Court Says Credit Crisis No Reason to Investigate Company Stock Offering

The U.S. District Court for the Southern District of Ohio has determined that Huntington Bancshares did not breach its fiduciary duties under ERISA offering company stock as a retirement plan investment during a period when the company was experiencing a financial downturn due to the credit crisis.

In dismissing participants’ claims, the court agreed with Huntington that it was simply part of “the unprecedented, ongoing credit crisis that has negatively impacted the stock price of banks and other corporations across the country whether these businesses were ERISA employers or not.” The opinion said ERISA imposes no duty on plan fiduciaries to continuously audit operational affairs, but that a duty to investigate only arises when there is some reason to suspect that investing in company stock may be imprudent. “This type of general news information is not the type courts have found to be sufficient to trigger the duty to investigate,’ the court said.

“[I]t is clear that the federal courts are currently experiencing a significant rise in “stock drop cases’ due to the current status of the stock market and the economic climate in general, which of course includes the subprime lending crisis. However, ERISA was simply not intended to be a shield from the sometimes volatile financial markets,’ the court concluded.

Huntington noted that its stock is owned by several large, public pension funds, which collectively have increased their Huntington holdings by over 137% over the class period, and the court agreed that this fact prevents a finding of imprudence in continuing to offer Huntington stock and/or not liquidating the plan’s holdings of Huntington stock during the class period.

The court also disagreed that Huntington violated Sections 404 and 405 of ERISA, 29 U.S.C. §§ 1104, 1105, by failing to provide complete and accurate information to the participants in the plans. The opinion pointed to numerous specific public disclosures that Huntington made regarding its potential exposure to credit and market risk both before and throughout the class period, and the court noted that Huntington also unequivocally disclosed its relationship with Franklin Credit, which participants said caused the stock to become an imprudent investment, in a publicly filed “Third Quarter Analyst Handout’ that specifically discussed Huntington’s exposure to Franklin Credit and the subprime loan market.

The participants claimed that Huntington breached its fiduciary duties to them when it merged with Sky Financial Group, Inc., increasing its risk of loss greatly by subjecting itself to $1.5 billion of subprime exposure through Sky Financial’s relationship with Franklin Credit. They alleged that Huntington stock became too risky to be considered a prudent investment and that Huntington failed to take any action to protect the assets of the plan from an “enormous, and entirely foreseeable,’ risk. Participants claimed Huntington’s actions caused over $100 million in losses to the plan.

The court disagreed, saying Huntington’s decision to merge was a business decision and is not conduct governed by ERISA. It also contended the merger did not constitute taking on massive subprime exposure. The opinion said the loans constituted just 3.9% of Huntington’ s total loans and leases and just 2.8% of Huntington’ s total assets.

The stock fund was one of up to 20 different investment choices offered by the plan, and the plan mandated that Huntington stock be offered to participants as an investment choice.

The opinion is here.