Court grants two new cases (UPDATED)
on Dec 13, 2013 at 1:52 pm
UPDATED 3:44 p.m. This post has been expanded to provide details of the bank fraud case.
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The Supreme Court agreed on Friday to clarify when the managers of an employee stock ownership plan have a legal duty to stop investing in the company’s own stock when they know it has become risky. This was one of two cases granted; both are likely to be heard in March. The other new case will deal with the kind of proof prosecutors must offer to get a conviction for bank fraud under federal law.
The stock ownership case is Fifth Third Bancorp v. Dudenhoeffer — a case that the U.S. Solicitor General had advised the Justices to review. The bank fraud case is Loughrin v. United States.
The Court limited its review of the Bancorp case to the first question. Although the Solicitor General had urged the Court to rewrite the question, the Court did not do so, and instead simply accepted the question as raised by the financial institution.
Here is the question: “Whether the Sixth Circuit erred by holding that respondents were not required to plausibly allege in their complaint that the fiduciaries of an employee stock ownership plan abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable, as required by the Employee Retirement Income Security Act of 1974 . . . and every other circuit to address the issue.”
The Court chose to bypass a second question about the effect on the fiduciary duty of statements that a financial institution had made in filings with the Securities and Exchange Commission. The Solicitor General, whose views the Court had sought last March, said that there was no conflict among lower courts on that question.
That case involves a bank holding company based in Cincinnati. One of its subsidiaries is the Fifth Third Bank. The parent company has an employee profit-sharing plan, defining specific contribution options for the company’s employees. The parent company serves as plan trustee.
Employees make voluntary contributions to the plan from their salaries, and direct the purchase of investments for their individual account from options that the trustee has selected. In the time period at issue in the case, the trustee offered the option to invest in the company’s own stock, in seventeen mutual funds, and in two collective funds.
The company matches one hundred percent of the first four percent of a worker’s compensation contributed as part of the worker’s pay package. Those matching funds are put in Fifth Third stock, but can be transferred to other investments. The plan is not required to invest solely in that stock.
In September 2008, two former employees of the bank subsidiary. representing a class of employees taking part in the plan, sued various officials for their investment decisions in the period before July 10, 2007.
The lawsuit contended that, at that time, the company switched from being a conservative bank lender to a lender in the subprime market — a far more risky venture. The lawsuit contended that the president and CEO and other high officials knew that the switch was risky, because of a high potential for defaults, and yet failed to do anything about the continued investment in company stock.
Between July 2007 and September 2009, the company’ stock price plummeted, causing the employee plan to lose tens of millions of dollars on its investments. The investments, the workers’ lawsuit argued, continued long after it was prudent to maintain them.
A federal district judge dismissed the lawsuit, finding that the company was entitled to a presumption that its continued investment in company stock was reasonable. The Sixth Circuit revived the lawsuit, finding that it could proceed on the claim that the officers had violated their fiduciary duty and caused the losses to the plan by failing to divest the plan of stock in the company and failing to remove that as an investment option for the employees. The Sixth Circuit ruled that the presumption is not to be applied at the pleading stage of such a lawsuit.
In asking the Supreme Court to review the case, Fifth Third Bancorp asked the Supreme Court to clarify the kind of proof that is required to overcome the presumption that such an investment was a reasonable one. The Sixth Circuit, the petition contended, was wrong in failing to require proof that continued investment in company stock was not prudent.
The newly granted case on federal bank fraud involves a man, Kevin Loughrin, who was sentenced to three years in prison for engaging in a scheme to steal bank checks from mailboxes, alter them, use the checks to buy items at retail stores like Target and Wal-Mart, and then return the merchandise for cash.
Prosecutors charged him with violations of two provisions of bank fraud law: defrauding a financial institution and obtaining money from financial institutions by fraud. Both were apparently based on evidence that the checks were drawn on Bank of America and Wells-Fargo Bank and on three credit unions.
Loughrin’s lawyers tried to have the jury told that, for him to be convicted on either count, there had to be proof that he intended to defraud a bank or other financial institution. The judge agreed that there had to be proof of intent aimed at a financial institution, for the charge to go ahead on defrauding the banks and credit unions, but that proof of intent to defraud a bank was not necessary for prosecution under the second provision.
Loughrin went to trial only on the charge under the second provision, and was found guilty on that charge, and on other criminal charges. He was sentenced to thirty-six months — a sentence that has now been completed, but his case will go on with Supreme Court review now granted.
In asking the Court to review his conviction, Loughrin’s lawyers said that federal circuits are divided on the kind of proof needed to support a conviction of federal bank fraud — that there must be evidence of intent to defraud a bank or other financial institution, as well as evidence that the conduct caused a financial loss to such an institution.
The Tenth Circuit rejected his challenge. Under the bank fraud provision on which he was convicted, the court of appeals ruled, it was enough that Loughrin had sought to defraud someone else — the retail stores — but there was no need for prosecutors to offer evidence of intent to defraud a bank directly.
The Court did not say when the cases would be heard, but there are still open slots in the March sitting, so they probably will be heard then.
(Disclosure: The law firm of Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the petitioner in Loughrin, but the author of this post operates independently of the law firm.)
