Supreme Court Allows Moench Presumption to Continue
On October 15, 2012, the United States Supreme Court declined to accept appeals of two stock-drop cases that had been decided in favor of the defendants, Gearren, at al. v. The McGraw-Hill Companies, Inc., et al. No. 11-1550 and Gray, et. al. v. Citigroup, Inc., et al., No. 11-1531.
In these two cases, a divided Second Circuit formally adopted the so-called “Moench presumption.” The presumption was created by a 1995 Third Circuit case holding that an ESOP plan fiduciary’s decision to allow continued investment in company stock would be reviewed for only “abuse of discretion” rather than under the general “prudent person” standard thatERISA section 404 applies to fiduciary investment decisions. The court reasoned that Congress intended to encourage ESOPs, noting that ERISA section 404(a)(2) itself exempts eligible individual account plans (EIAPs)(which include ESOPs, as well as most 401(k)s) from the general duty of diversification, with respect to qualifying employer stock. This presumption has subsequently been adopted by most Circuits, with the result that fiduciaries of EIAPs in most circuits are held liable for the acquisition or holding of employer stock only if the company was in dire circumstances or faced imminent collapse.
In Citigroup, plaintiffs alleged that the fiduciaries breached their duties with respect to Citigroup stock, in light of Citigroup’s exposure to, and billions of dollars in losses from, the riskier subprime mortgages in its loan portfolio. In McGraw-Hill participants alleged that defendants had continued to offer company stock as an investment option during a period when the Credit Market Services group of McGraw-Hill’s financial services division (Standard & Poor’s) knowingly provided inflated ratings to two structured-finance products linked to the subprime mortgage market, in violation of their duties under ERISA. In both cases the Plaintiffs alleged a variety of claims including, inter alia, failure to act prudently, and failure to fully inform participants and other fiduciaries. Both cases were decided by the district court on motions to dismiss based on the Moench presumption.
On appeal, Plaintiffs argued that the Moench presumption was flawed, and in any case should not apply at the pleading stage. The Second Circuit disagreed, holding that, if plaintiffs do not allege facts sufficient to establish that plan fiduciaries abused their discretion, within the limits of the Moench presumption, there is no reason not to grant a motion to dismiss. In considering the cases in tandem, the Second Circuit also made clear that it was adopting the Moench presumption for both ESOPs (Citigroup) and other EIAPs (McGraw-Hill).
By declining to accept the petitions for certiorari in either case, the Court has allowed the Moench presumption to continue and to be applied at the initial motions stage.
The United States Department of Labor has long argued in amicus briefs that the presumption is an evidentiary presumption which cannot be considered in regards to a motion to dismiss, an argument the Second Circuit expressly rejected. Following the Citigroup and McGraw-Hill appellate decisions, but before the Supreme Court’s denial of certiorari, the Sixth Circuit (whose Kuper v. Iokeno decision followed Moench by months, and legitimized its reasoning) concluded that the Moench presumption could not be applied at the pleadings stage. In so doing, the Sixth Circuit expressly rejected the Second Circuit’s reasoning in Citigroup and McGraw-Hill. Thus, the Supreme Court’s action leaves the question of applicability of the presumption to motions to dismiss in flux.
In the current administration, the Department of Labor has expanded its amicus arguments, claiming that the Moench presumption is inherently inconsistent with ERISA and thus invalid. By declining to consider either Citigroup or McGraw-Hill, the Court has set back those efforts.