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The following article was taken from the 6/17/13 issue of Pension & Benefits Week.
6/17/13 -- Ninth Circuit clarifies its position on availability of Moench presumption in stock drop case
In a clarification of its earlier opinion addressing the Moench presumption of fiduciary prudence, the Ninth Circuit has held that the presumption does not apply to fiduciaries' decisions to continue to offer employer stock as an investment option in eligible individual account plans (EIAPs) where the EIAPs merely permit, but did not require or encourage, investment in company stock. (Harris v. Amgen, Inc. (2013, CA9) 2013 WL 2397404)
Amgen, Inc., and its subsidiary Amgen Manufacturing, each provided an employer-sponsored pension plan to their employees: the Amgen Retirement and Savings Plan and the Retirement and Savings Plan for Amgen Manufacturing. The plans were employee stock-ownership plans (ESOPs) that qualified as eligible individual account plans (EIAPs) under ERISA § 407(d)(3)(A). Among the investments offered to participants in the Amgen plans was the Amgen common stock fund, which was invested solely in Amgen common stock.
In August 2007, Steve Harris and Dennis Ramos (the participants) filed an ERISA class action against Amgen, Amgen Manufacturing, Amgen's board of directors, and the plans' fiduciary committees (the Amgen defendants). According to the suit, during the class period, the Amgen plan fiduciaries had allowed the plans to buy and hold Amgen stock while knowing that the stock price was artificially inflated because of improper off-label drug marketing and sales. As a result, the Amgen stock price had declined significantly once the off-label activity became public.
Initially, the district court had dismissed Harris's claim with prejudice, concluding that he did not have statutory standing as a "participant" in the Amgen plan because he had already cashed out of his plan account. The court also dismissed Ramos's claim for failing to properly identify the fiduciaries of the Amgen plans. However, the Ninth Circuit reversed the district court's dismissal of Harris's and Ramos's complaints and remanded the case to the lower court for further proceedings.
On remand, the district court dismissed Amgen as a defendant on the ground that it was not a fiduciary. The court also dismissed the complaints against the other Amgen defendants who were fiduciaries, after applying the Moench "presumption of prudence" standard as set out by the Ninth Circuit in Quan v. Computer Sciences Corp. (2010, CA9) 623 F.3d 870. In the alternative, the district court found that, even without applying the Moench presumption, the defendants had not violated their fiduciary duties by continuing to offer the Amgen stock fund as an investment option.
Limits on Moench availability. On appeal, the participants alleged that the Amgen defendants had acted imprudently, and had violated their duty of care under ERISA § 404(a)(1)(B), by continuing to provide Amgen common stock as an investment option when the defendants knew, or should have known, that the stock was being sold at an artificially inflated price. In response, the Amgen defendants argued that they were entitled to the Moench presumption of prudence in continuing to allow Amgen stock as an investment alternative during the class period. The defendants further argued that their actions were prudent even if the Moench presumption did not apply.
According to the Ninth Circuit, its earlier decision in Quan stood for the proposition that an ERISA fiduciary was entitled to a presumption that he acted as a prudent investor only where the terms of the plan required or encouraged the fiduciary to invest primarily in employer stock. Unlike the situation in Quan, the Ninth Circuit could find no language in the Amgen plans requiring that an employer stock fund be made available as an investment for plan participants. Further, there was no language to the effect that, once established as an investment alternative, an employer stock fund had to be continued as an available investment option. Thus, the issue of the availability of the Moench presumption depended on whether the Amgen plans "encouraged" the fiduciaries to provide the Amgen common stock fund as an investment alternative.
The Amgen defendants made several arguments to support their contention that the Amgen plans encouraged the provision of an employer stock fund as an investment alternative. First, the defendants pointed out that the plans specifically referred to a company stock fund as a permissible investment, but did not make reference to another company's stock. In dismissing this argument, the Ninth Circuit agreed with the Second Circuit's decision in Taveras v. UBS AG (2013, CA2) 708 F.3d 436, which held that "almost identical" plan language did not give rise to the presumption of prudence.
Second, the Amgen defendants argued that the Amgen plans had provisions regulating the purchase, transfer, and distribution of Amgen stock, as well as providing voting rights to plan participants who held the stock. The Ninth Circuit also rejected this argument, stating that the plan language pointed to by the defendants cut both ways, as it also discouraged investment in Amgen stock. For example, a participant's holding in the Amgen common stock fund was limited to 50% of his total holdings, while there were no such limits on holdings in other funds.
Third, the Amgen defendants said that it was Amgen's "longstanding practice and intent" that the Amgen common stock be part of the plans' design. In dismissing this argument, the Ninth Circuit said that the language pointed to by the defendants for this proposition had come from a summary description of a plan amendment that had taken effect
Fourth, the Amgen defendants argued that the plans would have had to have been amended to remove the Amgen common stock fund as an investment. However, the Ninth Circuit found nothing in the plans to support this contention.
Thus, the Ninth Circuit concluded that the Amgen defendants were not entitled to the presumption of prudence because the plans' terms did not require or encourage that the Amgen common stock fund be offered as an investment to plan participants.
Prudent man standard. After concluding that the Moench presumption of prudence did not apply, the Ninth Circuit next reviewed whether the Amgen defendants' investment decisions as fiduciaries met the prudent man standard of ERISA § 404(a)(1)(B). This standard requires that a plan fiduciary perform his duties under a plan with the same level of care, skill, prudence, and diligence that a prudent man acting in a similar capacity and familiarity with these matters would use. In contending that their behavior met the prudent man standard, the Amgen defendants again made five arguments.
First, the Amgen defendants argued that investments in Amgen stock during the class period were not imprudent because Amgen did not experience severe financial difficulties during that time. Calling this argument "beside the point," the Ninth Circuit said that Amgen's profitability did not mean that its stock price was not artificially inflated during the class period.
Second, the Amgen defendants argued that the decline in Amgen stock price, alone, was not enough to show that the stock was an imprudent investment. The Ninth Circuit dismissed this argument, stating that it was foreclosed by a district court's decision in a parallel federal securities class action brought against Amgen, which was based on the same alleged events. Because the Amgen defendants' alleged misdeeds in the securities law action were sufficient to state a claim that they had violated their duties under the securities law, said the court, the same allegations of misconduct made in the current case were sufficient to state a claim that the defendants had violated their more stringent duty of care under ERISA.
Third, the Amgen defendants cited the Fifth Circuit's decision in Kirschbaum v. Reliant Energy, Inc. (2008, CA5) 526 F3d 243, arguing that making them liable for continuing to offer the option to invest in a declining stock would place them in the position where they could be sued both for following the plan and not selling off the employer stock, and for deviating from the plan and selling off the stock, if the stock price later rebounded.
The Ninth Circuit said that this reliance on Kirschbaum was misplaced because the plan at issue there required that employer stock be available as an investment option for plan participants. Here, the Amgen defendants had not been subject to such a requirement. Further, said the court, the Amgen defendants knew, or should have known, that the Amgen common stock fund was buying stock at an artificially inflated price due to the material misrepresentations and omissions made by company officers, as well as by the illegal off-label marketing, yet the defendants had continued to allow plan participants to invest in the common stock fund.
Fourth, the Amgen defendants claimed that, if they had removed the Amgen common stock fund as an investment option, this action alone might have caused a decline in the stock price. The Ninth Circuit rejected this claim, too, finding that the removal of the stock fund as an investment option would not have required its liquidation; instead, the removal would only have prevented participants from investing additional money in the fund at a time when the stock price was artificially inflated. Further, said the court, the number of shares involved would have been relatively small given the enormous number of actively traded Amgen shares. The court also stated that had the defendants timely met their duties under ERISA, there would have been little or no artificial increase in the share price before the fund was removed as an investment option.
Fifth, the Amgen defendants argued that they could not have removed the Amgen stock fund as an investment option based on undisclosed alleged adverse material information without running afoul of the securities laws. The Ninth Circuit again disagreed, saying that the "central problem" for Amgen here was that many of the Amgen officials who were defendants in the ERISA case had also made material misrepresentations and omissions in violation of the federal securities laws. Had these defendants revealed the material information in a timely manner to the general public (including plan participants), they would have satisfied their duties under both the securities laws and ERISA. Alternatively, said the court, if defendants had made no disclosures but had simply removed the Amgen common stock fund as an investment option while the stock price was artificially inflated, the defendants would not have violated the securities law prohibition against insider trading, because there could be no insider trading without a purchase or sale of stock.
Duty to provide material information. The participants also claimed that the Amgen defendants had violated their duties of loyalty and care under ERISA § 404(a)(1)(A) by not providing material information regarding the Amgen common stock fund. In response, the defendants argued that ERISA's disclosure obligations were limited, and did not extend to information that was material under the federal securities laws.
Citing Quan, the Ninth Circuit stated that ERISA fiduciaries must provide "complete and accurate" information, which extends to any alleged material misrepresentations made by plan fiduciaries. In this context, said the court, a misrepresentation would be material if there were a "substantial likelihood" that it would mislead a reasonable participant in deciding where to invest his retirement funds. Thus, said the court, the Amgen defendants were required to provide this material information to the participants in the common stock fund.
The Amgen defendants further argued that, because the participants had not shown reliance on any alleged material omission or misrepresentation, the participants had not met the requirements for their ERISA § 404(a)(1)(A) claim. The Ninth Circuit again disagreed, finding that ERISA participants should not be required to show actual reliance, but should be able to rely on the securities law "fraud on the market" theory in bringing an ERISA claim.
Amgen as fiduciary. The last issue addressed by the Ninth Circuit was whether Amgen itself was a proper defendant in the case. According to Amgen, it had delegated its discretionary authority over the plans to investment managers and the plans' trustees. Without such discretionary authority, said the company, it was no longer a fiduciary.
This argument, too, failed, as the Ninth Circuit determined that although the plan language authorized the fiduciary committee to act on behalf of Amgen, this was not a "clear delegation of exclusive authority" to the committee.
Reversed and remanded. Having rejected all of Amgen's arguments, the Ninth Circuit reversed the district court's decision and remanded the case to the district court for further proceedings consistent with the Ninth Circuit decision.
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