In re Lehman Bros. Securities & Erisa Litigation
113 F. Supp. 3d 745
S.D.N.Y.2015Background
- Plaintiffs are beneficiaries of the Lehman Brothers ESOP that held large quantities of Lehman stock and lost value when Lehman failed in 2008.
- Plaintiffs sued Plan Committee members (named fiduciaries) and former Lehman director/CEO Richard Fuld under ERISA for imprudently maintaining and buying Lehman stock and for failing to disclose or investigate risks.
- Plaintiffs amended the complaint (TCAC) after the Supreme Court's decision in Fifth Third Bancorp v. Dudenhoeffer and narrowed claims to allege imprudence based on public information, a "special circumstances" theory (SEC short-sale orders), a failure-to-investigate nonpublic information theory, and a monitoring/duty-to-inform claim against Fuld.
- The Plan Committee defendants conceded fiduciary status; plaintiffs do not allege the Committee actually possessed negative inside information, but allege they should have investigated and would have uncovered it.
- The court evaluated the TCAC under Rule 12(b)(6) and recent pleading standards (Twombly/Iqbal) and applied Dudenhoeffer's guidance on ESOP fiduciary duties.
- The court dismissed all counts: public-information imprudence claims (Counts I & II), the failure-to-investigate nonpublic-information claim (Count III), and both monitoring and duty-to-inform theories against Fuld (Count IV).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Plan Committee breached ERISA duty of prudence based on public information | Committee should have recognized by June 9, 2008 that Lehman stock was too risky and ceased purchases/divested | Public information was mixed; market price was a reliable aggregator and plaintiffs fail to plead a plausible inference of imprudence | Dismissed — public-info claims implausible as a general rule under Dudenhoeffer and Twombly/Iqbal; TCAC fails to plead special circumstances making market price unreliable |
| Whether SEC short-sale emergency orders constituted "special circumstances" making market price unreliable | SEC orders demonstrated unusual market distortion, so fiduciaries could not rely on market price | SEC orders did not say markets were inefficient; they aimed to prevent artificial price declines and thus suggested prices were artificially low, not masking risk | Dismissed — SEC orders do not plausibly allege a special circumstance that would render reliance on market price imprudent |
| Whether fiduciaries had duty to investigate nonpublic information (and whether a hypothetical investigation would have revealed inside facts and avoided harm) | Committee should have conducted an independent investigation that would have uncovered nonpublic risks (e.g., leverage, Repo 105, insider warnings) | No duty to seek insider info; plaintiffs allege no specifics how inquiry would have uncovered inside facts or how alternative actions would have helped | Dismissed — plaintiffs concede Committee lacked inside info, plead no non-conclusory path by which investigation would have revealed such info, and fail to plausibly allege an alternative action would not have done more harm than good |
| Whether appointing fiduciary (Fuld) had duty to monitor or to inform Plan Committee of nonpublic risks | Fuld failed to monitor and withheld material nonpublic information that would have altered Committee's judgment | Monitoring claim is derivative (requires primary breach); ERISA does not impose a duty on appointing fiduciaries to supply nonpublic corporate information to appointees | Dismissed — monitoring claim fails with no primary breach; duty-to-inform is not recognized under ERISA/trust law and would create conflicts with corporate duties |
Key Cases Cited
- Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014) (ESOP fiduciaries subject to ordinary ERISA prudence standard; public-info claims generally implausible absent special circumstances; nonpublic-info claims may be cognizable only if an alternative lawful action exists)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must state a plausible claim under Twombly standard)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Tibble v. Edison International, 135 S. Ct. 1823 (2015) (trust-law duty to monitor investments is continuing; claims for failure to monitor may be timely)
- Rinehart v. Akers, 722 F.3d 137 (2d Cir. 2013) (affirming dismissal under Moench; skeptical of ERISA duty to provide nonpublic information)
- In re Citigroup ERISA Litigation, 662 F.3d 128 (2d Cir. 2011) (ERISA fiduciaries have limited affirmative disclosure duties; cannot be required to furnish nonpublic information to beneficiaries)
- Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995) (presumption of prudence for ESOP fiduciaries under prior Second Circuit practice, discussed historically in lower courts)