Second Circuit Clarifies That Moench Presumption Applies Even Where Fiduciaries Have Discretion As To Whether Or Not To Offer Company Stock

On May 8, 2012, the United States Court of Appeals for the Second Circuit summarily affirmed the granting of judgment on the pleadings by the United States District Court for the Southern District of New York in favor of JP Morgan Chase & Co. (“JP Morgan”) and various affiliated individuals and committees. In so doing, the Second Circuit reiterated and expanded upon its adoption of the presumption of prudence (better known as the Moench presumption, named for the Third Circuit’s decision in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995)) for employee stock ownership plans (“ESOP”) and eligible individual account plans (“EIAP”) that the Second Circuit announced last fall in In re Citigroup ERISA Litig., 662 F.3d 128 (2d Cir. 2011).

The Plaintiffs were participant in JP Morgan’s 401(k) Savings Plan (the “Plan”) who held shares of JP Morgan stock between April 1, 1999, and January 2, 2003. The Plaintiffs alleged that: (1) the Defendants negligently permitted Plan participants to purchase and hold shares of JP Morgan stock when it was imprudent to do so; (2) the Defendants failed to disclose and also negligently misrepresented material facts to Plan participants; and (3) that JP Morgan and those Defendants who were members of its board of directors that were also Defendants failed to appoint appropriate fiduciaries, monitor the Plan’s fiduciaries, and supply the fiduciaries with information necessary to fulfill their duties.

The Court first addressed the Plaintiff’s allegation that it was imprudent for the Defendants to allow Plan participants to purchase and hold JP Morgan stock. Citing Citigroup, the Court noted that because there is a presumption that the fiduciaries acted prudently, the decisions made by those fiduciaries are only subject to review under the abuse of discretion standard. Under that standard, the Court agreed with the district court that the Plaintiffs failed to allege sufficient facts to allege “that defendants knew or should have known that JP Morgan was in a dire situation.” The Court noted that while JP Morgan’s stock price fell approximately 55% over the class period, even when it was at its lowest price, it still retained significant value ($15/share) and had rebounded by the end of the class period (to $25/share). The Court further noted that throughout the class period, JP Morgan remained a viable company.

Nevertheless, Plaintiffs attempted to distinguish Citigroup by alleging that “the Plan’s fiduciaries had unfettered discretion whether to offer” JP Morgan stock as an option under the Plan. In the most important part of its decision, the Court rejected this argument, noting that Citigroup “adopted the presumption of prudence as applying to all EIAPs and ESOPs.” The Court also rejected Plaintiff’s contention that Defendants had “unfettered discretion,” relying upon the fact that for most of the class period, matching contributions made by JP Morgan on behalf of certain of the Plan’s participants were automatically invested in the company’s stock fund.

The Court summarily rejected Plaintiffs’ disclosure claim based upon the holding in Citigroup that plan fiduciaries have no duty to provide participants with non-public information. The Court also found the appointment and monitoring claim to be derivative of Plaintiffs’ other claims and properly dismissed.

As noted above, the most important takeaway of this decision is the clarification of the Second Circuit that Moench presumption applies even where the Plan gives discretion to its fiduciaries as to whether or not to continue to offer company stock. This decision should make it significantly harder for plaintiffs – at least in the Second Circuit – to attempt to distinguish Moench and Citigroup by alleging that the presumption only applies where plan fiduciaries would be acting in excess of or contrary to their discretionary authority by restricting the availability of company stock as an investment option. Many plans either require or strongly encourage and incentivize purchase of company stock. It has traditionally been a harder argument for plaintiffs to make that fiduciaries should act contrary to the terms of the plan by discouraging or barring the sale of company stock. This case renders that distinction unnecessary as even where fiduciaries are given the express authority to change how the plan treats company stock, their determinations are still to be given the presumption of prudence.

The case is Fisher v. J.P. Morgan & Co., No. 10-1303-cv (2d Cir. May 8, 2012).