CINCINNATI - The U.S. Supreme Court ruled against Fifth Third Bank in a closely-watched case involving its retirement plan.
The ruling by the nation's highest court means employees can pursue claims that the bank acted irresponsibly by keeping retirement assets invested in company stock before the stock market crash in 2008.
Fifth Third shares lost 75 percent of their value between 2007 and 2009, as a national subprime lending scandal caused banks to restate their loan values and recognize billions in losses. Fifth Third retirement plans lost tens of millions in value as Fifth Third shares plunged to less than $3 by January, 2009.
The case has national implications in that hundreds of U.S companies have retirement plans that hold significant assets in company stock. The ruling is viewed as having a negative impact on investment plan advisors because it made it easier to pursue claims involving investment decisions.
The bank declined comment on the merits of the case, but released a statement saying it was “pleased to see their ruling on this important issue.”
Fifth Third shareholders are neither frightened nor inspired by the ruling. The stock spent much of the day within a few pennies of yesterday's closing price of $21.46.
Plaintiff attorney Ron Parry said the ruling will force Fifth Third employees to re-frame their arguments, but it is “ultimately a beneficial decision” because it “removes a hurdle” raised by the Sixth Circuit Court of Appeals.
Fifth Third argued that companies with Employee Stock Ownership Plans should be held to a different fiduciary standard than other plans covered by the Employee Retirement Income Security Act. Appellate judges agreed, but the Supreme Court ruled otherwise in Wednesday’s unanimous decision.
“In our view, the law does not create a special presumption favoring ESOP fiduciaries,” the justices ruled. “Rather, the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s holdings.”
The ruling sends the case back to the U.S. District Court in Cincinnati with a few guidelines on legal standards that should be applied to future pleadings.
For example, employees previously argued that the bank should have known that its stock was overvalued because it was participating in the lending practices that ultimately caused the national banking crisis.
But today’s ruling said retirement plan managers are not required to act on inside information to prevent losses.
“That would violate securities laws,” the ruling states.
In addition, the Supreme Court indicates lower courts hearing such claims should consider whether a retirement plan’s decision to sell company shares might be “taken as a sign that insider fiduciaries viewed the employer’s stock as a bad investment,” forcing a public disclosure that “would do more harm than good to the fund by causing a drop in the stock price.”
Parry said plaintiffs will file an amended complaint and future lawsuits on the same topic will have new legal guidance on how their arguments should be framed.
As for whether it makes plaintiffs more or less likely to prevail, Parry declined to hazard a guess.
“What the court has been doing over the last decade is making it easier to get cases dismissed at the pleading stage,” he said. “You have to plead with more specificity. This case has been in court for several years now. The only issue we’ve dealt with is whether we’ve adequately asserted a claim in the complaint.”