360° Coverage : Supreme Court Debates When Employee-Stock Plans Should Dump Stock

2 Updates

Supreme Court Debates When Employee-Stock Plans Should Dump Stock

Apr 3 2014, 3:22pm CDT | by

Justices wrestled with a difficult question at the U.S. Supreme Court today: If the executives in charge of a retirement plan that invests in company stock learn something bad about the company,...

Filed under: news

 
 
 

21 weeks ago

Supreme Court Debates When Employee-Stock Plans Should Dump Stock

Apr 3 2014, 3:22pm CDT | by

Justices wrestled with a difficult question at the U.S. Supreme Court today: If the executives in charge of a retirement plan that invests in company stock learn something bad about the company, should they sell?

That would fit the classic definition of insider trading, of course. And it could hardly be good public policy to encourage executives to help their own employees front-run the rest of the market by selling stock at an inflated price to saps who don’t know as much as they do.

Yet the Obama administration came perilously close to that position in arguments today in Fifth Third Bancorp v. Dudenhoeffer. When pressed by the justices on what a trustee of an employee stock plan should do when in possession of material, non-public information suggesting the stock is overvalued, Deputy Solicitor General Edwin S. Kneedler said “it would ordinarily be the right thing to do to sell.”

Seriously?

Justice Samuel Alito asked if Kneedler could possibly mean what he just said.

“No, he can’t — he can’t sell on the basis of inside information,” Kneedler backpedaled. “He could — I’m sorry, he could stop purchasing, which is –”

“But the market will see through that in about two seconds,” Justice Stephen Breyer snapped.

At issue in this case is whether plaintiff lawyers who pounce whenever a company’s stock price falls can make it past the initial motion for summary judgment, with claims that trustees of employee stock ownership plans should have dumped those shares because they knew they were overvalued. Congress carved out an exception for ESOPs from rules requiring retirement plans to diversify their holdings, under the theory that company stock ownership is a good thing and employees are free to put their retirement savings in other investments if they wish. (Despite silly articles like we’ve seen lately that confuse pension plans with self-directed 401(ks).)


Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

The justices struggled with how to apply centuries-old standards of fiduciary duties to the peculiar situation of trusts that invest in only one stock, overseen by company executives who may possess inside information.ESOPs hold over $1 trillion in assets and how the Supreme Court rules in this case could have broad implications for how they are run and whether companies take the risk of offering them at all.

For plaintiff lawyers, it’s simple: They should sell when the stock is “overvalued.” Or at the very least, put the fund in the hands of independent directors who don’t have inside information — and charge lots of money to oversee an investment which every employee knows is his or her own company’s stock.

Chief Justice John Roberts put the dilemma facing ESOP trustees in stark terms. Say a company executive possesses information suggesting the stock is overvalued, he asked.

Do you sell? In which case the beneficiaries’ holdings go way down and they sue you, or do you not sell? In which casse when the information comes out, the beneficiaries sue you because their value goes down. What are you supposed to do?

Alito added a wrinkle to that. What if the inside information is an unproven allegation that a company executive had engaged in illegal behavior? That would definitely make the stock go down if news got out. Should the ESOP release the news to the public, serving as a second conduit for company information even when that information is unconfirmed?

Kneedler didn’t have an answer for that. “Stop buying might be the right approach,” he said.

Robert A. Long of Covington & Burling, arguing for Fifth Third, urged the court to follow every appeals court that has considered the question so far and give the “ESOP fiduciary some leeway.” Because, as he noted, plaintiff lawyers could have sued Fifth Third’s ESOP if they had dumped all the bank’s stock after it plunged to $2 on concerns about its subprime lending practices. The price has since surged past $23.

“In this case, if the fiduciaries had shut down the ESOP, they would certainly have been sued because they would have violated the plan terms, and the — the plan has done very well,” he said. Ah, well, logic has never been the hallmark of securities class-action litigation.

 
Update
2

3 days ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slashin ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

4 days ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double traged ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Experiential purchases more satisfying than material ones
New York, Sep 2 (IANS) Spending money doing things or buying experiences makes people feel a lot more happier than spending money on material things, a study says.
 
 
Eat fruits daily for healthy heart
London, Sep 2 (IANS) Daily fruit consumption cuts the overall risk of death by 32 percent and cardio-vascular diseases (CVDs) by up to 40 percent, a study shows.
 
 
NASA building traffic control system for drones
New York, Sep 2 (IANS) NASA is developing a drone traffic management programme that would work as a separate air traffic control system for drones flying low to the ground at 400 to 500 feet.
 
 
App that enhances smartphone battery life
New York, Sep 2 (IANS) Are you frustrated by the limited battery life of your smartphone? No need to fret any longer as a US professor has created a free app called Estar that reveals how certain apps drain a smartphone battery faster.
 
 
 

Latest from the Network

Eight policemen killed in Egypt explosion
Cairo, Sep 2 (IANS) At least eight policemen were killed and four injured Tuesday in an explosion in Egypt's Sinai region, a security official said. The blast occurred when a police vehicle went over a planted...
Read more on Politics Balla
 
Coach Orenga content with Spain's basketball World Cup performance
Madrid, Sep 2 (IANS) Spanish basketball coach Juan Antonio Orenga said he was happy with his team's performance in the FIBA World Cup till date and was all praise for veteran Pau Gasol, who has been a star for the team...
Read more on Sport Balla
 
Hateful content on Facebook bad for your brain
London, Sep 2 (IANS) Are you exposed to reading homophobic, racist, misogynistic or other hateful content on Facebook? It may have a harmful effect on your brain in the long run. According to a recent Italian study,...
Read more on Celebrity Balla
 
Two policemen killed in Afghan suicide attack
Kabul, Sep 2 (IANS) At least two policemen were killed and two others injured Tuesday in a suicide car bomb attack in Afghanistan's Nangarhar province, an official said. "The attack took place in Ghani Khil district...
Read more on Politics Balla
 
Rihanna pays £6k for nail technician
Rihanna has paid £6,000 for a manicure. The 'Rude Boy' singer, who is currently enjoying some time off from her busy schedule on her luxury yacht in the Mediterranean, flew out A-list nail technician Jenny Longworth to...
Read more on Celebrity Balla
 
Kelly Brook: Simon Cowell thought I was a singer
Kelly Brook says Simon Cowell didn't know who she was when she was asked to appear on 'Britain's Got Talent'. The 34-year-old beauty starred as judge on the show in 2009, before she was unceremoniously dumped by the '...
Read more on Celebrity Balla
 
Cee Lo Green tweets controversial rape views
Cee Lo Green has deleted his Twitter account after allegedly tweeting some controversial views on rape. According to an article on BuzzFeed, the 39-year-old singer posted several comments about the subject on his...
Read more on Celebrity Balla
 
Ariana Grande hits out at nude photo leak
Ariana Grande insists reported nude pictures of her are fake - because her bottom is ''a lot cuter'' in real life. The 'Problem' hitmaker took to her Twitter account this morning (02.09.14) to address rumors that a...
Read more on Celebrity Balla
 
Ryan Fletcher opens up about Ashley Roberts romance
Lawson's Ryan Fletcher has opened up about his romance with Ashley Roberts. The bassist has confirmed that he's dating the former Pussycat Dolls singer - who was previously romantically linked with TV presenter Declan...
Read more on Celebrity Balla
 
Kanye West avoided dress disaster before wedding
Kanye West avoided a bridesmaid disaster before his wedding to Kim Kardashian. The rapper became a hero before he had even tied the knot with the brunette beauty at their May nuptials when he stepped in at the last...
Read more on Celebrity Balla