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Lehman Stock was not an Excessively Risky Investment for ESOP Fiduciaries in 2008

By: Zien Halwani

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

          The United States District Court for the Southern District New York dismissed an action for breach of fiduciary duty relating to investment in Lehman stock during the 2008 financial crisis.[1]  Beneficiaries of Lehman Brothers Savings Plan, an employee stock ownership plan (“ESOP”), sued Lehman’s former directors, which included Richard S. Fuld and the Lehman’s Employee Benefit Plans Committee (“Plan Committee”).[2]  This lawsuit was dismissed twice under Rule 12(b)(6) for failing to plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”[3]  The Second Circuit affirmed the second dismissal in Rinehart v. Akers,[4] but the dismissal was vacated and remanded to this district court by the United States Supreme Court in light of its decision in Fifth Third Bancorp v. Dudenhoeffer.[5]  Prior to the Supreme Court’s ruling in Dudenhoeffer, several lower courts found that ESOP fiduciaries were entitled to a general presumption of prudence.[6]  In Dudenhoeffer, the Supreme Court narrowed this entitlement to a presumption of prudence only when Employee Retirement Income Security Act (“ERISA”) fiduciaries — ESOP or otherwise —  rely on publicly available information in making investment decisions.[7]  The Supreme Court also held, however, that a company might be an imprudent investment if it was going “out of business.”[8]

            In the instant litigation, the plaintiffs alleged that under ERISA: (1) the Plan Committee breached its fiduciary duty “by failing to consider the prudence of continuing to invest in Lehman” during the 2008 financial crisis (i.e. they know or should have known that investment in Lehman had become increasingly risky during the time) and “by failing to investigate nonpublic information regarding the risks facing Lehman;” (2) there were special circumstances affecting the reliability of the market price of Lehman stock as an unbiased assessment of Lehman’s value; and (3) Fuld inadequately monitored the Plan Committee by not disclosing nonpublic information about the risks facing Lehman.[9]  On remand, the district court dismissed the claims for several reasons.[10]

            Relying on Dudenhoeffer, the district court dismissed the first claim finding that (1) there was not enough public information regarding Lehman during the 2008 financial crisis to trigger ERISA’s prudence requirements, i.e. a reasonably prudent fiduciary would not have reconsidered continuing investment in Lehman at that time; and (2) creating a duty to investigate nonpublic information would lead to a constant conflict between fiduciaries meeting that duty and fiduciaries abiding by federal insider trading laws.[11]  According to the court, a plaintiff may allege “an alternative action that the defendant could have taken that would have been consistent with securities law” in support of a breach of fiduciary duty claim.[12]  However, if a plaintiff does so he must also allege, according to court, that a prudent fiduciary could not have concluded that taking such action would do more harm than good.[13]

            The court dismissed the second claim, holding that a company’s stock price is presumptively a valid assessment of its value in light of public information, meaning ERISA fiduciaries did not need to rely on more than public information relating to a company in order to determine if the market was over or undervaluing that company’s stock.[14]  Interestingly, the court dismissed the notion that a Securities and Exchange Commission order blocking short trades on Lehman stock was a “special circumstance,” exempting plaintiffs from this general rule.[15]

            Finally, the court dismissed the third claim noting that a monitoring claim would be either be a derivative claim, based on a breach of fiduciary duty by the Plan Committee, or an independent claim, based on a breach of fiduciary duty by Fuld.[16]  It dismissed the former because the Plan Committee did not breach its fiduciary duty.[17]  The latter was dismissed because Fuld had no duty to inform the Plan Committee of anything relating to Lehman stock.[18]  Fuld was a fiduciary to the Plan Committee in so far as he appointed others to manage the Plan Committee.[19]  Accordingly, he could only breach his fiduciary under ERISA by imprudently appointing others to manage the committee not by failing to inform the Plan Committee of insider information.[20]

            If Lehman Brothers was not an imprudent investment in 2008 what short of outright fraud would produce a breach of duty for ESOP fiduciaries?  It seems not much.[21]  Corporate managers nationwide can take a sigh of relief. [22]  At first, Dudenhoeffer seemed to create a heavier burden for ESOP managers, announcing their presumption of prudence was no different than other ERISA fiduciaries.[23]  The court even said that if a “company was about to go out of business,” as with Lehman, an ESOP fiduciary’s investment in employer stock might be imprudent.[24]  This case’s application of Dudenhoeffer moved in the opposite direction by insulating ESOP fiduciaries through heightened pleading requirements.[25]  According to the district court, Lehman Brothers in 2008 was not such an excessively risky investment as to create a breach of duty for ESOP fiduciaries.[26]



[1] In re Lehman Brothers ERISA Litigation, No. 09-MD-2017, 2015 WL 4139978, (S.D.N.Y 2015).

[2] Id at *1.

[3] Id at *4 (citing Ashcroft v. Iqbal, 566 U.S. 622, 678 (2000)).

[4] 722 F.3d 137 (2d Cir. 2013) (holding that ESOP fiduciaries were entitled to presumption of prudence related to investments they make).  

[5] 134 S. Ct. 2459 (2014) (holding that while ESOP fiduciaries are not entitled to presumption of prudence they may prudently rely on at stock’s market price in light of public information)  

[6] Id at 2466 (explaining that “several” Courts of Appeals went beyond express ERISA provisions that ESOP fiduciaries need not diversify when those courts gave them a presumption of prudence). 

[7] Id.

[8] See id at 2468. (“. . . a claim that an ESOP fiduciary's investment in employer stock was imprudent as a way of securing retirement savings should be viewed unfavorably . . . unless the company was about to go out of business …”).

[9] In re Lehman Brothers ERISA Litigation, No. 09-MD-2017, 2015 WL 4139978 at *3.

[10] Id at *5–*17.

[11] Id at *10.

[12] Id at *3.

[13] Id at *11.

[14] Id at *9 (explaining that Dudenhoeffer bars claims on public information precisely because market is competent to react to such information).

[15] Id.

[16] Id at *13.

[17] Id.

[18] Id at *14 (holding that ERISA fiduciary status exists only to extent that person is engaged in ERISA regulated activities).

[19] Id.

[20] Id.

[21] See In re Lehman Brothers ERISA Litigation, No. 09-MD-2017, 2015 WL 4139978 at *5, (limiting ERISA fiduciary’s obligation of prudence to consideration of circumstances then prevailing).

[22] Id at *1.

[23] Dudenhoeffer, 134 S. Ct. at 2463.

[24] See Id.  at 2468 (“. . . a claim that an ESOP fiduciary's investment in employer stock was imprudent as a way of securing retirement savings should be viewed unfavorably . . . unless the company was about to go out of business …”).

[25] In re Lehman Brothers Erisa Litigation, No. 09-MD-2017, 2015 WL 4139978 at *1.

[26] Id at *9.