DOL’s Amicus Brief re: Citigroup ERISA Litigation

The February 15, 2010 Employee Ownership Update is online and discusses the following

• Obama Budget Tax Proposals Could Help ESOP Formation
• AMT Would Be Changed Under Obama Proposal
• Labor Secretary Hilda Solis Files Amicus Brief in Citicorp Case
• NCEO Board Elections

The Update discusses In re Citigroup ERISA Litigation, No. 07 Civ. 9790, 2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009) and the four key points of the DOL's Amicus Brief:

• Nothing in ERISA overrides the duty of fiduciaries to act prudently with regard to all investments. Even if company stock is mandated as an investment option or part of a plan's assets, the fiduciaries cannot be per se exempted from any prudence requirements at all.
  
• The plan here required that stock be held in the plan as an option, but did not require fiduciaries to buy it. If the stock was, as alleged, purchased at a price the fiduciaries knew was inflated given Citicorp's situation (knowledge they may have had that the public did not), then ERISA would be violated by their purchasing shares.
  
• The Moench presumption is an inappropriate standard. According to the brief: "As an initial matter, this Court, which has neither considered nor adopted Moench, ought not adopt any presumption of prudence with regard to investment in employer stock." The brief goes on to contend that plans can avoid the requirement for diversification under ERISA in properly drafted 401(k) plans or ESOPs, but they cannot rely on this to hold or buy company stock even when it is imprudent to do so. "Moreover," the brief went on, "whatever its utility in other situations, there is no rationale for applying the Moench presumption where, as here, the fiduciaries allegedly knew or should have known that the stock was artificially overpriced. It is always imprudent for ERISA fiduciaries to knowingly overpay for stock and they are not entitled to any contrary presumption." The language on "whatever its utility" in reference to Moench may seem to be taking a more measured stance, but the rest of the brief takes a tougher one.
  
• Fiduciaries should disclose information needed for participants to make intelligent decisions. Fiduciaries should "not hide behind their corporate roles to evade this duty with impunity and mislead participants."

Note that the brief concerns only the district court's dismissal of the plaintiff's case; it does not argue that the plaintiffs were right. The standards for dismissal are more stringent than for a final ruling. If the courts ultimately approve the district court's ruling, it would give fiduciaries far greater leeway to hold and buy company stock; if the DOL view prevails, existing standards would be considerably tightened.

The Update also explains how the Obama Budget Proposal that Increases Capital Gains Rates by 69% could make Section 1042 Sales more desirable, ultimately making ESOPs a more attractive business transition alternative. It also discusses how the budget would index the alternative minimum tax (AMT) for inflation, permanently fixing the annually recurring problem.