The number of class action lawsuits alleging breaches of fiduciary duty under the Employee Retirement Income Security Act (ERISA) has increased dramatically during the past decade. Initially fueled by large corporate scandals, such as Enron and WorldCom, most of these lawsuits accompany securities lawsuits and are filed following declines in the value of employer stock offered in corporate-defined contribution plans. These ERISA “stock drop” lawsuits typically allege that plan fiduciaries breached their duties by allowing participants to invest in company stock when the stock was an imprudent investment option for the plan. Plaintiffs usually assert that company stock was an imprudent investment because the company’s ongoing viability was in question and/or fiduciaries misrepresented or failed to disclose material information adversely affecting the value of the company’s stock.
According to Cornerstone Research’s ERISA Stock Drop Litigation Database, on average, 21 ERISA class actions have been filed annually between 2002 and 2011, although the number of cases in each year has fluctuated. These fluctuations seem to be related to the ups and downs of the stock market as well as industry-specific issues.
In 2002, following the dot-com bust and the crisis in the energy industry, 27 cases were filed, including 10 cases filed against energy companies. Even though the markets recovered in 2004, the number of cases remained above average primarily because accusations of improper business practices in the insurance sector spurred seven ERISA stock drop lawsuits against insurance companies, all in the fourth quarter. A record 35 cases were filed in 2008, most of which were related to the financial crisis.
Since the financial crisis, there has been a sharp decrease in the number of stock drop cases. During 2010 and 2011, there were 15 and six cases filed, respectively. Only three cases have been filed so far in 2012.
A multitude of factors can explain the recent decline in ERISA stock drop litigation. For example, positive performance of the stock market and the absence of large-scale, industry-specific problems since the financial crisis have resulted in fewer lawsuits. Decisions by employers to remove company stock from their plans or reduce the concentration of company stock holdings in their plans have also contributed to the reduction in lawsuit filings. According to a 2012 study by Vanguard Research, between December 2005 and June 2011, the fraction of plans offering company stock fell by 18 percent, and the fraction of participants investing in company stock fell by about a third.
Other than economic factors, experts have noted the impact of recent legal decisions on ERISA stock drop case filings. The Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, which directed district courts to engage in “rigorous analysis” and consider the merits of the plaintiffs’ claims, if appropriate, at the class certification stage, made certification of ERISA stock drop lawsuits more difficult. Similarly, the adoption of some form of the Moench presumption by multiple circuit courts (the 2nd, 3rd, 5th, 6th, 9th and 11th Circuits) raised the bar for plaintiffs. In Moench v. Robertson, the 3rd Circuit opined that an ERISA fiduciary’s decision to continue offering stock in the company 401(k) and employee stock ownership plans as investment options is presumed consistent with ERISA.
Despite the sharp decline in filings, it may be too early to pronounce that ERISA stock drop litigation is over. Not all circuit courts have adopted the Moench presumption, and ERISA stock drop cases that survive a motion to dismiss continue to have settlement values. Since the beginning of the year, settlements averaging $6 million have been announced for eight stock drop cases. Although recent trends favor defendants, it is likely that ERISA stock drop litigation will continue at a slower pace than historical averages, with filings concentrated in specific circuits. Negative stock market performance or a specific industry crisis, however, may result in an increase in stock drop filings.
The views expressed in this article are solely those of the author, who is responsible for the content, and do not necessarily represent the views of Cornerstone Research.