Update on Stock Drop Litigation Arising Out of Subprime Crisis

p>Numerous ERISA stock drop suits filed in the wake of the recent financial crisis continue to work their way through the system. To date, no case has gone to trial, but several have resulted in notable decisions at the motion to dismiss and/or summary judgment stages – with victories for both plaintiffs and defendants. The following are two examples of recent decisions in subprime-related class action lawsuits.

Johnson v. Radian Group, Inc.

In Johnson v. Radian Group, Inc., No. 08-2007, 2010 WL 2136562 (E.D. Pa. May 26, 2010), the district court granted the defendants' motion to dismiss an amended putative class action complaint for breach of fiduciary duties. The Johnson complaint asserted claims against the plan's employer-sponsor, a credit enhancement company that offered mortgage insurance and other financial services (the "Sponsor"), and the plan's named fiduciaries, and was filed on behalf of all participants whose plan accounts held Sponsor stock. The plaintiff alleged that the defendants breached their fiduciary duties to prudently and loyally manage the plan and to not mislead plan participants about the risks associated with Sponsor stock in relation to the Sponsor's investment in Credit-Based Asset Servicing and Securitization LLC ("C-BASS"), an issuer, servicer and investor in credit-sensitive residential mortgage assets, in which the Sponsor held a 46% interest. The plaintiff further alleged that the Sponsor failed adequately to disclose that it faced a "monumental liquidity crisis" caused by the subprime mortgage crisis coupled with C-BASS's business model, and that as the subprime mortgage market deteriorated giving rise to a material increase in mortgage loan defaults to which C-BASS was vulnerable, the Sponsor failed to disclose this investment risk to participants. On these allegations, the plaintiff asserted that the Sponsor breached fiduciary duties owed to participants by imprudently continuing to offer Sponsor stock as an investment option and matching contributions.

In granting the motion to dismiss, the court applied the presumption of prudence first articulated by the Third Circuit in Moench v. Robertson, 62 F.3d 533 (3d Cir. 1995), which affords deference to fiduciary decisions regarding investment in employer stock. Under the Moench presumption, fiduciaries investing in company stock where the plan at issue encourages such investment are presumed to have acted consistently with ERISA fiduciary duties, and their...