The Second Circuit Court of Appeals ruled against two groups of plaintiffs on Wednesday, denying federal Employee Retirement Income Security Act (ERISA) claims stemming from staggering subprime mortgage losses during the peak of the mortgage crisis.
In the first suit, Gray v. Citigroup, Inc., the Second Circuit Court of Appeals ruled against 153,000 workers whose 401(k) plans were depleted as a result of Citigroup's subprime-related losses.
The court found that Citigroup didn't breach its fiduciary duty, and that the workers had not shown that the "defendants either knew or should have known that Citigroup was in the sort of dire situation that required them to override plan terms in order to limit participants' investments in Citigroup stock."
Citigroup's share price fell 52 percent from between 2007 and 2008, resulting in $18.1 billion in subprime-related losses. The plaintiffs had accused Citigroup of "consistently downplaying its exposure to subprime mortgages and other toxic debt, causing hundreds of millions of dollars of losses for the tens of thousands of workers who owned bank stock in their 401(k)s," reports Reuters.
In the second suit, Gearren v. McGraw-Hill Cos., Inc., plaintiffs claimed that McGraw-Hill, (the parent company of credit rating agency Standard and Poor's), "violated fiduciary duties by offering employees its stock knowing the shares were likely to fall over allegations its Standard & Poor's unit gave improperly high ratings to mortgage-backed securities," reports Bloomberg.
In Gearren, the Second Circuit held that "the facts alleged by plaintiffs are, even if proven, insufficient to establish that the defendants abused their discretion by continuing to offer plan participants the opportunity to invest in McGraw-Hill stock."
Marc Machiz, a lawyer for the Citigroup plaintiffs, told Thomson Reuters News & Insight that he expects to ask the full Second Circuit Court of Appeals to rehear his clients' ERISA claims.
- Gray v. Citigroup, Inc. (FindLaw's CaseLaw)
- Gearren v. McGraw-Hill Cos., Inc. (FindLaw's CaseLaw)
- Hedge Fund Adviser Can Owe a Fiduciary Duty to Investors (FindLaw's Sixth Circuit blog)