Second Circuit Affirms Dismissal of ERISA Claim Arising from Lehman Collapse

In an important decision, the Second Circuit affirmed dismissal of plaintiffs' class action claims asserting ERISA claims against the employee benefit plan committee and others at Lehman Bros.  See In re Lehman Bros. ERISA Litig. (http://www2.bloomberglaw.com/public/desktop/document/In_re_Lehman_Brothers_ERIS_Li_Docket_No_1104232_2d_Cir_Oct_14_201).  Plaintiffs alleged that the plan committee should have done more to protect investors in Lehman's Employee Stock Ownership Plan ("ESOP"), contending that the plan committee should have recognized the risk of Lehman Bros. stock in the months leading to Lehman's collapse and curtailed or limited the exposure of investing employees in the plan.  Unlike the Lehman securities litigation where large pay outs to plaintiffs were made, the ERISA case was dismissed at the pleading stage and that dismissal was affirmed by the Second Circuit, likely spelling the end of the ERISA litigation. The set up of the Lehman plans provided significant benefit to the defendants.  Lehman had several plans.  The plan at issue invested solely in Lehman stock, and employees were only allowed to place a specified percentage of their contributions in that plan.  Moreover, because that plan was designated solely to invest in Lehman stock, the committee had no discretion to make other investments.  Except for a limited exception to comply with ERISA fiduciary duties, the committee also had no discretion to simply not make investments.  Plaintiffs' case ultimately boiled down to two issues:  First, plaintiffs argued that the committee should have seen major risk factors at Lehman and investigated to uncover facts that the general public was not privy to.  Had they done so, plaintiffs contend, they would have recognized Lehman presented an enormous risk and pulled out of Lehman securities.  The problem with this argument, the Second Circuit recognized, that had the committee uncovered such non-public facts, the committee would have been precluded under federal securities laws from trading on such material, non-public information.  Accordingly, the Second Circuit properly concluded that failure to uncover and trade upon material, non-public information could not constitute a cognizable claim.  Second, plaintiffs asserted that the committee should have investigated Lehman's financial statements and public filings for misstatements before incorporating them in the plans disclosures.  The Second Circuit noted that to require the committee to separately scrutinize the company's public filings created an unreasonable administrative burden and in any event plaintiffs pled insufficient facts to show that the committee should have suspected material misstatements.

This case is quite favorable for plan committees.  It is, however, dependent in significant part on the favorable set up of the Lehman plan at issue and the committee's own lack of discretion under that plan.