Employers could be held liable for holding company stock inside ESOP and 401(k) plans, especially if the stock falls in price and company executives failed to act to prevent the losses.
That was the upshot of a U.S. Supreme Court ruling on Wednesday that gave Fifth Third Bancorp employees a second chance in their class-action lawsuit against the Ohio institution.
In doing so, however, the court also provided the lower court several guidelines that would seem to weaken the plaintiffs’ case.
Among them: that a fiduciary should in some way have been able to recognize whether a stock was over- or undervalued.
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The suit was brought by employees in the bank’s defined contribution plan and ESOP, both of which held company stock that lost over 95 percent of its share price.
At issue was whether Fifth Third Bancorp executives should have known, based on publicly available, as well as inside information, that their own company stock was “overpriced and excessively risky,” according to the complaint.
The high court sent the case, Fifth Third Bancorp v. Dudenhoeffer, back to an appeals court for reconsideration.
In issuing its 9-0 decision, the court discarded the long-accepted doctrine of the presumption of prudence, which has offered plan fiduciaries protection in the event of a decline in asset values.
According to the suit, the bank kept offering company stock in its plans even as Fifth Third was increasing its risky subprime lending practices. Eventually, this exposed it to losses in the 2007 housing-led recession. Plaintiff’s lawyers filed the class-action on behalf of employees after the stock fell from $42 a share to below $2.
The 2008 suit also charged that as fiduciaries, bank officers should have sold the stock earlier, when the stock price began to decline, refrained from buying more company stock and publicly acknowledged the over-pricing so the market could have corrected itself.