U.S. Supreme Court Rules on Presumption of Prudence for Company Stock of Publicly-Traded Companies Held in ESOPs, Etc.

The U.S. Supreme Court held in Third Fifth Bancorp v. Dudenhoeffer that a “presumption of prudence” does not apply to company stock held in an employee stock ownership plan (ESOP).  Rather, the ordinary ERISA fiduciary duties apply, except there is no need to diversify assets.   Courts of Appeals had issued conflicting rulings on the subject.  Presumably, the decision relates to all eligible individual accounts plans, including stock bonus plans.  The Court ruled that plan terms cannot override the duty of prudence.  The Court essentially stated that markets relating to publicly-traded stocks are efficient, meaning it is next to impossible to claim breach of fiduciary duty with respect to a stock drop based on public knowledge.  Concerning the very important issue of the conflict between the federal securities laws and ERISA, the Court held that a fiduciary has no duty to break a securities law to comply with ERISA.  So, a fiduciary cannot sell company stock if doing so would violate the federal securities laws (i.e., due to use of inside information that led the fiduciary to believe the stock would lose value).  Concerning the issues of whether a duty to stop purchasing exists when inside information shows a loss in value is likely and whether a fiduciary has a duty to make public inside information that would likely cause the stock to drop, the Court punted (i.e., left it to the lower courts to decide the issue).  Many people fail to realize that the prudence issue relates to all ESOPs, not just those of publicly-traded companies.  Failure to regularly monitor prudence likely is a breach of fiduciary duty.  The end result of this case probably is that company stock drop cases that allege a breach of fiduciary duty based on facts known that are not publicly-known should overcome a motion to dismiss, while all other cases will be dismissed.  Query how many non-insiders know non-publicly known facts?  It would seem the answer is none.