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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]

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