Compliance March 24, 2016

Court Approves Settlement in Fifth Third Stock Drop Suit

The case reached the Supreme Court, and set new standards of pleading for lawsuits against retirement plans that hold on to company stock.
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A federal district court has preliminarily approved a settlement in the case of Dudenhoeffer v. Fifth Third Bancorp. 

The settlement agreement calls for $6 million to be placed into an account to be distributed to all class members in the case, minus certain fees. 

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In addition, the agreement calls for Fifth Third to make design changes to its retirement plan, including freezing the Fifth Third Stock Fund, so that no new money will be put into the fund. However, plan participants are allowed to transfer out of the fund if they wish. The recordkeeper of the plan will send an annual notice to participants that have more than 20% of their account invested in Fifth Third Stock Fund and educate them about the benefits of asset allocation and diversification. 

According to the settlement agreement, Fifth Third currently funds plan contributions in the form of cash (not shares) and agrees not to change this for at least the next eight years. The Fifth Third Bancorp Pension, Profit Sharing, and Medical Plan Committee members will receive annual fiduciary training, and Fifth Third agrees to increase this training to be conducted at least twice annually. 

NEXT: Long case history, ultimately achieving fame

The case was filed in 2008 when John Dudenhoefer, a Fifth Third employee, charged that the bank hid its true financial picture leading to its stock price to be artificially inflated. Then the stock suffered a major plunge in its share price when the company's financial problems were revealed. The suit alleges the bank's action caused the plan to lose millions of dollars.

In 2010, a federal judge in Ohio turned aside arguments that Fifth Third Bancorp committed a fiduciary breach when it continued to include company stock in its profit-sharing plan. Senior U.S. District Judge Sandra S. Beckwith of the U.S. District Court for the Southern District of Ohio based her decision on the presumption of prudence established in a 1995 decision in Moench v. Robertson.

However, the 6th U.S. Circuit Court of Appeals reversed the decision, saying that the “legislative history combined with a natural and clear reading of Section 404 [of the Employee Retirement Income Security Act (ERISA)] [led] to the inexorable conclusion that ESOP fiduciaries are subject to the same fiduciary standards as any other fiduciary except to the extent that the standards require diversification of investments.” 

The U.S. Supreme Court agreed to rule on the presumption of prudence issue, and in June 2014, decided fiduciaries of employee stock ownership plans (ESOPs) are not entitled to any special presumption of prudence under ERISA. The high court’s decision also set new standards of pleading for lawsuits against retirement plans that hold on to company stock, that have been used in many such lawsuits since the decision.

 

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