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Home > Blog > Blog > ESOPs > Seventh Circuit: Independent Investment Fiduciary Shields ESOP Fiduciaries from Liability for Investment in Company Stock

Seventh Circuit: Independent Investment Fiduciary Shields ESOP Fiduciaries from Liability for Investment in Company Stock

Burke v. Boeing Co., No. 20-3389, __F.4th__, 2022 WL 3030835 (7th Cir. Aug. 1, 2022) involves a lawsuit that seeks to hold fiduciaries of the Boeing Voluntary Investment Plan (the “Plan”), a 401(k) plan that Boeing sponsors for eligible employees, accountable for the significant loss in value to the Boeing Stock Fund following two fatal crashes of Boeing 737 MAX airliners. Plaintiffs-Appellants, who are participants in the Plan, brought a putative class action against The Boeing Company, its Employee Benefit Plans Committee (the “Plans Committee”) responsible for administering the Plan, and the Employee Benefit Investment Committee (the “Investment Committee”), which oversees the Plan’s investment options, plus Boeing officials who served on one or both committees. Plaintiffs allege that by November 7, 2018—one week after recovery of the flight data recorder from the first 737 MAX crash—Defendants should have issued a corrective public disclosure saying that the 737 MAX was not safe to fly. Plaintiffs further allege that during the Class Period, from November 7, 2018 to December 16, 2019, Boeing’s continuous concealment of material facts relating to the 737 MAX jets caused the price of Boeing stock to be artificially inflated. By November 7th, Defendants should have known that public disclosure of the safety issues was inevitable, and they should have taken steps to disclose them to the public immediately. However, Boeing did not announce until December 16, 2019, that it would suspend production of new 737 MAX jets beginning in January 2020.

Plaintiffs’ operative complaint alleges that Defendants breached the duty of prudence under ERISA § 404(a) and their duty of loyalty under ERISA § 404(a), because their failure to promptly disclose safety issues with the 737 MAX caused Plaintiffs and Class Members to continue to acquire and hold Boeing stock at an artificially inflated price. The complaint also alleges that Defendants breached the duty to monitor investments under ERISA § 404(a), and are liable as co-fiduciaries for the breaches of other Boeing Stock Fund fiduciaries under ERISA § 405(a). The district court dismissed the lawsuit for failure to state a claim and the Seventh Circuit affirmed.

The problem for Plaintiffs, as the court sees it, is that the Investment Committee contracted with an outside trust company, Newport Trust (not named in the lawsuit) to manage the Plan’s investments in Boeing stock. The operative agreement between the Investment Committee and Newport Trust provided that Newport Trust would have exclusive fiduciary authority and responsibility, in its sole discretion, to determine whether the continuing investment in the Boeing Stock Fund is prudent under ERISA. The court explained that the “central question here is whether the delegation of those investment responsibilities protects the company and company insiders from liability for the plan’s continued offering of Boeing stock as an investment option for employees before and during a time when the value of Boeing stock dropped significantly.” The court agreed with the district court that the delegation of investment decisions to Newport Trust means that neither Defendants acted in an ERISA fiduciary capacity in connection with the continued investments in Boeing stock. Plaintiffs have not identified any ERISA-based fiduciary duty to disclose non-public information about the employer’s business to Plan participants or the general public.

In Howell v. Motorola, Inc., 633 F.3d 552, 571 (7th Cir. 2011), the court rejected the argument that plan fiduciaries were required to provide all information about the corporation’s business decisions in real time to plan participants. To rule otherwise would create insider trading in violation of federal securities laws. ERISA does not add additional layers of duties to disclose inside information. The court further explained that independent fiduciaries “can serve a valuable and legitimate purpose in managing the tension between ERISA and federal securities laws” and there are “important benefits associated with the practice of corporate insiders appointing independent fiduciaries to make the choices about investments, particularly in employer stock.” Because Plaintiffs’ duty of prudence claim fails, so does their duty of loyalty claim which cannot circumvent the demanding Dudenhoeffer standard for duty of prudence claims. The failure to monitor and breach of co-fiduciary duties claims fail insofar as they are derivative of the imprudence claim.

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