District Court Says ESOP Fiduciaries Have to Diversify Only If the Company Faces "Impending Doom"

In In re McKesson HBOC Inc. ERISA Litigation, No. C-00-20030 RMW, (U.S. Dist. Ct., 9/9/05), a U.S. district court rejected the arguments made in the Moench v. Robertson case in 1995 that found that ESOP fiduciaries have an affirmative obligation to divest company stock if they know, or should have known, that the stock was about to drop severely. Instead, the district court ruled that ERISA "unequivocally declares that ESOP fiduciaries may 'hold' company stock even when a prudent fiduciary would diversify the plan." The court held that the ruling in Moench, which has served as strong guidance for ESOP fiduciaries for 10 years, was "fundamentally flawed" because it puts ESOP fiduciaries in a bind. If they divest company stock in a downturn, they may be violating their obligations under the plan and ERISA to invest primarily in employer securities; if they fail to diversify, they may be liable under Moench." Instead, the court found that fiduciaries would have to know that the company was facing "impending doom" or "dire circumstances" to be required to act. Nonetheless, the court allowed the lawsuit to proceed on the narrower plan administrative grounds centered on when stock was converted to cash. The ruling is does not set a precedent (and the Third Circuit's ruling in Moench only has precedent in that circuit), but it does represent a very different conclusion than other courts have reached on this matter.