Eighth Circuit Adopts "Net Seller" Rule in Stock-Drop Case

In Brown v. Medtronic Inc., No. 09-2524 (8th Cir., Dec. 13, 2010), a circuit court ruled that an employee who sold stock at a profit lacked standing to sue even if alleged fiduciary violations in the offering of company stock in a 401(k) plan were true. The standard differs from an alternative approach that looks at what might have happened absent the breach, something the court said was too hypothetical. The net seller approach has not been universally adopted but has shown up in a number of cases. There can be important nuances to such cases. If, as here, the employee actually benefitted from the alleged fraud because Medtronic stock was artificially higher, the plaintiff's case seems weaker than, for instance, where profit sharing assets were moved into an ESOP, and the ESOP shares subsequently increased in value, but not as much as diversified investments in general did. In that case, the employee is still a net seller, but the alleged fiduciary violation made him or her worse off, not better.

Notably, however, the court declined to adopt the presumption of prudence assumption, saying that the strength of this presumption is "unclear" and that it was not as protective of fiduciaries as Medtronic argued.