Opinion ID: 176297
Heading Depth: 3
Heading Rank: 3

Heading: The Imprudent Investment Claim

Text: The Participants assert that investment of the Plan's assets in CSC stock was imprudent, because of material weaknesses in both CSC's stock option granting program and CSC's accounting for income taxes. The Moench presumption applies to this claim of breach of fiduciary duty by an EIAP fiduciary for offering employer stock in the plan and failing to divest the plan of the employer's stock. The Moench presumption applies even if, prior to January 2007, the Fiduciaries were not only required to offer employer stock as an investment option, but also required to invest matching contributions in employer stock. We note that the Participants did not show that the Committee had discretion to halt purchases of CSC's common stock or to invest Plan assets that were required to be invested in the CSC stock fund in other assets instead. The question is whether the district court correctly found that the Participants did not generate any genuine issues of material fact that the Fiduciaries nevertheless should have stopped Plan investments in CSC stock. See Kirschbaum, 526 F.3d at 253; Syncor, 516 F.3d at 1102 (the claimant must show that a prudent investor under the circumstances would not have followed the plan's mandate to invest in employer securities). The Participants contend that the district court erred in granting summary judgment in favor of the Fiduciaries on their imprudence claim, because the record is rich with evidence that it was imprudent for the Fiduciaries to hold or offer CSC stock in the Plan. We agree with the district court, however, that the Participants did not generate a genuine issue of material fact sufficient to rebut the Moench presumption that continued investment in CSC stock was prudent. Even assuming that the Fiduciaries were aware of problems with the stock option granting practices and income tax accountingand contrary to the Participants' assertions, the record giving rise to inferences that the Fiduciaries would have known of these problems is rather scant [o]ne cannot say that whenever plan fiduciaries are aware of circumstances that may impair the value of company stock, they have a fiduciary duty to depart from [Plan] provisions. Kirschbaum, 526 F.3d at 256. Instead ... there ought to be persuasive and analytically rigorous facts demonstrating that reasonable fiduciaries would have considered themselves bound to divest. Id. The Participants here have presented no evidence that it was unreasonable for the Fiduciaries to believe that CSC would overcome its problems with stock options pricing and income tax accounting, especially in light of CSC's internal investigations of those problems. Thus, the Participants' evidence is insufficient to rebut the Moench presumption of prudence. Nor do the Participants point to evidence that would generate a genuine issue of material fact that, at the time that the Fiduciaries continued to hold CSC common stock as part of the Plan's investment, the Fiduciaries failed to employ appropriate methods to investigate the merits of the investment and to structure the investment. Wright, 360 F.3d at 1097; see also Moench, 62 F.3d at 572. First, [m]ere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the Moench presumption. Wright, 360 F.3d at 1099. Thus, the district court properly found that the decline in CSC's stock price did not give rise to an inference that the Fiduciaries did not properly investigate the merits of continued investment in CSC stock. Second, contrary to the Participants' contentions, the district court did not engage in a faulty analysis by considering that the Fiduciaries might also have been sued if they had stopped offering CSC stock. Courts applying the Moench presumption have recognized that this very principle applies, not only where fiduciaries allegedly fail to maximize returns, but also where they allegedly held employer stock imprudently. See Moench, 62 F.3d at 571-72; see also Kirschbaum, 526 F.3d at 256. Moreover, the Participants' argument against considering whether the fiduciary might also be sued for divesting improperly relies on the hindsight conclusion that the fiduciary acted imprudently by holding the company stock in the first place. See DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 424 (4th Cir.2007) ([W]hether a fiduciary's actions are prudent cannot be measured in hindsight, whether this hindsight would accrue to the fiduciary's detriment or benefit.). Third, the district court properly rejected the Participants' claim that the one-day drop in CSC's stock price in late June 2006 was sufficient to show that the Fiduciaries did not properly investigate their continued investment in CSC stock. It is true that [a] violation may occur where a company's stock did not trend downward over time, but was artificially inflated during that time by an illegal scheme about which the fiduciaries knew or should have known, and then suddenly declined when the scheme was exposed. Syncor, 516 F.3d at 1102 (emphasis added). However, the Participants did not argue below, and do not argue on appeal, that any alleged problems in the handling of stock options, which purportedly caused the one-day drop in CSC's stock price, amounted to an illegal scheme. That one-day drop also does not generate a genuine issue of material fact as to imprudence of continued investment in CSC stock on the basis of allegations of wrong-doing short of illegal conduct, where the price of the stock rebounded to more than its trading price within a reasonably short time frame. See Edgar, 503 F.3d at 349 n. 13. Fourth, equally unavailing is the Participants' assertion that the Fiduciaries' knowledge of problems with CSC's stock option granting practices and accounting for income taxes shows that the Fiduciaries failed to evaluate the merits of continued investment in company stock. Courts have held that a duty to investigate whether continued investment in company stock is prudent only arises when there is some reason to suspect that investing in company stock may be imprudentthat is, there must be something akin to a `red flag' of misconduct. Pugh v. Tribune Co., 521 F.3d 686, 700 (7th Cir.2008) (citing Barker v. Am. Mobil Power Corp., 64 F.3d 1397, 1403 & n. 4 (9th Cir.1995)). [9] The Participants alleged that the fiduciaries ignored red flags, but CSC responded to the red flag issues by appropriately investigating and addressing the alleged problems. The Fiduciaries did not breach their duty by failing to divest the Plan of company stock. See id. Finally, to generate genuine issues of material fact on an imprudent investment claim, the Participants `must show a causal link between the failure to investigate [or divest] and the harm suffered by the plan.' Wright, 360 F.3d at 1099. They have not done so. The evidence they present does nothing to distinguish the causal effect on the stock price, if any, of the announcement of the SEC's request for information about CSC's stock option granting practices from the causal effect of the announcement of other significant matters that same day, including the fact that CSC was no longer looking for a buyer and would buy back a substantial amount of its stock. [10] The record is also devoid of evidence that CSC's repricing its stock options, after its internal investigation and after the SEC's clarification of the guidelines for stock option pricing, was out of step with adjustments that other companies were forced to make in light of the SEC's clarification. Upon de novo review, we affirm the district court's grant of summary judgment to the Fiduciaries on the Participants' imprudent investment claim.