Newsletter Article
October 2019

Cases & Rulings: November/December 2019

Department of Labor Brief in IBM Stock Case Argues Securities Law Rules Should Be the Basis for Whether to Disclose Adverse Information: 

In an Aug. 18, 2019, amicus brief to the Supreme Court in the case of Jander v. IBM, the Department of Labor argued that the proper standard for determining if a fiduciary should disclose insider information affecting company stock in a retirement plan should be what securities law requires.

The brief argued that the case should be remanded to a lower court to make a decision on this basis, rather than, as in prior decisions, about whether disclosure would do more harm than good, the standard most courts have used under Dudenhoeffer. The DOL argued that “Absent extraordinary circumstances, ERISA’s duty of prudence requires an ESOP fiduciary to publicly disclose inside information only when the securities laws require such a disclosure…Although the parties largely focus on the third consideration—whether a prudent fiduciary could not have concluded that disclosure would do more harm than good—the proper analysis should be informed by the requirements and objectives of the securities laws. The federal securities laws provide a comprehensive scheme of public disclosure rules designed to protect investors…There is no sound reason to adopt a different set of disclosure rules to protect those investors who also happen to be investors through an ESOP, or the ESOP itself. Accordingly, a prudent fiduciary could not rely on ERISA as a basis for declining to disclose information that he is required by the securities laws to disclose, and thus for concluding that to do so would do more harm than good to the fund and its participants and beneficiaries. But by the same token, a prudent fiduciary could conclude that not disclosing information that the securities laws do not require him to disclose would be consistent with the objectives of the securities laws, and thus that disclosure would do more harm than good.”

This alternative approach would arguably present as stiff or stiffer a challenge for plaintiffs as the “more harm than good” standard. Plaintiffs could prevail, but it would be an uphill battle. The DOL argued that “to be clear, the fact that a prudent ESOP fiduciary without a personal securities-laws obligation to disclose would rarely, if ever, have an ERISA-based personal duty to publicly disclose inside information does not mean that he has no ERISA-based duty to do something in response to inside information suggesting that the employer’s stock is not a prudent investment.”

Claim Based on Post-ESOP Drop in Shares Due to Leverage is Decisively Rejected: 

In Lee v. Argent Trust, No. 5:19-cv-00156-BO (W.D.N.C., Aug. 7, 2019) a district court ruled that a post-transaction drop in the value of Choate Construction’s ESOP stock value from $198 million to $65 million did not indicate a fiduciary violation by the plan’s trustee, Argent Trust. The court ruled that the drop was due to the leverage used to buy the shares. The court said the plaintiff was not harmed by the transaction, nor did she allege any additional harm from the post-transaction drop in value. Moreover, the judge said that she “fundamentally misunderstood” the nature of the transaction. The judge wrote that rather than focusing on a simple before and after comparison, “it is better to conceive of this transaction, as defendants have argued, as being comparable to the purchase of a mortgage-financed house” in which the equity value naturally declines.

The strong conclusion is one of the first times a court has specifically ruled that the mere fact that stock value drops after a sale because of leverage is not a fiduciary violation.

$6.5 Million Judgment in Sentry Equipment Case: 

In Pizzella v. Vinoskey, No. 6:16-cv-00062, (W.D. Va., Aug. 2, 2019), a district court imposed a $6.5 million judgment in an ESOP valuation case. An ESOP had bought the remaining shares of Sentry Equipment in the transaction for $21 million. The court ruled that the ESOP trustee, Evolve Bank and Trust, relied on an investigation of the transaction that was “rushed and cursory” because of the desire to close the transaction quickly. Part of the dispute revolved around whether to use a capitalization of earnings method, as was the case here, or discounted cash flow (DCF), which the DOL’s expert argued was usually the appropriate standard (generally, which method to use depends on how much past earnings best predict future earnings). The court said that the DCF standard was more common by a “small margin,” although it did not suggest the basis for that. The court also disagreed with the control assumptions because, even though the ESOP had 100% ownership, certain elements of the transaction, such as including the prior owners’ remaining involvement, reduced the trust’s effective control. Other factors included how various costs were calculated and the assumed weighted average cost of capital. The court also said that Evolve showed no evidence that it tried to negotiate the price.

Additionally, the court ruled that the seller, Adam Vinoskey, has co-fiduciary liability because he knowingly participated in Evolve’s breach of duty by making no effort to accept a lower price. This appears to be a novel conclusion that could implicate sellers in ESOPs more generally in cases such as this.

The decision contains one of the most elaborate explications of damages in an ESOP case. The judge did not find the DOL’s valuation expert’s persuasive, and ended up concluding that the co-fiduciaries were responsible for a $6.5 million payment transaction rather than the $11.5 million the DOL sought.

Wawa Gets Appeal of ESOP Case: 

In Cunningham v. Wawa, Inc., No. 19-8029, (3rd Cir., order granting petition to appeal, Aug. 13, 2019), Wawa convinced an appeals court to review a lower court ruling that certified a class of 1,000 who claimed they were improperly prevented from keeping their Wawa stock until they turned 68. Wawa agreed the employees could challenge the stock price, but not a change in provisions in the plan to move employees out of stock after termination. Wawa argues that the “right-to-hold” claim is a function of how much individuals relied on information provided by Wawa that members of the loss claim were misleading, so only individuals can sue. For instance, one of the plaintiffs admitted that the information did not support the claim.

GreatBanc Can’t Use Release to Avoid Fiduciary Litigation: 

In McMaken v. GreatBanc Tr. Co., No. 1:17-cv-04983 (N.D. Ill., Aug. 21, 2019) a district court ruled that GreatBanc cannot use a release signed by the plaintiff Michael McMaken from claims against Chemonics or any of its fiduciaries when he left the ESOP-owned firm Chemonics. The court ruled that GreatBanc was a fiduciary for the ESOP trust and its reading of the release was too broad. GreatBanc had contended that its status as a fiduciary included being a fiduciary to the company.