ERISA requires fiduciaries to follow a prudent person standard regarding investment decisions. For plans requiring investment in the employer’s stock, often called Employee Stock Ownership Plans, or ESOPs, courts have developed a presumption that the investment in employer stock is prudent. A recent 9th Circuit case has addressed the limits of that presumption. Harris v. Amgen, Inc., — F.3d –, 2013 WL 2397404 (9th Cir. June 4, 2013).
The complaint alleged that, from 2005 to 2007, Amgen had artificially inflated its stock price through misrepresentations about the safety of certain anti-anemia drugs, and through illegal efforts to encourage “off-label” sales of the drugs. Two of Amgen’s plans held Amgen stock, and participants in those plans alleged that Amgen and plan fiduciaries had breached its fiduciary duty by permitting continued investment in Amgen stock while they knew or should have known that the stock price was artificially inflated.
ERISA requires fiduciaries to follow a prudent person standard, 29 U.S.C. 1104. It expressly provides that the duty to diversify (part of the prudent person standard) is not violated by acquiring or holding qualifying employer securities. A number of circuits have adopted a presumption of prudence, under which a fiduciary of an employee stock plan who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision. This is often referred to as the “Moench presumption,” after the originating decision, Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995).
In Harris, the court held that that the presumption of prudence applies only when plan terms require or encourage the fiduciary to invest primarily in employer stock. The court held that the Amgen plans did neither. The plans permitted investment in company stock, but did not require such investment, nor did they compel such an investment option to be continued once established. Thus, the plans did not require investment in employee stock.
Nor did they encourage investment, because they merely permitted the fiduciaries to invest in employee stock. The court explained that, just because a particular investment is permitted, does not relieve the fiduciary of the duty to determine that the investment is prudent.
Next, the court found that the plaintiffs had sufficiently alleged a breach of fiduciary duty, rejecting numerous counter-arguments by the defendants. Of particular interest, the defendants had argued that they would have violated the securities laws if they had prevented further investments in the stock funds based on undisclosed material information (i.e., the existence of undisclosed problems with the anemia drugs and the illegal sales of those drugs). The court confirmed that fiduciaries are not obligated to violate securities laws, but held that complying with ERISA would not have required violation of the securities laws:
Compliance with ERISA would not have required defendants to violate those laws; indeed, compliance with ERISA would likely have resulted in compliance with the securities laws. If defendants had revealed material information in a timely fashion to the general public (including plan participants), thereby allowing informed plan participants to decide whether to invest in the Amgen Common Stock Fund, they would have simultaneously satisfied their duties under both the securities laws and ERISA.
Finally, the court rejected Amgen’s argument that it was not a fiduciary under the plans because it had delegated its discretionary authority. The court noted that even a named fiduciary could avoid liability for breach of fiduciary duty if it granted exclusive authority over the plan to a delegate, and also expressly disclaimed authority to act. Here, however, though Amgen had appointed a trustee with exclusive authority to manage and control plan assets, it Amgen retained authority to direct “how such assets shall be invested.” This was sufficient to maintain its status as a fiduciary, and to make it a proper defendant.