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9th Circuit narrows protection for administrators of ERISA-covered plans

The "presumption of prudence" doctrine does not apply if companies don't require investment in corporate stock, court rules

While he was an employee of Amgen Inc., Steve Harris participated in one of the drug maker’s employee pension plans, which invested part of plan participants’ funds in Amgen stock. In 2005, Amgen stock was trading at $86.17, flying high on strong sales of its anemia drug Aranesp, which the company was aggressively marketing.

But over the next three years, Amgen stock plummeted precipitously as allegations surfaced that Amgen had withheld results of tests that showed Aranesp was not as safe as initially thought, and the company had been illegally marketing the drug for off-label uses. Amgen stock lost a third of its value even before the company pled guilty to federal charges that it illegally marketed the drug for off-label uses and agreed to pay $150 million in criminal penalties and a $612 million civil settlement.

The 9th Circuit adopted a particularly strong form of the presumption in the 2010 case Quan v. Computer Sciences Corp. In that case, participants in an employee stock ownership plan alleged that the plan fiduciaries breached their duties when they continued to invest in the employer’s stock after the discovery of errors in the company’s pricing of stock options and accounting deficiencies that led to a large drop in the stock price, resulting in the loss of hundreds of millions of dollars in retirement savings to employees and retirees. The court rejected the claim, finding that fiduciaries’ investment in company stock is not a basis for liability unless it can be shown to be an abuse of discretion.

“In effect, a participant in a plan can’t sue for breaches of fiduciary duty under ERISA unless the plaintiff can show that the plan administrator knew or should have known that the company was on the brink of collapse,” Flum says.

Adele Nicholas

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