Securities claims related to the collapse of Lehman Brothers Holdings Inc. culminated in settlements worth more than $500 million, but parallel ERISA litigation against the bank has been a bust for plaintiffs lawyers. Their latest, and likely final, defeat came on Monday at the hands of the U.S. Court of Appeals for the Second Circuit.
In a 41-page decision, the appeals court affirmed the dismissal of claims that Lehman's leaders didn't prudently manage the company's employee stock ownership plan. The court held that plan-participants couldn't "plausibly allege that the [defendants] knew or should have known that Lehman was an imprudent investment given the mixed signals with which [they] grappled." The ruling is a win for defense firms including Simpson Thacher & Bartlett, Dechert, and Allen & Overy.
Lehman allowed its employees to save for retirement by contributing income to an employee stock ownership program, which invested in Lehman common stock. The retirement savings vanished virtually overnight when Lehman collapsed in September 2008. Plan participants immediately brought a putative class actions against the Lehman execs that oversaw the plan, alleging that they should have known about Lehman's woes and tried to rescue the retirement savings. The complaint also named as defendants member of Lehman's board of directors.
U.S. District Judge Lewis Kaplan in Manhattan dismissed the claims without prejudice in February 2010. Under prevailing law, the defendants are presumed to have acted prudently, he wrote, and on the facts there was no reason to scrap that presumption. Kaplan noted that Lehman was profitable for much of the class period, and there was no indication that the plan overseers "knew or had inside information suggesting that any company financial reports were false or misleading."
Plaintiffs lawyers at Wolf Haldenstein Adler Freeman & Herz and Gainey & McKenna filed an amended complaint in September 2010. This time, they picked a more modest class period: March 16, 2008 to June 10, 2009. You may recall that March 16, 2008 was the day Bear Stearns & Co. collapsed. According to the amended complaint, Bear Stearns's demise should have erased any doubts about Lehman's own dire straits. The plaintiffs also incorporated aspects of a court-appointed examiner's report on Lehman's collapse, as we explained here. Nevertheless, Kaplan ruled in October 2011 that the plaintiffs still hadn't made a viable claim for imprudent management.
On appeal, Mark Rifkin of Wolf Haldenstein argued that Kaplan got it wrong. According to Rifkin, any reasonable investigation by the defendants would have turned up nonpublic information revealing Lehman's precarious state, so the plaintiffs had a strong case for breach of fiduciary duty. The Department of Labor appeared at oral argument and largely sided with Rifkin's position.
The defense firms countered that the Department of Labor's position put ERISA defendants in an unfair dilemma: Failing to investigate nonpublic information would make them liable for breach of fiduciary duty. But if they uncover nonpublic information and sell assets based on that information, they risk liability for insider trading. Jonathan Youngwood of Simpson Thacher argued on behalf of the committee that oversaw the retirement plan. Adam Wasserman of Dechert argued on behalf of all board members except former Lehman CEO Richard Fuld Jr, who was represented attorneys at Allen & Overy.
In Monday's ruling, the Second Circuit sided with the defendants and rejected the DOL's standard. "Given the conflicted state of the law, there seems but one reasonable approach: the duty of prudence must not be construed to include an obligation to affirmatively seek out material, nonpublic information pertaining to plan investments," Circuit Judge Richard Wesley wrote on behalf of the unanimous three-judge panel.
Simpson Thacher's Youngwood praised Welsey's ruling, telling us in an interview that the court "found a way to harmonize these areas of the law."
Wolf Haldenstein's Rifkin was not immediately available for comment.
This article originally appeared in The Am Law Litigation Daily.
