Employees fail to establish fiduciary misrepresentation as cause of plan loss following stock drop

Plan participants could not recover losses incurred following a decline in the value of employer stock, as they did not allege that the stock drop occurred when purported fiduciary misrepresentations were revealed as untrue, according to the U.S. Court of Appeals in Cincinnati (CA-6). An inflated stock price alone does not constitute injury sufficient to state an ERISA claim, the court stressed.

Participants in an employer’s 401(k) plan, structured as an ESOP, brought a class action suit following a significant drop in the value of employer stock in which their account assets had been invested. The participants alleged that the plan fiduciaries breached their duties of prudence and loyalty by investing in employer stock and by failing to inform plan participants about the attendant risks. The employees sold the employer stock at a loss. However, the trial court dismissed their suit for failure to state a claim.

The central issue on appeal was whether the fiduciary conduct alleged to constitute a breach of duty caused the loss to the plan. The employees maintained that the correct causation standard was whether “an adequate investigation would have revealed to a reasonable fiduciary that the investment was improvident.”

Such an alternative investment case is based on the theory that a prudent and loyal fiduciary would have made a different investment decision. The fiduciaries countered that the employees’ claim was actually based on the theory that fiduciary misrepresentations inflated the stock price above its true value. The pivotal inquiry in such cases, the fiduciaries maintained, is whether the inflated stock price fell significantly after the truth was revealed.

Treating the employees’ claims as based on an artificial inflation theory, the court initially noted that an inflated stock price alone does not constitute injury (Taylor v. KeyCorp., CA-6 (2012). The court then explained that the employees were required to allege in their complaint that the price of the employer stock held by them fell when the misrepresentations made by the fiduciaries were subsequently revealed to be untrue. As the employees did not make such an allegation, and were not allowed to amend their complaint to state an alternative investment claim, their suit was dismissed.

Source: Metyk v. KeyCorp (CA-6).

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