SCOTUS Won't Hear Reverse Stock Drop Case

Monday marked the end of the U.S. Supreme Court’s 2014-15 term, revealing the extensive list of cases the top court will hear next term—and those it won’t.

Among those that didn’t make the cut is RJR Pension Investment Committee v. Tatum et. al, an important Employee Retirement Income Security Act (ERISA) case. The case hinged on what to do when a fiduciary has breached the duty of prudence by failing to put in place a prudent process to evaluate an investment decision—in this case, dropping an investment from the plan without thoroughly investigating whether it was prudent to do so. Is it reasonable for the defendant to argue that the result would have been the same even with a prudent process in place and thus avoid liability?

The 4th Circuit concluded that the defendants failed to have a prudent process because they failed to consider the best interests of the participants. In the face of a failure of procedural prudence, how can the fiduciary prove it still made the right substantive choice?

The defendants wanted a standard that would have allowed them to put on evidence that a prudent fiduciary could have made the same decision. The plaintiffs, and ultimately the 4th Circuit, supported a standard where the defendant must show that a prudent fiduciary would have made the same decision. Hence, the Could Have vs. Would Have issue.

In declining to hear the case, the Supreme Court apparently took into consideration a brief from the Solicitor General and the Department of Labor that argued the 4th Circuit got the decision right and that the high court shouldn’t hear it.