Kirschbaum v. Reliant Energy, Inc.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
April 25, 2008
No. 06-20157
Charles R. Fulbruge III
Clerk

BRAD KIRSCHBAUM, on behalf of himself and all others similarly situated

Plaintiff - Appellant

RAYMOND ROYER
Appellant

v.

RELIANT ENERGY, INC., ET AL.,
Defendants

RELIANT ENERGY, INC.; T. MILTON HONEA; MILTON CARROLL;
JOHN T. CATER; RICHARD E. BALZHISER; JAMES A. BAKER, III;
BENEFITS COMMITTEE OF RELIANT ENERGY; DAVID M.
MCCLANAHAN; MARY P. RICCIARDELLO; GARY WHITLOCK; LEE
HOGAN; WATERS S. DAVIS IV; STEVE SHAEFFER; TOM STANDISH

Defendants - Appellees

Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:02-CV-2051

Before JONES, Chief Judge, and STEWART and CLEMENT, Circuit Judges.
EDITH H. JONES, Chief Judge:
Brad Kirschbaum (“Kirschbaum”), an employee of Reliant Energy, Inc.
(“REI”) and a participant in the Reliant Energy Savings Plan (“Plan”), brought
 No. 06-20157

this ERISA class action against REI and the REI Benefits Committee
(collectively, “REI defendants”) representing current and former plan
participants on whose behalf the Plan purchased or held shares of the Reliant
Energy Common Stock Fund from August 2, 1999 to May 16, 2002. The district
court certified the class but granted the REI defendants’ motion for summary
judgment on all claims. We AFFIRM. Even if the REI defendants had a
fiduciary duty to liquidate the Common Stock Fund and cease purchasing REI
shares, notwithstanding the Plan’s express contrary requirements, Kirschbaum
falls short of bearing his heavy burden to rebut the presumption that the
defendants satisfied their legal duties.
BACKGROUND
The relevant version of the Plan was adopted on April 1, 1999. Pursuant
to a Trust Agreement adopted simultaneously and incorporated into the Plan,
all Plan assets were held in trust by the Northern Trust Company (“Trustee”).1
The Trustee, REI, and the Benefits Committee were all named in the Plan as
fiduciaries for specific purposes. The Plan is an Eligible Individual Account Plan
(“EIAP”) under ERISA. 29 U.S.C. § 1107(d)(3). Consequently, participants could
invest in a number of funds, ranging from riskier, growth-oriented funds to more
stable mutual funds. One investment option under the plan was the REI
Common Stock Fund (“Common Stock Fund”). With the exception of a small
cash component for liquidity purposes, the Common Stock Fund was invested
entirely in REI common stock.
Participants were permitted to invest up to sixteen percent of their
compensation in the Plan. REI agreed to match up to the first six percent of an
employee’s contribution with shares of REI common stock allocated to the
employee’s Common Stock Fund account. Matching contributions were to

1
The Northern Trust Company was not named as a party to this action.

2
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remain in the Common Stock Fund for all employees who had not yet attained
the age of fifty-five years with ten years of service with the company. After
reaching that benchmark, employees could divest a portion of their holdings in
the Common Stock Fund.2 The participants’ holdings of REI stock and the
Common Stock Fund assets thus arose from two sources: employees’ voluntary
purchases of the Common Stock Fund as a Plan option, and REI’s matching
contributions in the form of REI common stock.
The value of the Common Stock Fund fell when the price per share of REI
common stock dropped about forty percent, from $24.60 on May 9, 2002, to
$14.50 a week later. The drop was occasioned by the disclosure that some REI
employees had engaged in “round-trip” energy trades between 1999 and 2001.
In these sham transactions, REI and another energy trader would “sell” identical
quantities of power or natural gas to each other simultaneously, for the same
price. Although no gas, power or money ever changed hands, the “round-trip”
trades were booked as transactions to inflate REI’s trading volume. The
disclosure occurred in stages. On May 10, 2002, REI withdrew a planned $500
million debt offering in light of the possibility that “round-trip” trading had
occurred. On May 13, REI publicly confirmed that such trades had inflated
revenues by about ten percent over a three year period. On May 16, senior
executives implicated in the “round-trip” trading resigned.
In his three-count Fourth Amended Complaint, Kirschbaum alleges that
the REI defendants are responsible under ERISA to make good the losses the
Plan sustained on REI common stock. Counts I and II both allege the REI
defendants should have known, based on information available to them, that
REI stock was not a prudent investment. Count I focuses on information

2
This restriction was removed effective May 6, 2002 (shortly before the adverse
disclosures that are the center of this lawsuit), and employees were allowed to direct their REI
matching contributions to any fund in the Plan.

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available to the public, while Count II focuses on non-public information (the
“round-trip” trades). Both counts assert that because REI common stock became
an imprudent investment, the REI defendants had a fiduciary duty to (a) halt
all Plan purchases of REI common stock, (b) sell the Plan’s holdings in REI
common stock, and (c) terminate the Common Stock Fund. Count III alleges
that the REI defendants breached their fiduciary duties by negligently
misrepresenting REI’s financial condition to Plan participants in documents that
incorporated the company’s SEC filings.
After certifying the class, the district court granted summary judgment to
the REI defendants on all three Counts. On Counts I and II, the court reasoned
that the REI defendants could be fiduciaries only to the extent they exercised
discretionary control over the Plan. Since the Plan afforded them no discretion
to terminate the fund or halt investments in it, the district court concluded the
REI defendants had no fiduciary duty to do so. As to Count III, the district court
held that the alleged misrepresentations were made by REI in its corporate
capacity, not its fiduciary capacity, and were not actionable under ERISA.
Kirschbaum has appealed.
DISCUSSION
We review a grant of summary judgment de novo, using the same
standards applied by the district court. Condrey v. SunTrust Bank of Georgia,
429 F.3d 556, 562 (5th Cir. 2005). Summary judgment is proper when the
movant can demonstrate that there is no genuine issue of material fact and that
he is entitled to judgment as a matter of law. Willis v. Coca Cola Enterprises,
Inc., 445 F.3d 413, 416 (5th Cir. 2006). On review of a grant of summary
judgment, all facts and inferences must be construed in the light most favorable
to the non-movant. Murray v. Earle, 405 F.3d 278, 284 (5th Cir. 2005).

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A brief sketch of the ERISA principles underlying the operation of the REI
Savings Plan is in order. ERISA provides that an employer who sponsors an
employee plan may also serve as a fiduciary of that plan. The statute imposes
on the employer-fiduciary and on those who manage the plan strict statutory
duties, including loyalty, prudence, and diversification. See 29 U.S.C.
§ 1104(a)(1). Under the common law of trusts, an employer could not invest plan
assets in its own stock without creating an impermissible conflict of interest.
See Pegram v. Herdrich, 530 U.S. 211, 225, 120 S. Ct. 2143, 2152 (2000). But
Congress, for well-documented policy reasons, has encouraged plan ownership
of employer stock and has exempted such investments from certain of ERISA’s
fiduciary requirements. See, e.g., Donovan v. Cunningham, 716 F.2d 1455,
1466-67 (5th Cir. 1983). In particular, for an EIAP like that before us, there is
no “cap” on the percentage of permissible investments in the employer’s own
securities. Compare 29 U.S.C. § 1107(b)(1) with § 1107(a)(3)(A). Further, an
EIAP fiduciary’s decision to purchase or hold the employer’s securities is exempt
from the duty to diversify and the related duty of prudence insofar as it concerns
asset diversification. 29 U.S.C. § 1104(a)(2). The fiduciary remains bound,
however, by its other statutory fiduciary duties. See, e.g., Martin v. Feilen, 965
F.2d 660, 665, 670 (8th Cir. 1992). With these general principles in mind, we
turn to the discussion of each count.
Count I - Publicly Available Information
As it happens, the general statutory principles are sufficient to affirm the
district court’s grant of summary judgment on Count I. Kirschbaum here avers
that the REI defendants should have concluded, based on publicly available
information, that REI common stock was an imprudent investment. Count I
alleges that the transformation of REI from a “traditional power utility
company” into a “speculative energy trading operation” changed REI common

5
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stock from a “classic long term conservative investment” to a “risky and volatile
one.” The company’s change in business strategy, Kirschbaum contends, made
it imprudent for the REI defendants to continue investing “such massive
amounts or such a large percentage of [the Plan’s] assets” in REI common stock.
By its terms, Count I asserts that the Plan became too heavily weighted
in high-risk REI stock when the company dove into energy trading. Count I
faults the REI defendants for failing to maintain an appropriate “portfolio mix,”
and for not evaluating the risk and reward of the Common Stock Fund in the
context of all the Plan’s investments. Kirschbaum does not claim in Count I that
REI common stock was an imprudent investment per se, but rather that it was
too risky for the Plan to hold in large quantities. Despite Kirschbaum’s efforts
on appeal to recast this as a claim of imprudence, Count I clearly states a failure
to diversify. See Fourth Amended Complaint, ¶ 6 (faulting Defendants for, inter
alia, “failing to diversify the assets of the Plan”); see also 29 U.S.C.
§ 1104(a)(1)(C) (imposing a duty of the diversification “so as to minimize the risk
of large losses”).
The REI defendants correctly observe that ERISA exempts an EIAP from
the duty to diversify with regard to the purchase or holding of company stock.
29 U.S.C. § 1104(a)(2). The construction of this statutory exemption begins with
the language of the statute. Hughes Aircraft Company v. Jacobson, 525 U.S.
432, 438, 119 S. Ct. 755, 760 (1999). “And where the statutory language
provides a clear answer, it ends there as well.” Id. The statute states that “the
diversification requirement . . . and the prudence requirement (only to the extent
that it requires diversification) . . . [are] not violated by acquisition or holding of
qualifying employer real property or qualifying employer securities [in an
EIAP].” § 1104(a)(2). Despite the risks inherent in concentrating plan assets in
any one security, the express statutory exemption of the diversification duty in

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relation to an employer’s stock holdings precludes the recovery Kirschbaum
seeks under Count I.
Count II-Non-public Information
Unlike Count I, Count II states a claim for more than failure to diversify.
Count II alleges it was imprudent for the Plan to hold even one share of REI
stock during the period when “round-trip” trading had artificially inflated its
price. The diversification exemption stated in § 1104(a)(2) does not exempt EIAP
fiduciaries from liability for “other forms of imprudence.” See, e.g., In re
McKesson HBOC, Inc. ERISA Lit., 391 F. Supp. 2d 812, 825 (N.D. Cal. 2005).
Count II asserts that in light of this inflation, the REI defendants had a
fiduciary duty to halt further purchases of REI common stock, sell the Plan’s
holdings in the Common Stock Fund, and terminate the Fund. Three significant
issues are presented by these allegations. First, do the terms of the REI Plan
mandate that company common stock be an available investment option for
participants, and that it must be the exclusive vehicle for company matching
contributions? Second, what, if any, fiduciary duties pertain to REI or the
Benefits Committee with respect to investments in the REI Common Stock
Fund? Third, if such duties exist, by what standard should a court review the
alleged breaches of duties?
1. Plan Requirements Concerning REI Stock
The Plan documents, considered as a whole, compel that the Common
Stock Fund be available as an investment option for employee-participants;
require that REI common stock be the basis for the company’s matching
contributions; and authorize investment of contributions and dividends to the
Fund solely in REI common stock. These mandatory provisions are embedded
in the Plan and could not be terminated or modified absent a Plan amendment.
Section 8.1 of the Plan presumes the existence of the Common Stock Fund and

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requires the investment of all REI matching contributions into the Fund.3
Likewise, Attachment A, fully incorporated into the Plan by Section 8.1, reflects
that the Benefits Committee had no authority to delete the Common Stock Fund
as an investment option. Further, the Trust Agreement, incorporated into the
Plan by Section 9.1, states that the Plan’s investment funds “shall consist of the
Reliant Energy Common Stock Fund and other such Investment Funds selected
and approved by the Committee from time to time.” Trust Agreement, Section
4.1 (emphasis added). Altering any of these provisions would have required
REI, acting in its capacity as a settlor, to amend the Plan.
It is clear that the Plan required the Fund to be invested almost
exclusively in REI common stock, preserving only a minimal cash component to
maintain liquidity for transactions in the stock. Attachment A specifies that the
Common Stock Fund is to be “primarily invested and reinvested” in REI common
stock. Kirschbaum asserts that this language would have permitted the REI
defendants to increase the cash component of the Fund up to forty-nine percent
of its total holdings. On the contrary, Section 4.2(a) of the Trust Agreement
directs the Trustee to invest all contributions to the Fund in REI common stock
“as soon as practicable.” The remainder of that section, as well as Section 6.7,
require the Trustee to invest the Common Stock Fund exclusively in REI stock,
with an exception of a small, short-term cash component “as necessary to make
any distribution or payment.” The Statement of Investment Policy, albeit not
a constitutive Plan document, reflects these detailed restrictions when it
provides that no more than .25 percent to 1.25 percent of the Fund’s total value
may be held in cash. A cash percentage greater than that necessary for minimal
liquidity would have contravened Plan requirements.

3
With the limited exception of employees who had attained the age of fifty-five years
and ten years of service with the company — those employees were permitted under the Plan
to direct their matching contributions to other funds. See supra.

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Based on all of these provisions, neither REI nor the Benefits Committee
were given express discretion to halt the purchase of REI common stock or invest
Fund assets in other holdings.
2. Who is a Fiduciary?
If Plan “fiduciaries” would violate the Plan by deviating from the
mandatory retention and acquisition of REI stock in the Common Stock Fund,
the district court reasoned, they had no discretion, and hence no fiduciary duty,
to deviate. Kirschbaum, supported by the Department of Labor as an Amicus,
strenuously disagrees that Plan managers can, by the expedient of applying
mandatory Plan provisions, divest themselves of their prudential fiduciary duty
not to purchase company stock that they know is artificially inflated. These
circumstances raise subtle questions concerning the scope of fiduciary
responsibility for employee savings plans that feature company stock as an
investment option or a matching contribution.4
The Supreme Court has noted that the first question pertinent to
establishing ERISA liability is whether the defendant is in fact a fiduciary.
Pegram, 530 U.S. at 226, 120 S. Ct. at 2152-53. ERISA plan managers bear
fiduciary responsibility correlative with the scope of their duties. An ERISA
fiduciary for one purpose is not necessarily a fiduciary for other purposes.
Bannistor v. Ullman, 287 F.3d 394, 401 (5th Cir. 2002); see also Cotton v. Mass.
Mut. Life Company, 402 F.3d 1267, 1277 (11th Cir. 2005) (fiduciary status under
ERISA is not an “all-or-nothing” concept). Rather, a person is a fiduciary only
“to the extent” he has or exercises specified authority, discretion, or control over
a plan or its assets:
[A] person is a fiduciary with respect to a plan to the extent (i) he
exercises any discretionary authority or discretionary control

4
This court’s decision in Langbecker v. Electronic Data Systems Corp. touched upon but
did not resolve these questions. 476 F.3d 299, 308 n.19, 312 n.24 (5th Cir. 2007).

9
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respecting management of such plan or exercises any authority or
control respecting management or disposition of its assets . . . or
(iii) he has any discretionary authority or discretionary
responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A). Fiduciary duties may thus arise either from the terms
of the governing plan or from acts and practices in carrying it out. Id.; see also
Bannistor, 287 F.3d at 401. Excluded from fiduciary responsibilities, however,
are the decisions of a plan sponsor to modify, amend or terminate the plan; such
decisions are those of a trust settlor, not a fiduciary. Hughes Aircraft, 525 U.S.
at 444, 119 S. Ct. at 763.
REI begins its defense with the contention that investments in the REI
Common Stock Fund were “hard wired” into the Plan, and that it, as settlor,
cannot be liable in damages for what would amount to a compelled amendment,
termination, or modification of the Plan. In interpreting 29 U.S.C. § 1002(21)(A),
the Supreme Court emphasized that employers or other plan sponsors “are
generally free under ERISA, for any reason at any time, to adopt, modify, or
terminate welfare plans.” Lockheed Corporation v. Spink, 517 U.S. 882, 890,
116 S. Ct. 1783, 1789 (1996) (internal quotations omitted). This holding was
extended to employee retirement plans in Hughes Aircraft. 525 U.S. at 444, 119
S. Ct. at 763. The Court emphasized that the term fiduciary with respect to a
plan encompasses “management” and “administration” of the plan, but does not
include plan design. Id. Thus, when employers undertake actions to adopt,
modify or terminate a plan, “they do not act as fiduciaries but are analogous to
the settlors of the trust.” Spink, 517 U.S. at 890, 116 S. Ct. at 1789 (internal
citations omitted). Viewed solely from this perspective, Kirschbaum’s insistence
that REI had an obligation to terminate the Common Stock Fund, cease
purchasing REI stock for the Fund, and liquidate the Fund’s investment in REI
common stock seeks no less than systemic modifications of the Plan itself.

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Because the Plan’s design was allotted to REI, as settlor, the company had no
fiduciary duty concerning such terms.
Kirschbaum, for his part, responds that the Court has distinguished
between “the composition or design of the Plan itself” and “the employer’s
fiduciary duties which consist of such actions as the administration of the Plan’s
assets.” See Hughes Aircraft, 525 U.S. at 444, 119 S. Ct. at 763. Moreover, REI
was involved in the Plan administration and asset management because,
pursuant to the Plan, it was both a named fiduciary and directed the Trustee
and because it apparently played a part in promulgating a Statement of
Investment Policy,5 which detailed how the Plan’s investments would be
managed. We may easily reject the first two grounds for REI’s alleged fiduciary
status. The terms of the Plan, which named REI as fiduciary and enabled it to
direct the Trustee, also specifically limited REI’s authority.6 REI could be a
fiduciary “to the extent” of its carrying out the activities referenced in the Plan,
but its fiduciary duty status cannot be expanded beyond them.
Interpreting the Statement of Investment Policy, however, poses a closer
question. This is a document formally adopted by the Benefits Committee for
the purpose of establishing the policy for management of Plan assets. In its
preamble, the policy states:
This Statement may be modified, in whole or in part, by Reliant
Energy at any point in time. Reliant Energy may provide
supplemental guidelines for each investment option of the Plan.

5
The REI defendants submit that the Policy was promulgated by the Benefits
Committee, but the Policy reads as a statement by REI itself, e.g., “This statement may be
modified, in whole or in part, by Reliant Energy at any point in time.” At the very least, there
is a fact issue as to this question.
6
Plan, §§ 1.26, 2.13.

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The Statement goes on to declare that the Benefits Committee “has
responsibility and authority for the operation of the Plan, including
administration and investment of the Plan’s assets.” Further, “the Benefits
Committee will serve as the ‘named fiduciary’ of the Plan under ERISA with
respect to the management and investment of the Plan’s assets.” The Policy
then briefly outlines the investment objectives of the Plan; the funding
requirements; the target allocation of long-term assets; monitoring; and
performance guidelines.
On one hand, the Statement expressly complies with the provision of the
Plan making the REI Common Stock Fund a mandatory feature and compelling
as close to one hundred percent of its assets as possible to be invested in REI
stock. One could also read REI’s above-quoted modification authority simply to
reflect its position as the Plan’s settlor. This Statement is not, however, a Plan
document. That it reserves to REI the right to provide “supplemental guidelines
for each investment option” might alternatively be construed as going beyond
plan design and into discretionary asset management. Notwithstanding the
arguably reserved power in the Statement, when REI eliminated the restrictions
on age and tenure that limited employees’ rights to sell company matching stock
that had been allocated to their plans, it amended the Plan.7 The mandatory
plan provision took precedence, in practice, over the vague language of the
Statement. In sum, there seems to be a factual issue whether REI had
discretionary authority in the management of the Plan or exercised any
authority respecting management or disposition of its assets. See 29 U.S.C.
§ 1002(21)(A)(i). Perhaps the reservation of such authority could give rise to
fiduciary duties pertinent to the Common Stock Fund.

7
See note 2, supra.

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The Benefits Committee, by contrast, is explicitly made a fiduciary in its
discretionary authority over Plan management and the exercise of actual
asset-management activities. REI contends that the Benefits Committee had no
fiduciary duties with respect to acquiring and holding REI stock beyond the duty
to comply with the Plan’s mandatory guidelines. REI further contends, not
without reason, that if the decisions to cease acquiring REI common stock,
terminate the fund, and liquidate the REI common stock holdings amount to
settlor’s decisions, then the Benefits Committee should not have fiduciary duties
inconsistent with or broader than those of the settlor.
Because the Plan’s requirements to invest in REI stock are mandatory and
were treated as such by REI and the Benefits Committee, we agree with the
district court that no fiduciary duties are inherent in the Plan other than to
follow its terms. Whether the Statement of Investment Policy gave rise to
implied authority by REI, and whether REI and the Benefits Committee were
subject to broader fiduciary duties under the supervening compulsion of ERISA
are close questions that we need not definitively resolve in this opinion.
3. Fiduciary Duty to Override?
Kirschbaum asserts that the REI defendants not only had the authority,
but on these facts, a fiduciary duty to cease the Fund’s continued investment in
REI common stock. Bluntly, they had a fiduciary duty to disobey the plain terms
of the Plan—and Congress’s sanction for company stock purchase plans—in
order to comply with ERISA’s equal duties to invest prudently and not to violate
the statute. See 29 U.S.C. §§ 1104(a)(1) and (a)(1)(D). See also Laborers
National Pension Fund v. N. Trust Quantitative Advisors, Inc., 173 F.3d 313, 322
(5th Cir. 1999) (“A fiduciary may not discharge his duties in a manner
inconsistent with ERISA provisions.”).
Citing these provisions, is, however, far easier than propounding a test for
their violation. One hypothetical frequently cited by both parties is a benefits

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plan written to require investment in lottery tickets. Such an anomalous plan
would violate ERISA, and a fiduciary would be bound to deviate from the plan’s
requirements.
But shares of REI’s common stock are neither lottery tickets nor an
investment that is intrinsically and in all cases imprudent. Kirschbaum
contends that the stock became an imprudent investment when the defendants
obtained adverse information about the “round-trip trading”. Far from being
clear-cut, this claim requires a balance to be struck among competing
congressional purposes. See Varity Corp. v. Howe, 516 U.S. 489, 497, 116 S. Ct.
1065, 1070 (1996). Generally, Congress’s intent in ERISA is to balance the
protection of employee benefits against creating a system “so complex that
administrative costs, or litigation expenses, unduly discourage employers from
offering welfare benefit plans in the first place.” Id. Moreover, in this particular
context Congress has expressed a strong preference for plan investment in the
employer’s stock, although this preference may be in tension with ERISA’s
general fiduciary duties. See, e.g., Langbecker v. Elec. Data Sys. Corp, 476 F.3d
299, 309 n.19 (5th Cir. 2007).
The question is how to define when the duty of prudence might require a
fiduciary to disobey the clear requirements of an EIAP and halt the purchase of
employer stock. In this, as in all cases, the test of prudence is one of conduct, not
results. Donovan, 716 F.2d at 1467. The prudence test asks whether the
fiduciary selected investments “with the care, skill, prudence, and diligence
under the circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims.” 29 U.S.C. § 1104(a)(1)(B).
The focus of the inquiry is “how the fiduciary acted,” not “whether his
investments succeeded or failed.” Donovan, 716 F.2d at 1467 (internal citation

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omitted). The prudence requirement is a flexible standard, and a fiduciary’s
conduct must be evaluated “in light of the character and aims of the particular
type of plan he serves.” Id. (internal quotation omitted). Relevant here are the
“long-term horizon of retirement investing,” as well as the “favored status
Congress has granted to employee stock investments in their own companies.”
Langbecker, 476 F.3d at 308; see also Varity, 516 U.S. at 497, 116 S. Ct. at 1070
(courts must interpret ERISA’s fiduciary duties in a manner consistent with “the
special nature and purpose of employee benefit plans.” (internal citation
omitted)).
Attempting to strike the proper balance, the Third Circuit adopted an
abuse of discretion standard of review for a fiduciary of an Employee Stock
Option Plan (“ESOP”) that is designed to invest primarily in an employer’s stock.
Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995) (concerning ESOPs); Edgar
v. Avaya, Inc., 503 F.3d 340, 347 (3d Cir. 2007) (extending Moench’s reasoning
to EIAPs). The Moench court was unwilling to subject these fiduciaries to the
“strict scrutiny” that applies under conventional trust law to a trustee who is
simply authorized, but not encouraged or required, to make a particular
investment. Doing so, it noted, would eviscerate the statutory preference for
ESOPs. Moench, 62 F.3d at 570. Rather, Moench concluded that a fiduciary of
this sort of plan is entitled to a presumption that his decision to invest in the
employer’s securities was prudent. A plaintiff may rebut the presumption only
by showing that “owing to circumstances not known to the settlor and not
anticipated by him [the making of such investment] would defeat or
substantially impair the accomplishment of the purposes of the trust.” Id. at 571
(quoting RESTATEMENT (SECOND) OF TRUSTS, § 227 cmt. g). In Moench, there was
a triable question on this point because the facts showed a “continual and
precipitous” drop in stock price, the fiduciaries’ knowledge of the company’s

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impending collapse, and their internal conflicts over the proper course of action
for the ESOP.
Both parties initially disagreed that Moench should be the governing
authority for this case. Kirschbaum contends that the court’s presumption in
favor of continued company stock investment should not apply at all where
allegations, like his, relate to the fiduciaries’ knowing purchases of stock at an
artificially inflated price. Moench, Kirschbaum argues, concerned a “mere”
failure to diversify. We reject this limitation. The distinction between these
allegations is not only often elusive, but hardly justified by Moench itself. The
opinion dwelt at length on the Benefits Committee’s internal discussions based
on their insider knowledge and fears about the company’s dire financial
prospects. More to the point, there is no principled difference between how a
fiduciary should respond to “artificial inflation” of the stock price as opposed to
other sorts of negative insider information. Consequently, the standard of
judicial review applicable to such decisions should not generally turn on pleading
artifices. The Moench presumption logically applies to any allegations of
fiduciary duty breach for failure to divest an EIAP or ESOP of company stock.8
For their part, the REI defendants resist application of the Moench
presumption insofar as it expressly applies only where a plan strongly favors but
does not compel investment in company stock.9 The REI Savings Plan, as noted,
affords no discretion to enter into other investments. This is a potent objection,

8
Moench, of course, would not apply to allegations like those in Count I, above, which
fairly state only a violation of the fiduciaries’ duty to diversify, because ERISA specifically
exempts fiduciaries from that duty relating to a plan authorizing or requiring purchases of
company stock.
9
Unlike the REI Savings Plan, the plan in Moench was only “biased” toward employer
stock. The court concluded the plan gave the fiduciaries some measure of discretion to invest
in less-risky holdings as necessary. Moench, 62 F.3d at 567. Accordingly, the court limited its
ruling to cases where a fiduciary “is not absolutely required to invest in employer securities but
is more than simply permitted to make such investments.” Id. at 571.

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for Moench recognized that a greater degree of deference, and hence a lesser
degree of judicial scrutiny, would be appropriate to such mandatory plans. Id.
(citing RESTATEMENT (THIRD) OF TRUSTS § 228) (noting “the trustee must comply”
in such a situation unless compliance would be impossible or illegal).10 While
Moench did not resolve the issue, the court clearly implies that a plan
participant would bear an even heavier burden of showing a fiduciary duty
breach where the plan utterly compelled investment in company stock.11 Like
Moench, however, we decline to speculate on the scope of a fiduciary duty to
override clear and unequivocal plan terms. In this case, even if a factfinder
concluded that the REI defendants are fiduciaries for this purpose and had some
discretion to override the Plan, Kirschbaum’s allegations fail to rebut the
Moench presumption of prudence.
Moench concluded it might have been imprudent for the fiduciaries to
continue investing in company stock that steadily lost ninety-eight percent of
its value over two years, falling from $18.25 per share to $0.25 per share. It was
also relevant that the fiduciaries were aware of the company’s impending
collapse, and the employer ultimately filed for Chapter 11 bankruptcy protection.
Moench, 62 F.3d at 557. In contrast to the company-wide failure evidenced in
Moench, here Kirschbaum has alleged round-trip trading by a few employees

10
See also Edgar, 503 F.3d at 346 n.10 (noting that Moench “explicitly left open the
issue of whether there could still be a breach of fiduciary duty” in a case where the plan
absolutely required a particular investment). Edgar did not reach this question either. Id. at
347 n.11.
11
In most comparable circuit court opinions, the benefits plan at issue left the fiduciary
some discretion to take the action plaintiffs were seeking. See Edgar, 503 F.3d at 347 n.11;
DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 416-17 (4th Cir. 2007); Moench, 62 F.3d at 571.
One exception is the Ninth Circuit’s decision in Wright v. Oregon Metallurgical Corp., where
the fiduciaries had no discretion to take the requested action. 360 F.3d 1090, 1097 (9th Cir.
2004) (“Selling the stock in either scenario would have been in violation of the Plan’s express
terms.”) The Wright court did not find it necessary to proceed beyond Moench, concluding that
even under the Moench standard plaintiff could not prevail. Id. at 1097-98.

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and an initial drop in REI’s stock value of approximately forty percent. There
is no indication that REI’s viability as a going concern was ever threatened, nor
that REI’s stock was in danger of becoming essentially worthless. This is a far
cry from the downward spiral in Moench, and much less grave than facts other
courts routinely conclude are insufficient to rebut the Moench presumption.12
As the Ninth Circuit has explained, “[m]ere stock fluctuations, even those that
trend downward significantly, are insufficient to establish the requisite
imprudence to rebut the Moench presumption.” Wright, 360 F.3d at 1099. If
Kirschbaum cannot carry his burden under Moench, he cannot meet any higher
standard appropriate where an EIAP absolutely requires investment in
employer stock.
We do not hold that the Moench presumption applies only in the case of
investments in stock of a company that is about to collapse. The presumption,
however, is a substantial shield. As Moench states, it may only be rebutted if
unforeseen circumstances would defeat or substantially impair the
accomplishment of the trust’s purposes. Moench, 62 F.3d at 571. One cannot
say that whenever plan fiduciaries are aware of circumstances that may impair
the value of company stock, they have a fiduciary duty to depart from ESOP or
EIAP plan provisions. Instead, there ought to be persuasive and analytically
rigorous facts demonstrating that reasonable fiduciaries would have considered
themselves bound to divest. Less than rigorous application of the Moench
presumption threatens its essential purpose. A fiduciary cannot be placed in the

12
Wright, 360 F.3d at 1096, 1098 (ill-fated merger, reverse stock split, and seventy-five
percent drop in stock price were insufficient to rebut Moench presumption of prudence); Kuper
v. Iovenko, 66 F.3d 1447, 1451, 1459 (6th Cir. 1995) (company-wide financial woes and eighty
percent drop in stock price insufficient); In re McKesson, 391 F. Supp. 2d at 830-33 (declining
to apply Moench, but concluding widespread accounting violations, restated revenues for three
years, and seventy-five percent drop in stock price were insufficient to rebut presumption in
any event).

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untenable position of having to predict the future of the company stock’s
performance. In such a case, he could be sued for not selling if he adhered to the
plan, but also sued for deviating from the plan if the stock rebounded.13
A further objection to tempering the Moench presumption is that, in some
cases, requiring a fiduciary to override the terms of a company stock purchase
plan could suggest the necessity of trading on insider information. Such a course
is prohibited by the securities laws. Fiduciaries may not trade for the benefit of
plan participants based on material information to which the general
shareholding public has been denied access. Moreover, from a practical
standpoint, compelling fiduciaries to sell off a plan’s holdings of company stock
may bring about precisely the result plaintiffs seek to avoid: a drop in the stock
price. These objections, as well as the lack of clear textual support in ERISA for
creating a presumption, have led some courts to reject even the limited
possibility of liability provided for by Moench.14 We do not do so. Instead, we
find in these objections a reenforcement of the conclusion that the Moench
presumption cannot be lightly overcome.
Because Kirschbaum failed to rebut the Moench presumption, summary
judgment on Count II of the Complaint was proper.
Negligent Misrepresentation
In Count III of the Complaint, Kirschbaum brings an ERISA claim for
alleged misrepresentations that the company made concerning its financial

13
As the Third Circuit has noted, courts must be aware of the risks that “if the
fiduciary, in what it regards as an exercise of caution, does not maintain the investment in the
employer’s securities, it may face liability for that caution, particularly if the employer’s
securities thrive.” Moench, 62 F.3d at 572; See also In re Coca Cola Enterprises Inc. ERISA Lit,
1:06-CV-0953, 2007 WL 1810211, at *10 (N.D. Ga. June 20, 2007) (reasoning that a fiduciary
who scraps plan requirements is “just as apt to be sued” as if he had enforced them).
14
In re McKesson, 391 F. Supp. 2d at 830-33; In re Coca Cola Enterprises Inc. ERISA
Lit, 2007 WL 180211, at *20.

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condition. To recover for these statements under ERISA, as opposed to the
securities laws, Kirschbaum must demonstrate that the representations were
made in a fiduciary capacity. “ERISA liability arises only from actions taken or
duties breached in performance of ERISA obligations.” In re Worldcom, Inc.,
263 F. Supp. 2d 745, 760 (S.D.N.Y. 2003). The relevant question is not whether
an employer’s action adversely affected a beneficiary’s interest, but whether the
employer was acting as a fiduciary when it took that action. Pegram, 530 U.S.
at 226, 120 S. Ct. at 2152-53; Varity, 516 U.S. at 505, 116 S. Ct. at 1074.
Here, Kirschbaum has failed to identify any misrepresentations made by
the REI defendants in a fiduciary capacity. Kirschbaum claims the company
misrepresented its financial condition in its Form 10-Q and 10-K filings with the
SEC. He admits that the filings were made in REI’s corporate capacity and do
not constitute fiduciary communications, but, he argues, they became fiduciary
communications when the REI defendants incorporated them into other
documents, namely: (1) the Form S-8 Registration Statement for REI common
stock filed May 28, 1999, and (2) the 10a Prospectus for REI common stock dated
October 25, 2000, which was later distributed to Plan participants.15
In neither case has Kirschbaum shown the REI defendants were acting in
anything other than a corporate capacity in making these statements or
incorporating them into other documents. Varity, 516 U.S. at 505, 116 S. Ct. at
1074. REI’s obligation to file a Form S-8 incorporating its SEC filings is a
corporate obligation arising under the securities laws. 15 U.S.C. § 77e; 17 C.F.R.
§ 239.16b. The same is true of its obligation to incorporate its SEC filings into
a 10a Prospectus, and to distribute that Prospectus to Plan participants.
17 C.F.R. § 230.428(a)(1), (b)(1). When it incorporated its SEC filings into the

15
Kirschbaum’s argument that the REI defendants used these documents to satisfy
their obligations under § 404(c) of ERISA was not presented to the district court and is waived.
See Little v. Liquid Air Corp., 37 F.3d 1069, 1071 n.1 (5th Cir. 1994).

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Forms S-8 and 10a Prospectus, REI was discharging its corporate duties under
the securities laws, and was not acting as an ERISA fiduciary. “Those who
prepare and sign SEC filings do not become ERISA fiduciaries through those
acts, and consequently, do not violate ERISA if the filings contain
misrepresentations.” WorldCom, 263 F. Supp. 2d at 766.
This case is easily distinguishable from Dynegy, a case relied on by
Kirschbaum. In Dynegy the plaintiff alleged the employer had used the 10a
Prospectus as the Summary Plan Description (“SPD”) for ERISA purposes. In
re Dynegy, Inc. ERISA Lit., 309 F. Supp. 2d 861, 869 (S.D. Tex. 2004) (ruling on
12(b)(6) motion). Kirschbaum makes no such claim, and the record reveals that
the REI defendants issued a separate document to serve as the SPD.
Kirschbaum has made no showing that the REI defendants were speaking as
fiduciaries when they made the statements at issue. Accordingly, any remedy
for these statements lies under the securities laws, not ERISA.
CONCLUSION
For these reasons the judgment of the district court is AFFIRMED.

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