Kirschbaum v. Reliant Energy, Inc.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

April 25, 2008

No. 06-20157

Charles R. Fulbruge III

Clerk

BRAD KIRSCHBAUM, on behalf of himself and all others similarly situated

Plaintiff - Appellant

RAYMOND ROYER

Appellant

v.

RELIANT ENERGY, INC., ET AL.,

Defendants

RELIANT ENERGY, INC.; T. MILTON HONEA; MILTON CARROLL;

JOHN T. CATER; RICHARD E. BALZHISER; JAMES A. BAKER, III;

BENEFITS COMMITTEE OF RELIANT ENERGY; DAVID M.

MCCLANAHAN; MARY P. RICCIARDELLO; GARY WHITLOCK; LEE

HOGAN; WATERS S. DAVIS IV; STEVE SHAEFFER; TOM STANDISH

Defendants - Appellees

Appeal from the United States District Court

for the Southern District of Texas

USDC No. 4:02-CV-2051

Before JONES, Chief Judge, and STEWART and CLEMENT, Circuit Judges.

EDITH H. JONES, Chief Judge:

Brad Kirschbaum (“Kirschbaum”), an employee of Reliant Energy, Inc.

(“REI”) and a participant in the Reliant Energy Savings Plan (“Plan”), brought

No. 06-20157

this ERISA class action against REI and the REI Benefits Committee

(collectively, “REI defendants”) representing current and former plan

participants on whose behalf the Plan purchased or held shares of the Reliant

Energy Common Stock Fund from August 2, 1999 to May 16, 2002. The district

court certified the class but granted the REI defendants’ motion for summary

judgment on all claims. We AFFIRM. Even if the REI defendants had a

fiduciary duty to liquidate the Common Stock Fund and cease purchasing REI

shares, notwithstanding the Plan’s express contrary requirements, Kirschbaum

falls short of bearing his heavy burden to rebut the presumption that the

defendants satisfied their legal duties.

BACKGROUND

The relevant version of the Plan was adopted on April 1, 1999. Pursuant

to a Trust Agreement adopted simultaneously and incorporated into the Plan,

all Plan assets were held in trust by the Northern Trust Company (“Trustee”).1

The Trustee, REI, and the Benefits Committee were all named in the Plan as

fiduciaries for specific purposes. The Plan is an Eligible Individual Account Plan

(“EIAP”) under ERISA. 29 U.S.C. § 1107(d)(3). Consequently, participants could

invest in a number of funds, ranging from riskier, growth-oriented funds to more

stable mutual funds. One investment option under the plan was the REI

Common Stock Fund (“Common Stock Fund”). With the exception of a small

cash component for liquidity purposes, the Common Stock Fund was invested

entirely in REI common stock.

Participants were permitted to invest up to sixteen percent of their

compensation in the Plan. REI agreed to match up to the first six percent of an

employee’s contribution with shares of REI common stock allocated to the

employee’s Common Stock Fund account. Matching contributions were to

1

The Northern Trust Company was not named as a party to this action.

2

No. 06-20157

remain in the Common Stock Fund for all employees who had not yet attained

the age of fifty-five years with ten years of service with the company. After

reaching that benchmark, employees could divest a portion of their holdings in

the Common Stock Fund.2 The participants’ holdings of REI stock and the

Common Stock Fund assets thus arose from two sources: employees’ voluntary

purchases of the Common Stock Fund as a Plan option, and REI’s matching

contributions in the form of REI common stock.

The value of the Common Stock Fund fell when the price per share of REI

common stock dropped about forty percent, from $24.60 on May 9, 2002, to

$14.50 a week later. The drop was occasioned by the disclosure that some REI

employees had engaged in “round-trip” energy trades between 1999 and 2001.

In these sham transactions, REI and another energy trader would “sell” identical

quantities of power or natural gas to each other simultaneously, for the same

price. Although no gas, power or money ever changed hands, the “round-trip”

trades were booked as transactions to inflate REI’s trading volume. The

disclosure occurred in stages. On May 10, 2002, REI withdrew a planned $500

million debt offering in light of the possibility that “round-trip” trading had

occurred. On May 13, REI publicly confirmed that such trades had inflated

revenues by about ten percent over a three year period. On May 16, senior

executives implicated in the “round-trip” trading resigned.

In his three-count Fourth Amended Complaint, Kirschbaum alleges that

the REI defendants are responsible under ERISA to make good the losses the

Plan sustained on REI common stock. Counts I and II both allege the REI

defendants should have known, based on information available to them, that

REI stock was not a prudent investment. Count I focuses on information

2

This restriction was removed effective May 6, 2002 (shortly before the adverse

disclosures that are the center of this lawsuit), and employees were allowed to direct their REI

matching contributions to any fund in the Plan.

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No. 06-20157

available to the public, while Count II focuses on non-public information (the

“round-trip” trades). Both counts assert that because REI common stock became

an imprudent investment, the REI defendants had a fiduciary duty to (a) halt

all Plan purchases of REI common stock, (b) sell the Plan’s holdings in REI

common stock, and (c) terminate the Common Stock Fund. Count III alleges

that the REI defendants breached their fiduciary duties by negligently

misrepresenting REI’s financial condition to Plan participants in documents that

incorporated the company’s SEC filings.

After certifying the class, the district court granted summary judgment to

the REI defendants on all three Counts. On Counts I and II, the court reasoned

that the REI defendants could be fiduciaries only to the extent they exercised

discretionary control over the Plan. Since the Plan afforded them no discretion

to terminate the fund or halt investments in it, the district court concluded the

REI defendants had no fiduciary duty to do so. As to Count III, the district court

held that the alleged misrepresentations were made by REI in its corporate

capacity, not its fiduciary capacity, and were not actionable under ERISA.

Kirschbaum has appealed.

DISCUSSION

We review a grant of summary judgment de novo, using the same

standards applied by the district court. Condrey v. SunTrust Bank of Georgia,

429 F.3d 556, 562 (5th Cir. 2005). Summary judgment is proper when the

movant can demonstrate that there is no genuine issue of material fact and that

he is entitled to judgment as a matter of law. Willis v. Coca Cola Enterprises,

Inc., 445 F.3d 413, 416 (5th Cir. 2006). On review of a grant of summary

judgment, all facts and inferences must be construed in the light most favorable

to the non-movant. Murray v. Earle, 405 F.3d 278, 284 (5th Cir. 2005).

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No. 06-20157

A brief sketch of the ERISA principles underlying the operation of the REI

Savings Plan is in order. ERISA provides that an employer who sponsors an

employee plan may also serve as a fiduciary of that plan. The statute imposes

on the employer-fiduciary and on those who manage the plan strict statutory

duties, including loyalty, prudence, and diversification. See 29 U.S.C.

§ 1104(a)(1). Under the common law of trusts, an employer could not invest plan

assets in its own stock without creating an impermissible conflict of interest.

See Pegram v. Herdrich, 530 U.S. 211, 225, 120 S. Ct. 2143, 2152 (2000). But

Congress, for well-documented policy reasons, has encouraged plan ownership

of employer stock and has exempted such investments from certain of ERISA’s

fiduciary requirements. See, e.g., Donovan v. Cunningham, 716 F.2d 1455,

1466-67 (5th Cir. 1983). In particular, for an EIAP like that before us, there is

no “cap” on the percentage of permissible investments in the employer’s own

securities. Compare 29 U.S.C. § 1107(b)(1) with § 1107(a)(3)(A). Further, an

EIAP fiduciary’s decision to purchase or hold the employer’s securities is exempt

from the duty to diversify and the related duty of prudence insofar as it concerns

asset diversification. 29 U.S.C. § 1104(a)(2). The fiduciary remains bound,

however, by its other statutory fiduciary duties. See, e.g., Martin v. Feilen, 965

F.2d 660, 665, 670 (8th Cir. 1992). With these general principles in mind, we

turn to the discussion of each count.

Count I - Publicly Available Information

As it happens, the general statutory principles are sufficient to affirm the

district court’s grant of summary judgment on Count I. Kirschbaum here avers

that the REI defendants should have concluded, based on publicly available

information, that REI common stock was an imprudent investment. Count I

alleges that the transformation of REI from a “traditional power utility

company” into a “speculative energy trading operation” changed REI common

5

No. 06-20157

stock from a “classic long term conservative investment” to a “risky and volatile

one.” The company’s change in business strategy, Kirschbaum contends, made

it imprudent for the REI defendants to continue investing “such massive

amounts or such a large percentage of [the Plan’s] assets” in REI common stock.

By its terms, Count I asserts that the Plan became too heavily weighted

in high-risk REI stock when the company dove into energy trading. Count I

faults the REI defendants for failing to maintain an appropriate “portfolio mix,”

and for not evaluating the risk and reward of the Common Stock Fund in the

context of all the Plan’s investments. Kirschbaum does not claim in Count I that

REI common stock was an imprudent investment per se, but rather that it was

too risky for the Plan to hold in large quantities. Despite Kirschbaum’s efforts

on appeal to recast this as a claim of imprudence, Count I clearly states a failure

to diversify. See Fourth Amended Complaint, ¶ 6 (faulting Defendants for, inter

alia, “failing to diversify the assets of the Plan”); see also 29 U.S.C.

§ 1104(a)(1)(C) (imposing a duty of the diversification “so as to minimize the risk

of large losses”).

The REI defendants correctly observe that ERISA exempts an EIAP from

the duty to diversify with regard to the purchase or holding of company stock.

29 U.S.C. § 1104(a)(2). The construction of this statutory exemption begins with

the language of the statute. Hughes Aircraft Company v. Jacobson, 525 U.S.

432, 438, 119 S. Ct. 755, 760 (1999). “And where the statutory language

provides a clear answer, it ends there as well.” Id. The statute states that “the

diversification requirement . . . and the prudence requirement (only to the extent

that it requires diversification) . . . [are] not violated by acquisition or holding of

qualifying employer real property or qualifying employer securities [in an

EIAP].” § 1104(a)(2). Despite the risks inherent in concentrating plan assets in

any one security, the express statutory exemption of the diversification duty in

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No. 06-20157

relation to an employer’s stock holdings precludes the recovery Kirschbaum

seeks under Count I.

Count II-Non-public Information

Unlike Count I, Count II states a claim for more than failure to diversify.

Count II alleges it was imprudent for the Plan to hold even one share of REI

stock during the period when “round-trip” trading had artificially inflated its

price. The diversification exemption stated in § 1104(a)(2) does not exempt EIAP

fiduciaries from liability for “other forms of imprudence.” See, e.g., In re

McKesson HBOC, Inc. ERISA Lit., 391 F. Supp. 2d 812, 825 (N.D. Cal. 2005).

Count II asserts that in light of this inflation, the REI defendants had a

fiduciary duty to halt further purchases of REI common stock, sell the Plan’s

holdings in the Common Stock Fund, and terminate the Fund. Three significant

issues are presented by these allegations. First, do the terms of the REI Plan

mandate that company common stock be an available investment option for

participants, and that it must be the exclusive vehicle for company matching

contributions? Second, what, if any, fiduciary duties pertain to REI or the

Benefits Committee with respect to investments in the REI Common Stock

Fund? Third, if such duties exist, by what standard should a court review the

alleged breaches of duties?

1. Plan Requirements Concerning REI Stock

The Plan documents, considered as a whole, compel that the Common

Stock Fund be available as an investment option for employee-participants;

require that REI common stock be the basis for the company’s matching

contributions; and authorize investment of contributions and dividends to the

Fund solely in REI common stock. These mandatory provisions are embedded

in the Plan and could not be terminated or modified absent a Plan amendment.

Section 8.1 of the Plan presumes the existence of the Common Stock Fund and

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No. 06-20157

requires the investment of all REI matching contributions into the Fund.3

Likewise, Attachment A, fully incorporated into the Plan by Section 8.1, reflects

that the Benefits Committee had no authority to delete the Common Stock Fund

as an investment option. Further, the Trust Agreement, incorporated into the

Plan by Section 9.1, states that the Plan’s investment funds “shall consist of the

Reliant Energy Common Stock Fund and other such Investment Funds selected

and approved by the Committee from time to time.” Trust Agreement, Section

4.1 (emphasis added). Altering any of these provisions would have required

REI, acting in its capacity as a settlor, to amend the Plan.

It is clear that the Plan required the Fund to be invested almost

exclusively in REI common stock, preserving only a minimal cash component to

maintain liquidity for transactions in the stock. Attachment A specifies that the

Common Stock Fund is to be “primarily invested and reinvested” in REI common

stock. Kirschbaum asserts that this language would have permitted the REI

defendants to increase the cash component of the Fund up to forty-nine percent

of its total holdings. On the contrary, Section 4.2(a) of the Trust Agreement

directs the Trustee to invest all contributions to the Fund in REI common stock

“as soon as practicable.” The remainder of that section, as well as Section 6.7,

require the Trustee to invest the Common Stock Fund exclusively in REI stock,

with an exception of a small, short-term cash component “as necessary to make

any distribution or payment.” The Statement of Investment Policy, albeit not

a constitutive Plan document, reflects these detailed restrictions when it

provides that no more than .25 percent to 1.25 percent of the Fund’s total value

may be held in cash. A cash percentage greater than that necessary for minimal

liquidity would have contravened Plan requirements.

3

With the limited exception of employees who had attained the age of fifty-five years

and ten years of service with the company — those employees were permitted under the Plan

to direct their matching contributions to other funds. See supra.

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No. 06-20157

Based on all of these provisions, neither REI nor the Benefits Committee

were given express discretion to halt the purchase of REI common stock or invest

Fund assets in other holdings.

2. Who is a Fiduciary?

If Plan “fiduciaries” would violate the Plan by deviating from the

mandatory retention and acquisition of REI stock in the Common Stock Fund,

the district court reasoned, they had no discretion, and hence no fiduciary duty,

to deviate. Kirschbaum, supported by the Department of Labor as an Amicus,

strenuously disagrees that Plan managers can, by the expedient of applying

mandatory Plan provisions, divest themselves of their prudential fiduciary duty

not to purchase company stock that they know is artificially inflated. These

circumstances raise subtle questions concerning the scope of fiduciary

responsibility for employee savings plans that feature company stock as an

investment option or a matching contribution.4

The Supreme Court has noted that the first question pertinent to

establishing ERISA liability is whether the defendant is in fact a fiduciary.

Pegram, 530 U.S. at 226, 120 S. Ct. at 2152-53. ERISA plan managers bear

fiduciary responsibility correlative with the scope of their duties. An ERISA

fiduciary for one purpose is not necessarily a fiduciary for other purposes.

Bannistor v. Ullman, 287 F.3d 394, 401 (5th Cir. 2002); see also Cotton v. Mass.

Mut. Life Company, 402 F.3d 1267, 1277 (11th Cir. 2005) (fiduciary status under

ERISA is not an “all-or-nothing” concept). Rather, a person is a fiduciary only

“to the extent” he has or exercises specified authority, discretion, or control over

a plan or its assets:

[A] person is a fiduciary with respect to a plan to the extent (i) he

exercises any discretionary authority or discretionary control

4

This court’s decision in Langbecker v. Electronic Data Systems Corp. touched upon but

did not resolve these questions. 476 F.3d 299, 308 n.19, 312 n.24 (5th Cir. 2007).

9

No. 06-20157

respecting management of such plan or exercises any authority or

control respecting management or disposition of its assets . . . or

(iii) he has any discretionary authority or discretionary

responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A). Fiduciary duties may thus arise either from the terms

of the governing plan or from acts and practices in carrying it out. Id.; see also

Bannistor, 287 F.3d at 401. Excluded from fiduciary responsibilities, however,

are the decisions of a plan sponsor to modify, amend or terminate the plan; such

decisions are those of a trust settlor, not a fiduciary. Hughes Aircraft, 525 U.S.

at 444, 119 S. Ct. at 763.

REI begins its defense with the contention that investments in the REI

Common Stock Fund were “hard wired” into the Plan, and that it, as settlor,

cannot be liable in damages for what would amount to a compelled amendment,

termination, or modification of the Plan. In interpreting 29 U.S.C. § 1002(21)(A),

the Supreme Court emphasized that employers or other plan sponsors “are

generally free under ERISA, for any reason at any time, to adopt, modify, or

terminate welfare plans.” Lockheed Corporation v. Spink, 517 U.S. 882, 890,

116 S. Ct. 1783, 1789 (1996) (internal quotations omitted). This holding was

extended to employee retirement plans in Hughes Aircraft. 525 U.S. at 444, 119

S. Ct. at 763. The Court emphasized that the term fiduciary with respect to a

plan encompasses “management” and “administration” of the plan, but does not

include plan design. Id. Thus, when employers undertake actions to adopt,

modify or terminate a plan, “they do not act as fiduciaries but are analogous to

the settlors of the trust.” Spink, 517 U.S. at 890, 116 S. Ct. at 1789 (internal

citations omitted). Viewed solely from this perspective, Kirschbaum’s insistence

that REI had an obligation to terminate the Common Stock Fund, cease

purchasing REI stock for the Fund, and liquidate the Fund’s investment in REI

common stock seeks no less than systemic modifications of the Plan itself.

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No. 06-20157

Because the Plan’s design was allotted to REI, as settlor, the company had no

fiduciary duty concerning such terms.

Kirschbaum, for his part, responds that the Court has distinguished

between “the composition or design of the Plan itself” and “the employer’s

fiduciary duties which consist of such actions as the administration of the Plan’s

assets.” See Hughes Aircraft, 525 U.S. at 444, 119 S. Ct. at 763. Moreover, REI

was involved in the Plan administration and asset management because,

pursuant to the Plan, it was both a named fiduciary and directed the Trustee

and because it apparently played a part in promulgating a Statement of

Investment Policy,5 which detailed how the Plan’s investments would be

managed. We may easily reject the first two grounds for REI’s alleged fiduciary

status. The terms of the Plan, which named REI as fiduciary and enabled it to

direct the Trustee, also specifically limited REI’s authority.6 REI could be a

fiduciary “to the extent” of its carrying out the activities referenced in the Plan,

but its fiduciary duty status cannot be expanded beyond them.

Interpreting the Statement of Investment Policy, however, poses a closer

question. This is a document formally adopted by the Benefits Committee for

the purpose of establishing the policy for management of Plan assets. In its

preamble, the policy states:

This Statement may be modified, in whole or in part, by Reliant

Energy at any point in time. Reliant Energy may provide

supplemental guidelines for each investment option of the Plan.

5

The REI defendants submit that the Policy was promulgated by the Benefits

Committee, but the Policy reads as a statement by REI itself, e.g., “This statement may be

modified, in whole or in part, by Reliant Energy at any point in time.” At the very least, there

is a fact issue as to this question.

6

Plan, §§ 1.26, 2.13.

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No. 06-20157

The Statement goes on to declare that the Benefits Committee “has

responsibility and authority for the operation of the Plan, including

administration and investment of the Plan’s assets.” Further, “the Benefits

Committee will serve as the ‘named fiduciary’ of the Plan under ERISA with

respect to the management and investment of the Plan’s assets.” The Policy

then briefly outlines the investment objectives of the Plan; the funding

requirements; the target allocation of long-term assets; monitoring; and

performance guidelines.

On one hand, the Statement expressly complies with the provision of the

Plan making the REI Common Stock Fund a mandatory feature and compelling

as close to one hundred percent of its assets as possible to be invested in REI

stock. One could also read REI’s above-quoted modification authority simply to

reflect its position as the Plan’s settlor. This Statement is not, however, a Plan

document. That it reserves to REI the right to provide “supplemental guidelines

for each investment option” might alternatively be construed as going beyond

plan design and into discretionary asset management. Notwithstanding the

arguably reserved power in the Statement, when REI eliminated the restrictions

on age and tenure that limited employees’ rights to sell company matching stock

that had been allocated to their plans, it amended the Plan.7 The mandatory

plan provision took precedence, in practice, over the vague language of the

Statement. In sum, there seems to be a factual issue whether REI had

discretionary authority in the management of the Plan or exercised any

authority respecting management or disposition of its assets. See 29 U.S.C.

§ 1002(21)(A)(i). Perhaps the reservation of such authority could give rise to

fiduciary duties pertinent to the Common Stock Fund.

7

See note 2, supra.

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No. 06-20157

The Benefits Committee, by contrast, is explicitly made a fiduciary in its

discretionary authority over Plan management and the exercise of actual

asset-management activities. REI contends that the Benefits Committee had no

fiduciary duties with respect to acquiring and holding REI stock beyond the duty

to comply with the Plan’s mandatory guidelines. REI further contends, not

without reason, that if the decisions to cease acquiring REI common stock,

terminate the fund, and liquidate the REI common stock holdings amount to

settlor’s decisions, then the Benefits Committee should not have fiduciary duties

inconsistent with or broader than those of the settlor.

Because the Plan’s requirements to invest in REI stock are mandatory and

were treated as such by REI and the Benefits Committee, we agree with the

district court that no fiduciary duties are inherent in the Plan other than to

follow its terms. Whether the Statement of Investment Policy gave rise to

implied authority by REI, and whether REI and the Benefits Committee were

subject to broader fiduciary duties under the supervening compulsion of ERISA

are close questions that we need not definitively resolve in this opinion.

3. Fiduciary Duty to Override?

Kirschbaum asserts that the REI defendants not only had the authority,

but on these facts, a fiduciary duty to cease the Fund’s continued investment in

REI common stock. Bluntly, they had a fiduciary duty to disobey the plain terms

of the Plan—and Congress’s sanction for company stock purchase plans—in

order to comply with ERISA’s equal duties to invest prudently and not to violate

the statute. See 29 U.S.C. §§ 1104(a)(1) and (a)(1)(D). See also Laborers

National Pension Fund v. N. Trust Quantitative Advisors, Inc., 173 F.3d 313, 322

(5th Cir. 1999) (“A fiduciary may not discharge his duties in a manner

inconsistent with ERISA provisions.”).

Citing these provisions, is, however, far easier than propounding a test for

their violation. One hypothetical frequently cited by both parties is a benefits

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No. 06-20157

plan written to require investment in lottery tickets. Such an anomalous plan

would violate ERISA, and a fiduciary would be bound to deviate from the plan’s

requirements.

But shares of REI’s common stock are neither lottery tickets nor an

investment that is intrinsically and in all cases imprudent. Kirschbaum

contends that the stock became an imprudent investment when the defendants

obtained adverse information about the “round-trip trading”. Far from being

clear-cut, this claim requires a balance to be struck among competing

congressional purposes. See Varity Corp. v. Howe, 516 U.S. 489, 497, 116 S. Ct.

1065, 1070 (1996). Generally, Congress’s intent in ERISA is to balance the

protection of employee benefits against creating a system “so complex that

administrative costs, or litigation expenses, unduly discourage employers from

offering welfare benefit plans in the first place.” Id. Moreover, in this particular

context Congress has expressed a strong preference for plan investment in the

employer’s stock, although this preference may be in tension with ERISA’s

general fiduciary duties. See, e.g., Langbecker v. Elec. Data Sys. Corp, 476 F.3d

299, 309 n.19 (5th Cir. 2007).

The question is how to define when the duty of prudence might require a

fiduciary to disobey the clear requirements of an EIAP and halt the purchase of

employer stock. In this, as in all cases, the test of prudence is one of conduct, not

results. Donovan, 716 F.2d at 1467. The prudence test asks whether the

fiduciary selected investments “with the care, skill, prudence, and diligence

under the circumstances then prevailing that a prudent man acting in a like

capacity and familiar with such matters would use in the conduct of an

enterprise of a like character and with like aims.” 29 U.S.C. § 1104(a)(1)(B).

The focus of the inquiry is “how the fiduciary acted,” not “whether his

investments succeeded or failed.” Donovan, 716 F.2d at 1467 (internal citation

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No. 06-20157

omitted). The prudence requirement is a flexible standard, and a fiduciary’s

conduct must be evaluated “in light of the character and aims of the particular

type of plan he serves.” Id. (internal quotation omitted). Relevant here are the

“long-term horizon of retirement investing,” as well as the “favored status

Congress has granted to employee stock investments in their own companies.”

Langbecker, 476 F.3d at 308; see also Varity, 516 U.S. at 497, 116 S. Ct. at 1070

(courts must interpret ERISA’s fiduciary duties in a manner consistent with “the

special nature and purpose of employee benefit plans.” (internal citation

omitted)).

Attempting to strike the proper balance, the Third Circuit adopted an

abuse of discretion standard of review for a fiduciary of an Employee Stock

Option Plan (“ESOP”) that is designed to invest primarily in an employer’s stock.

Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995) (concerning ESOPs); Edgar

v. Avaya, Inc., 503 F.3d 340, 347 (3d Cir. 2007) (extending Moench’s reasoning

to EIAPs). The Moench court was unwilling to subject these fiduciaries to the

“strict scrutiny” that applies under conventional trust law to a trustee who is

simply authorized, but not encouraged or required, to make a particular

investment. Doing so, it noted, would eviscerate the statutory preference for

ESOPs. Moench, 62 F.3d at 570. Rather, Moench concluded that a fiduciary of

this sort of plan is entitled to a presumption that his decision to invest in the

employer’s securities was prudent. A plaintiff may rebut the presumption only

by showing that “owing to circumstances not known to the settlor and not

anticipated by him [the making of such investment] would defeat or

substantially impair the accomplishment of the purposes of the trust.” Id. at 571

(quoting RESTATEMENT (SECOND) OF TRUSTS, § 227 cmt. g). In Moench, there was

a triable question on this point because the facts showed a “continual and

precipitous” drop in stock price, the fiduciaries’ knowledge of the company’s

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impending collapse, and their internal conflicts over the proper course of action

for the ESOP.

Both parties initially disagreed that Moench should be the governing

authority for this case. Kirschbaum contends that the court’s presumption in

favor of continued company stock investment should not apply at all where

allegations, like his, relate to the fiduciaries’ knowing purchases of stock at an

artificially inflated price. Moench, Kirschbaum argues, concerned a “mere”

failure to diversify. We reject this limitation. The distinction between these

allegations is not only often elusive, but hardly justified by Moench itself. The

opinion dwelt at length on the Benefits Committee’s internal discussions based

on their insider knowledge and fears about the company’s dire financial

prospects. More to the point, there is no principled difference between how a

fiduciary should respond to “artificial inflation” of the stock price as opposed to

other sorts of negative insider information. Consequently, the standard of

judicial review applicable to such decisions should not generally turn on pleading

artifices. The Moench presumption logically applies to any allegations of

fiduciary duty breach for failure to divest an EIAP or ESOP of company stock.8

For their part, the REI defendants resist application of the Moench

presumption insofar as it expressly applies only where a plan strongly favors but

does not compel investment in company stock.9 The REI Savings Plan, as noted,

affords no discretion to enter into other investments. This is a potent objection,

8

Moench, of course, would not apply to allegations like those in Count I, above, which

fairly state only a violation of the fiduciaries’ duty to diversify, because ERISA specifically

exempts fiduciaries from that duty relating to a plan authorizing or requiring purchases of

company stock.

9

Unlike the REI Savings Plan, the plan in Moench was only “biased” toward employer

stock. The court concluded the plan gave the fiduciaries some measure of discretion to invest

in less-risky holdings as necessary. Moench, 62 F.3d at 567. Accordingly, the court limited its

ruling to cases where a fiduciary “is not absolutely required to invest in employer securities but

is more than simply permitted to make such investments.” Id. at 571.

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for Moench recognized that a greater degree of deference, and hence a lesser

degree of judicial scrutiny, would be appropriate to such mandatory plans. Id.

(citing RESTATEMENT (THIRD) OF TRUSTS § 228) (noting “the trustee must comply”

in such a situation unless compliance would be impossible or illegal).10 While

Moench did not resolve the issue, the court clearly implies that a plan

participant would bear an even heavier burden of showing a fiduciary duty

breach where the plan utterly compelled investment in company stock.11 Like

Moench, however, we decline to speculate on the scope of a fiduciary duty to

override clear and unequivocal plan terms. In this case, even if a factfinder

concluded that the REI defendants are fiduciaries for this purpose and had some

discretion to override the Plan, Kirschbaum’s allegations fail to rebut the

Moench presumption of prudence.

Moench concluded it might have been imprudent for the fiduciaries to

continue investing in company stock that steadily lost ninety-eight percent of

its value over two years, falling from $18.25 per share to $0.25 per share. It was

also relevant that the fiduciaries were aware of the company’s impending

collapse, and the employer ultimately filed for Chapter 11 bankruptcy protection.

Moench, 62 F.3d at 557. In contrast to the company-wide failure evidenced in

Moench, here Kirschbaum has alleged round-trip trading by a few employees

10

See also Edgar, 503 F.3d at 346 n.10 (noting that Moench “explicitly left open the

issue of whether there could still be a breach of fiduciary duty” in a case where the plan

absolutely required a particular investment). Edgar did not reach this question either. Id. at

347 n.11.

11

In most comparable circuit court opinions, the benefits plan at issue left the fiduciary

some discretion to take the action plaintiffs were seeking. See Edgar, 503 F.3d at 347 n.11;

DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 416-17 (4th Cir. 2007); Moench, 62 F.3d at 571.

One exception is the Ninth Circuit’s decision in Wright v. Oregon Metallurgical Corp., where

the fiduciaries had no discretion to take the requested action. 360 F.3d 1090, 1097 (9th Cir.

2004) (“Selling the stock in either scenario would have been in violation of the Plan’s express

terms.”) The Wright court did not find it necessary to proceed beyond Moench, concluding that

even under the Moench standard plaintiff could not prevail. Id. at 1097-98.

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No. 06-20157

and an initial drop in REI’s stock value of approximately forty percent. There

is no indication that REI’s viability as a going concern was ever threatened, nor

that REI’s stock was in danger of becoming essentially worthless. This is a far

cry from the downward spiral in Moench, and much less grave than facts other

courts routinely conclude are insufficient to rebut the Moench presumption.12

As the Ninth Circuit has explained, “[m]ere stock fluctuations, even those that

trend downward significantly, are insufficient to establish the requisite

imprudence to rebut the Moench presumption.” Wright, 360 F.3d at 1099. If

Kirschbaum cannot carry his burden under Moench, he cannot meet any higher

standard appropriate where an EIAP absolutely requires investment in

employer stock.

We do not hold that the Moench presumption applies only in the case of

investments in stock of a company that is about to collapse. The presumption,

however, is a substantial shield. As Moench states, it may only be rebutted if

unforeseen circumstances would defeat or substantially impair the

accomplishment of the trust’s purposes. Moench, 62 F.3d at 571. One cannot

say that whenever plan fiduciaries are aware of circumstances that may impair

the value of company stock, they have a fiduciary duty to depart from ESOP or

EIAP plan provisions. Instead, there ought to be persuasive and analytically

rigorous facts demonstrating that reasonable fiduciaries would have considered

themselves bound to divest. Less than rigorous application of the Moench

presumption threatens its essential purpose. A fiduciary cannot be placed in the

12

Wright, 360 F.3d at 1096, 1098 (ill-fated merger, reverse stock split, and seventy-five

percent drop in stock price were insufficient to rebut Moench presumption of prudence); Kuper

v. Iovenko, 66 F.3d 1447, 1451, 1459 (6th Cir. 1995) (company-wide financial woes and eighty

percent drop in stock price insufficient); In re McKesson, 391 F. Supp. 2d at 830-33 (declining

to apply Moench, but concluding widespread accounting violations, restated revenues for three

years, and seventy-five percent drop in stock price were insufficient to rebut presumption in

any event).

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No. 06-20157

untenable position of having to predict the future of the company stock’s

performance. In such a case, he could be sued for not selling if he adhered to the

plan, but also sued for deviating from the plan if the stock rebounded.13

A further objection to tempering the Moench presumption is that, in some

cases, requiring a fiduciary to override the terms of a company stock purchase

plan could suggest the necessity of trading on insider information. Such a course

is prohibited by the securities laws. Fiduciaries may not trade for the benefit of

plan participants based on material information to which the general

shareholding public has been denied access. Moreover, from a practical

standpoint, compelling fiduciaries to sell off a plan’s holdings of company stock

may bring about precisely the result plaintiffs seek to avoid: a drop in the stock

price. These objections, as well as the lack of clear textual support in ERISA for

creating a presumption, have led some courts to reject even the limited

possibility of liability provided for by Moench.14 We do not do so. Instead, we

find in these objections a reenforcement of the conclusion that the Moench

presumption cannot be lightly overcome.

Because Kirschbaum failed to rebut the Moench presumption, summary

judgment on Count II of the Complaint was proper.

Negligent Misrepresentation

In Count III of the Complaint, Kirschbaum brings an ERISA claim for

alleged misrepresentations that the company made concerning its financial

13

As the Third Circuit has noted, courts must be aware of the risks that “if the

fiduciary, in what it regards as an exercise of caution, does not maintain the investment in the

employer’s securities, it may face liability for that caution, particularly if the employer’s

securities thrive.” Moench, 62 F.3d at 572; See also In re Coca Cola Enterprises Inc. ERISA Lit,

1:06-CV-0953, 2007 WL 1810211, at *10 (N.D. Ga. June 20, 2007) (reasoning that a fiduciary

who scraps plan requirements is “just as apt to be sued” as if he had enforced them).

14

In re McKesson, 391 F. Supp. 2d at 830-33; In re Coca Cola Enterprises Inc. ERISA

Lit, 2007 WL 180211, at *20.

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No. 06-20157

condition. To recover for these statements under ERISA, as opposed to the

securities laws, Kirschbaum must demonstrate that the representations were

made in a fiduciary capacity. “ERISA liability arises only from actions taken or

duties breached in performance of ERISA obligations.” In re Worldcom, Inc.,

263 F. Supp. 2d 745, 760 (S.D.N.Y. 2003). The relevant question is not whether

an employer’s action adversely affected a beneficiary’s interest, but whether the

employer was acting as a fiduciary when it took that action. Pegram, 530 U.S.

at 226, 120 S. Ct. at 2152-53; Varity, 516 U.S. at 505, 116 S. Ct. at 1074.

Here, Kirschbaum has failed to identify any misrepresentations made by

the REI defendants in a fiduciary capacity. Kirschbaum claims the company

misrepresented its financial condition in its Form 10-Q and 10-K filings with the

SEC. He admits that the filings were made in REI’s corporate capacity and do

not constitute fiduciary communications, but, he argues, they became fiduciary

communications when the REI defendants incorporated them into other

documents, namely: (1) the Form S-8 Registration Statement for REI common

stock filed May 28, 1999, and (2) the 10a Prospectus for REI common stock dated

October 25, 2000, which was later distributed to Plan participants.15

In neither case has Kirschbaum shown the REI defendants were acting in

anything other than a corporate capacity in making these statements or

incorporating them into other documents. Varity, 516 U.S. at 505, 116 S. Ct. at

1074. REI’s obligation to file a Form S-8 incorporating its SEC filings is a

corporate obligation arising under the securities laws. 15 U.S.C. § 77e; 17 C.F.R.

§ 239.16b. The same is true of its obligation to incorporate its SEC filings into

a 10a Prospectus, and to distribute that Prospectus to Plan participants.

17 C.F.R. § 230.428(a)(1), (b)(1). When it incorporated its SEC filings into the

15

Kirschbaum’s argument that the REI defendants used these documents to satisfy

their obligations under § 404(c) of ERISA was not presented to the district court and is waived.

See Little v. Liquid Air Corp., 37 F.3d 1069, 1071 n.1 (5th Cir. 1994).

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No. 06-20157

Forms S-8 and 10a Prospectus, REI was discharging its corporate duties under

the securities laws, and was not acting as an ERISA fiduciary. “Those who

prepare and sign SEC filings do not become ERISA fiduciaries through those

acts, and consequently, do not violate ERISA if the filings contain

misrepresentations.” WorldCom, 263 F. Supp. 2d at 766.

This case is easily distinguishable from Dynegy, a case relied on by

Kirschbaum. In Dynegy the plaintiff alleged the employer had used the 10a

Prospectus as the Summary Plan Description (“SPD”) for ERISA purposes. In

re Dynegy, Inc. ERISA Lit., 309 F. Supp. 2d 861, 869 (S.D. Tex. 2004) (ruling on

12(b)(6) motion). Kirschbaum makes no such claim, and the record reveals that

the REI defendants issued a separate document to serve as the SPD.

Kirschbaum has made no showing that the REI defendants were speaking as

fiduciaries when they made the statements at issue. Accordingly, any remedy

for these statements lies under the securities laws, not ERISA.

CONCLUSION

For these reasons the judgment of the district court is AFFIRMED.

21