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Supreme Court revives Lehman workers’ ESOP suit

Lehman Brothers Holdings Inc. employees who invested part of their incomes in the company’s stock have had their lawsuit revived by the U.S. Supreme Court, although perhaps only temporarily.

In a class suit filed in October 2008 after the brokerage filed bankruptcy, Lehman workers sued company executives who served as trustees of the employee stock ownership plan, or ESOP. They alleged that the plan’s trustees violated their fiduciary duties by failing to sell Lehman stock when they should have known the firm was in dire financial condition.

The district court dismissed the suit, and the U.S. Court of Appeals in Manhattan reached the same result last July. The Lehman workers sought an appeal from the Supreme Court. On Tuesday, the high court reinstated the suit and sent it back to the appeals court.

Resolving a split among the federal courts of appeal, the Supreme Court handed down a unanimous opinion on June 25 in a similar case called Fifth Third Bancorp v. Dudenhoeffer. The Fifth Third opinion, by Justice Stephen Breyer, said there is no “presumption of prudence” in situations where the ESOP is created expressly to purchase stock in the employer.

On Tuesday, the Supreme Court set aside the appeals court’s Lehman decision and told the circuit court to review the case once again in light of Fifth Third. The justices didn’t tell the New York appeals court how it should rule on remand.

The Lehman case in the Supreme Court is Rinehart v. Akers, 13-830.

Beyond its statement in favor of the employees, the remainder of Breyer’s opinion in Fifth Third lays out several grounds on which lawsuits of the type still can fail. First, Breyer said that a plan trustee isn’t imprudent for assuming that the market price of the company’s stock is a valid indicator of value.

Next, Breyer said it’s “implausible” as a general rule to argue that trustees involving a public company should have recognized from publicly available information that the stock was overvalued.

As with Lehman, the Fifth Third plaintiffs alleged that the plan trustees had non-public information telling them that holding the stock was imprudent. On that issue, Breyer said that the duty of prudence doesn’t require selling stock when doing so based on non-public information would violate securities laws.

Finally, Breyer said plaintiffs “must plausibly allege” what the trustee could have done “that would have been consistent with the securities laws” and wouldn’t have been “more likely to harm the fund than to help it.”

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