The document discusses fiduciary duties and challenges following the Supreme Court's Dudenhoeffer decision. It summarizes various court cases that have addressed different types of ERISA stock drop claims. The document discusses claims based on publicly available information and whether "special circumstances" were adequately alleged. It also discusses pleading standards for claims based on inside information, examining what alternative actions plaintiffs must plausibly allege fiduciaries could have taken without doing more harm than good. The document provides examples from multiple circuit court cases.

1. Fiduciary Challenges Following Dudenhoeffer
&
Ethics In ERISA Litigation
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Russell L. Hirschhorn
Proskauer Rose LLP
rhirschhorn@proskauer.com
212.969.3286
David S. Preminger
Keller Rohrback LLP
dpreminger@kellerrohrback.com
646.380.6690

2. |
• Prudence Claim: Plan fiduciaries knew or should
have known that company stock was an imprudent
investment, and failed to halt or eliminate the stock
fund as an investment option or discontinue
investments in
that fund
• Disclosure Claim: Plan fiduciaries made material
misrepresentations about the company or failing to
disclose material information affecting the value of the
company’s stock
1

3. |
• Plan fiduciaries presumed to act prudently when they
offer employees the option to invest in employer stock
unless company’s viability as a going concern is in
doubt or other “dire circumstances” are present
• Moench v. Robertson, 62 F.3d 553 (3rd Cir. 1995)
2

4. |
• “In our view, the law does not create a special
presumption favoring ESOP fiduciaries. Rather, the
same standard of prudence applies to all ERISA
fiduciaries, including ESOP fiduciaries, except that an
ESOP fiduciary is under no duty to diversify the
ESOP’s holdings.”
• The presumption “does not readily divide the plausible
sheep from the meritless goats. That important task
can be better accomplished through careful, context-
sensitive scrutiny of a complaint’s allegations.”
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5. |
• Allegations that a fiduciary should have recognized
from publicly available information alone that the
market was overvaluing or undervaluing the stock are
implausible as a general rule, at least in the absence of
“special circumstances.”
• ERISA fiduciaries, like many investors, see little hope
of outperforming the market based solely on publicly
available information and thus may generally prudently
rely on the market price.
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6. |
• To state a claim for breach of duty of prudence based
on inside information, a plaintiff must plausibly allege:
• An alternative action that the defendant could have taken that
would have been consistent with the securities laws, and
• A prudent fiduciary in the same circumstances would not have
viewed as more likely to harm the fund than to help it.
5

7. |
• Three points for consideration in determining whether a
claim based on inside information has been plausibly
pled:
• Plan fiduciaries are not required to break the law
• Does a plan fiduciary’s decision to purchase (or refrain from
purchasing) stock or for failure to disclose information to the
public conflict with federal securities laws or with the objectives
of those laws
• Whether a prudent fiduciary could not have concluded that
stopping purchases or publicly disclosing negative information
would do more harm than good to the stock fund
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8. |
• What, if any, types of claims are viable based on
publicly available information?
• What is a “special circumstance” for purposes of stating
a prudence claim based on publicly available
information?
• How can plaintiffs properly allege prudence claims
based on inside information?
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9. Claims Based on
Publicly Available Information
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10. 9
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• Kodak allegedly relied on a “dying technology”
• “The fact that the market, on any given date, may have
provided the best available estimate of the ‘value’ of
Kodak stock, does not necessarily reveal much about
whether defendants acted prudently in continuing to
invest in that stock”
• Relevant inquiry – should defendants “have realized
that Kodak stock represented such a poor long-term
investment that they should have ceased to purchase,
hold, or offer Kodak stock to plan participants”
9

11. 10
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• Plan fiduciaries allegedly knew or should have known
that Citigroup was heavily invested in subprime
mortgages and was thus an imprudent investment
• media reports about the subprime mortgage crisis
• ratings downgrades of Citigroup securities
• Citigroup’s public announcements of quarterly losses
• the decline in Citigroup stock by more than half
• No identifiable “special circumstance” alleged
• Claims were barred by statute of limitations

12. 11
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• Third Amended Complaint added
allegations about:
• ominous news articles
• volatility in Lehman’s stock price
• increased trading volumes
• rising costs of Lehman credit default swaps
• downgrades from various ratings agencies
• Plaintiffs alleged “special circumstances”
• SEC orders that prohibited short selling the securities of certain
large financial services firms, including Lehman, to eliminate the
possibility that short selling would contribute to artificial and
unnecessary depression in security prices

13. 12
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• Unlike Kodak, “Lehman did not spend months slowly
withering in public view such that any observer could
have foretold its collapse. Its ultimate demise was
abrupt, market-shaking, and occurred over a period
lasting barely longer than a week”
• Without allegations justifying a conclusion that reliance
on the market price was imprudent, Dudenhoeffer
forecloses public information claims irrespective of
whether such claims are characterized as based on
alleged overvaluation or alleged riskiness of a stock

14. 13
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• Allegations about Delta’s ability to survive in the
industry
• Increased industry competition from discount airlines
• Experienced losses of over one billion dollars a year
• Stock price decline by 92%
• Debt increase by 42%
• Dramatic reduction in workforce
• Eleventh Circuit: claim was just the type of claim that
the Supreme Court deemed "implausible as a general
rule," since it failed to allege any special circumstances

15. 14
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• State Street bought (and declined to sell) GM stock
until March 2009 despite the alleged “overwhelming
evidence in the public domain” raising concerns about
GM’s viability
• Sixth Circuit affirmed the summary judgment for State
Street
• Plaintiff failed to allege any “special circumstance” such that
State Street should not have relied on market pricing
• State Street’s processes for monitoring and evaluating the
investment in GM stock, which involved many meetings and
advice from outside counsel and financial advisors,
demonstrated prudence

16. 15
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• Alleged negative publicity regarding Cliffs and the
mining industry (excessive risk) should have led the
plan to stop investing in Cliffs stock
• Sixth Circuit – rejected allegation that a fiduciary’s
failure to independently verify the accuracy of the
market’s pricing is a “special circumstance”

17. 16
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• Allegations that RadioShack stock was
excessively risky
• District Court
• That the derivative and equity markets
predicted RadioShack would default is not a
special circumstance
• Large debt-load is not a special circumstance
• One of a handful of cases that tried to
revive claims against directed trustees

18. Claims Based on
Inside Information
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19. 18
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• “The Ninth Circuit … failed to assess whether the
complaint in its current form ‘has plausibly alleged’ that
a prudent fiduciary in the same position ‘could not have
concluded’ that the alternative action ‘would do more
harm than good.’”
• “The Ninth Circuit's proposition that removing the
Amgen Common Stock Fund from the list of investment
options was an alternative action that could plausibly
have satisfied [Dudenhoeffer]'s standards may be true.
If so, the facts and allegations supporting that
proposition should appear in the stockholders'
complaint.”

20. 19
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• Allegations of material non-disclosed information
relating to BP’s securities and environmental violations
caused BP American Depository Shares to be artificially
inflated
• Plan fiduciaries could have averted plan losses by freezing,
limiting or restricting stock purchases, and/or by accurate
disclosures
• Fifth Circuit
• Plaintiff bears the “significant burden” of proposing an alternative
course of action so clearly beneficial that a prudent fiduciary
could not conclude that it would be more likely to harm the fund
than to help it
• Rejected conclusory allegations that the proposed alternatives
were consistent with Fifth Third

21. 20
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• Allegations that plan fiduciaries
failed to investigate nonpublic
information regarding risks
facing Lehman
• Second Circuit
• Assuming a duty to investigate nonpublic information even
exists, complaint failed to explain in non-conclusory fashion how
a hypothetical investigation would have uncovered alleged
inside information
• ERISA does not impose a duty on appointing fiduciaries to keep
their appointees apprised of nonpublic information

22. 21
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• Allegations that plan fiduciaries had non-public
information regarding fraud by CIO
• Second Circuit
• Allegations were “wholly conclusory and materially
indistinguishable” from the allegations in Amgen
• Complaint did not plausibly allege that a prudent fiduciary could
not conclude that freezing purchases or disclosing the fraud
publicly would cause more harm than good

23. 22
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• Allegations that defendants knew that a mining project
would not deliver the projected profits
• Sixth Circuit
• Rejected allegations that a prudent fiduciary could not have
concluded that disclosing the inside information or halting
additional contributions would do more harm than good.
• Plan fiduciaries could have concluded that divulging inside
information would have collapsed the company stock price
• Closing the fund without explanation might be even worse

24. 23
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• Allegations of improper accounting practices of
Autonomy – acquired by HP
• HP retained PwC to conduct an investigation of
Autonomy’s accounting practices
• Defendants allegedly should have restricted new
investments in HP stock or publicly disclosed the illegal
scheme
• District Court
• Complaint failed to allege facts making it plausible that “a prudent
fiduciary in the same circumstances would not have viewed pre-
investigation disclosure to be more likely to harm the fund than to help
it”
• Market impact of freezing the HP stock fund “likely would have been
dire,” and a prudent manager would have waited to investigate
Autonomy’s accounting practices before disclosing it to the market
• It is inconsistent with securities laws to require “HP to disclose in real
time any suspicions about Autonomy that are yet uninvestigated”

25. 24
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• Closely-held corporation ceased
operations and employees
retirement savings were worthless
• Plaintiffs alleged that the decision to continue to offer
company stock when insiders knew that dissolution of
the company was “imminent” was a breach of
defendants’ fiduciary duties
• Court found that plaintiffs “failed to allege an alternative
action that a prudent fiduciary in the same
circumstances would not have viewed as more likely to
harm the fund than help it”

26. 25
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• Cassandra Wilson v. Edison Int'l, Inc.,
2016 WL 7469601 (C.D. Cal. July 6, 2016)
• Allegations that there was fraudulent activity related to
administrative proceedings in which the company was a party to
• Complaint failed to account for the risk that the market might
overreact to the proposed public disclosures
• In re Pilgrim’s Pride, No. 08-cv-472 (E.D. Tex. Oct. 4,
2016)
• Allegations that the stock was artificially inflated as a result of
poor financial decisions by management
• Public disclosure and/or a sale or “transfer” of company stock
would have all but guaranteed a collapse of the stock price

27. 26
|
• Jander v. IBM, 205 F. supp. 3d 538 (S.D.N.Y. 2016)
• Plaintiffs alleged that defendants knew that IBM’s stock
price was artificially inflated based on the value of its
microelectronics business, leading to a 17% drop in IBM’s stock
price
• Plaintiffs only offered “a rote recitation of proposed remedies”
• Martone v. Whole Foods Mkt., Inc., 2016 WL 5416543 (W.D. Tex.
Sept. 28, 2016)
• Allegations that stock inflated due to misrepresentations
• Dudenhoeffer set a “highly demanding” pleading standard
• Complaint offers only a rote recitation of proposed remedies
without the necessary facts and allegations supporting Plaintiffs’
proposition

28. 27
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• In re RadioShack, 14-cv-959 (N.D. Tex. Sept. 29, 2016)
• Allegations that stock price was artificially inflated by
withholding material information from the market and
made misleading statements of its unrealistic turnaround
abilities
• Must at least allege that defendants possessed such information
• In re Idearc ERISA Litig., 2016 WL 7189981 (N.D. Tex. Oct. 4,
2016)
• Plaintiffs alleged that defendants knew of a decline in Idearc’s
customer base, loosening of credit policies, reduction in account
collection workforce, and alteration of accounting book
• Complaint failed to plead how a prudent fiduciary might have
perceived a risk of stock price drop as a result of a purchase
freeze

29. 28
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• Murray v. Invacare Corp, 2015 WL 5093438
(N.D. Ohio Aug. 28, 2015)
• Plaintiff alleged defendants knew that Invacare was not
complying with FDA safety and compliance standards applicable to
the Company's most important products
• Plaintiff’s “allegations . . . show that a prudent fiduciary armed
with this inside information, would have known that Invacare
stock was artificially inflated . . . and that a significant fall was
inevitable”
• “A prudent fiduciary in Defendants' position could have
concluded that stopping Plan participants from further
investment in Company stock before the fall occurred would not
have caused the Plan more harm than good”

30. 29
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• Ramirez v. J.C. Penney Corp.,
2015 WL 5766498 (E.D. Tex. Sept. 11, 2015)
• Defendants argued that:
• public could not have been unaware that JCP’s
transformation plan carried substantial risk, pointing to public
disclosures and other statements showing that the investing
public was aware of these risks
• disclosing inside information to the public would have caused
a large drop in stock price
• defendants delegated duty to manage company stock fund to
Evercore - they had no duty to manage or control the fund
• Plaintiffs argued that value of JCP stock remained virtually
constant and the market could not have appreciated true risks

31. 30
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• Public information presented by defendants
may raise an issue of fact of whether the market
was actually aware of the riskiness of JCP stock, but did not
demonstrate that plaintiffs’ claim failed as a matter of law
• Truthful disclosure that corrected alleged material
misrepresentations was only course of action consistent with the
securities laws
• Because disclosing fraud was the only viable option to
defendants, the harm caused by that action was irrelevant
• Because defendants did not disclose information about the
riskiness of company stock to Evercore, Evercore could no
longer effectively discharge its obligations

32. 31
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Potential Action Discussion
Continue to Offer
Company Stock
Investment
• Retain status quo – no change to existing ability of participants to
invest in company stock
• Review investment policy and practices in light of recent cases
Hire an Independent
Fiduciary
• Shift company stock fiduciary responsibilities to take advantage of
reliance on market price and avoid potential conflicts from access
to inside information
• Consider retaining qualified institutional fiduciary with existing
procedures for monitoring company stock investments and
reporting capabilities
Freeze or Limit
Participant
Investments or
Eliminate the
Company Stock Fund
• Freeze company stock fund from any further investments or limit
the % of participant balances invested in company stock
• Sunset or eliminate company stock as an investment option
• Freezing or limiting investments in company stock still requires
continued oversight

33. 32
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Reconsider Fiduciary
Composition
• Determine if individual internal
fiduciaries are or may be in a
position to have access to inside
information and evaluate the
potential ramifications
• Consider appointing only
individuals without access to
inside information as internal
fiduciaries
• Evaluate the potential retention
of a qualified independent
fiduciary for company stock
investments
• Create or enhance company
stock investment oversight
processes to align with other
plan investment monitoring
practices
• Document periodic review for
prudency of continued holding or
investment in company stock
and any other fiduciary decisions
with respect to the stock fund
• If you have a company stock
investment manager or
independent fiduciary
understand its oversight process
and receive periodic reporting
• Does the plan require or
mandate an investment in
company stock?
• Are the fiduciaries responsible
for company stock clearly
identified and is their authority for
investment oversight and
decisions articulated?
• Is there an investment policy for
the plan or other asset classes
that contemplates company
stock issues?
Enhance Investment
Oversight Processes
Review Plan Documents

34. Fiduciary Exception to the
Attorney-Client Privilege
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35. 34
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• The Legal Framework
• Advising Fiduciaries Regarding Personal Liability
• Representation of Multiple Clients
• How to Render Advice at
Meetings

36. 35
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• An exception to the normal rules of attorney-client
privilege where the communication relates to advice
pertaining to plan administration and/or a participant’s
benefit rights under an ERISA plan
• Recognized by several circuit courts
– Second, Fifth, Sixth, Seventh, Ninth,
Eleventh, DC

37. 36
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• Duty to Disclose
• Derives from an ERISA
fiduciary’s duty to disclose
• “Real Client”
• As a representative for the
beneficiaries of the plan
which s/he is
administering, the
beneficiaries, and not the
fiduciaries, are the
attorney’s real clients.

38. 37
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• Pre-Decisional v. Post-Decisional Communications
• Fiduciary exception applies to
communications between
counsel and plan fiduciaries
concerning claims for benefits.
• Communications must have
occurred prior to the decision
on appeal.
• Post-decisional communications are no longer
relevant to the decision-making process
and constitute evidence that the interests of the
beneficiary and the plan fiduciary have diverged.

39. 38
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• Advice relating to a settlor function
• Divergent interests/anticipation of
litigation
• Where the advice pertains to matters
involving a participant who is adverse to
the plan (in anticipation of litigation)
• Where attorney work-product is prepared
for the plan in anticipation of litigation,
such that plan’s interests diverge from the
participant’s
• Goal of advice is to advise the fiduciary of his or her
potential personal liability

40. 39
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• ERISA does not distinguish between insurers and other
types of fiduciaries, Stephan v. Unum Life Ins. Co. of
Am., 697 F.3d 917 (9th Cir. 2012)
• Because there is a conflict between an insurer’s profit
motive and the interests of a beneficiary, beneficiaries
are not clients and there is no reason to impose trustee-
like disclosure obligations, Wachtel v. Health Net,
Inc., 482 F.3d 225 (3d Cir. 2007)

41. 40
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• Where the DOL commences an action
on behalf of participants and beneficiaries,
courts frequently have concluded that it
steps into the shoes of the participants and
beneficiaries and may invoke the fiduciary exception.
• Fiduciary exception can be invoked by the DOL
in lawsuits and during compliance investigations.
• However, there is an argument to be made that the
DOL should not have unfettered access to documents
and information that are unrelated to the
investigation.

42. 41
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• There are many potential
clients in ERISA litigation
• Plan
• Employer/Sponsor
• Plan Committees
• Trustees or Fiduciaries
• Third-party Administrators
• Insurers
• Independent Fiduciaries
• Other Entities with Discretion or Responsibility to Pay
Claims

43. 42
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• Benefits lawyers commonly represent more than one
client.
• If you represent an employee organization or employer
organization, can you represent the organization’s
constituents?
• What are the potential or actual conflicts of interest?
• Multiple representation examples
• Board of Trustees
• Employer, Board of Directors and/or Benefits
Committee

44. 43
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• Even when two or more clients have “differing interests,” the
affected clients may be able to waive the conflict and
consent to the attorney’s simultaneous representation.
• Such waiver and written, informed consent are effective if
three conditions are met:
• competent and diligent representation to each affected
client
• representation is not prohibited by law
• representation does not involve the assertion of a
claim by one client against another client represented
by the lawyer in the same litigation or other proceeding
before a tribunal

45. 44
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• Potential Pitfalls
• Waiver and Exceptions to Waiver
• Mixing Settlor and Administrative Advice

46. 45
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• Presence of a Third Party
• Agency Exception
• Common Interest Exception to Waiver
• Inadvertent Disclosures

47. 46
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• To preserve privilege, and avoid the
fiduciary exception, discuss the legal advice in a
conversation, meeting or email that is separate from
the decision on a benefit claim.
• Maintain the proper audience. Be sure that an intended
privileged communication is not made during the claims
process to a claims fiduciary.
• If the nature of the legal advice relates to personal
liability of the fiduciary, to the extent possible make that
clear before the communication is made.

48. 47
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• Understand and communicate the
potential conflicts of interests to your clients before
they arise if they can reasonably be foreseen at the
time of the engagement.
• The engagement letter should clearly set forth what will
happen if a conflict arises that will preclude you from
continuing to represent multiple clients.
• Clients should be cognizant of their lawyer’s ethical
obligation not to represent multiple clients with
divergent interests.

49. 48
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• Remove unnecessary parties from the
room before conducting privileged conversations.
• Separate advice to plan sponsor from advice to plan
fiduciaries.
• Make clear on all written communications that they are
protected by the joint/common interest privilege.
Create an “expectation of privilege.”

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