud class action filings and parrot the allegations that false or misleading statements by a company caused an artificial inflation in the price of company stock. The ERISA plaintiffs then assert that the company’s retirement plan fiduciaries knew or should have known that the company’s stock price was artificially inflated and therefore should have eliminated company stock as an option within the company’s retirement plan (typically through an employee stock ownership plan (ESOP)). This allegedly would have allowed the retirement plan participants to divest their company stock holdings before the stock price fell when the ‘‘truth’’ about the company was revealed.

Although this report focuses on the appropriate damage analysis for an ERISA stock drop class action, no wrap up of ERISA stock drop litigation would be complete without addressing the U.S. Supreme Court’s June 25, 2014, ruling in Fifth Third Bancorp. v. Dudenhoeffer. In Fifth Third Bancorp, the Supreme Court reviewed the decision of the U.S. Court of Appeals for the Sixth Circuit that reversed the dismissal of an ERISA stockdrop complaint by the U.S. District Court for the Southern District of Ohio. The district court concluded that ERISA fiduciaries in an ESOP plan were entitled to a presumption of prudence when continuing to invest in company stock absent a showing that the viability of the company was at risk or similar dire conditions (often referred to as the Moench presumption from the Third Circuit decision that first recognized it). The district court further concluded that plaintiffs were required to overcome this presumption at the pleading stage. As they failed to do so, the district court dismissed the complaint.

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Employee Benefits and Executive Compensation