The Seventh Circuit’s recent decision in White v. Marshall & Ilsley Corp. awarded another early-round victory to employers in ERISA stock-drop litigation.
The plaintiffs in this case sought to recover losses in the M&I Bank 401(k) Plan’s stock fund that were attributable to a 54% decline in the market price of M&I stock that occurred during the financial crisis of 2008 and 2009. The district court granted M&I’s motion to dismiss the plaintiffs’ misrepresentation and imprudent investment claims, but the plaintiffs appealed only the dismissal of their imprudent investment claims.
The Seventh Circuit affirmed the district court’s judgment. Consistent with rulings by the Second, Third, and Eleventh Circuit (and contrary to a ruling by the Sixth Circuit), the Court ruled that the presumption of prudence adopted by the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995) applied at the pleading stage as a substantive standard of conduct and that the presumption was not an evidentiary standard to be applied at the summary judgment stage, as urged by the plaintiffs and their amicus, the Secretary of Labor.
The M&I Plan offered 22 investment options. Employees could allocate their new contributions and existing investments to different investment options at any time. One of the Plan’s investment options was the M&I stock fund. The Plan document required the Plan’s fiduciaries to offer the M&I stock fund at all times, regardless of reversals of fortune, and under all circumstances, no matter how dire. The Plan limited each participant’s investments in the stock fund to 30 percent of the participant’s account balance, although the Seventh Circuit’s opinion indicates that the Plan also allowed a participant to transfer additional assets to the stock fund on request.
According to the Seventh Circuit, the plaintiffs — like the plaintiffs in other stock-drop cases — relied on two theories to support their imprudent investment claims: (1) the theory that the stock was overvalued and that investors were sure to lose when the market corrected the price downward and (2) the theory that the stock was excessively risky. The Seventh Circuit expressed fundamental doubts about the viability of a prudence claim based on either theory, particularly where the stock is publicly traded in an efficient market and where the stock is only one of many investment options to which an employee may shift investments with relative ease. The Court ruled that plaintiffs’ overvaluation theory was based on the unacceptable view that fiduciaries have a duty to be omniscient, to outsmart the market, or to use nonpublic information for the benefit of employees, in violation of the securities laws. The Court ruled that plaintiffs’ excessive risk theory was equally problematic since the Plan gave each participant the freedom to make his or her own investment choices and to tailor the portfolio to the individual’s tolerance for risk.
The Court also rejected the standard adopted by the Sixth Circuit in Pfeil v. State Street Bank & Trust Co., 671 F.3d 585, 591 (6th Cir. 2012) and proposed by both the plaintiffs and the Secretary of Labor in this case: that plaintiffs can overcome the presumption of prudence merely by showing that “a prudent fiduciary acting under similar circumstances would have made a different investment decision.” The Seventh Circuit ruled if the presumption could be rebutted so easily, it would serve little purpose, observing that showing that another fiduciary would have invested differently does not shed meaningful light on the conduct of the defendants.
The Seventh Circuit did not rely on the Plan provision requiring the Plan’s fiduciaries to offer the stock fund under any circumstances, no matter how dire. In the absence of any allegations that M&I’s circumstances were dire or nearing collapse, the Court ruled that strength of the Plan’s direction to offer M&I stock was irrelevant to its decision and declined to reach the question whether this provision was consistent with ERISA.