District Court Finds Fiduciaries Have No Duty to Investigate False Sale Allegations for ESOP Investment

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In Malcolm v. Trilithic, Inc., 2014 WL 1324082, No. 1:13-cv-00073 (S.D. Ind. Mar. 31, 2014), the Southern District of Indiana held that plan fiduciaries were under no duty to investigate allegations that a false sale had been included in the company’s records as a way of “puff[ing] up [its] receivables account and profitability” to present a better record to the company’s lender bank. Plaintiff, the former CEO and board chairman of the company brought the suit, alleging several ERISA-based causes of action, including a claim for breach of fiduciary duty based on a theory that recording the false sale would put the Company in default of its lending agreement, such default would impact the continued viability of the company, which would put the company’s stock price at risk, and also put the plan participants at risk of losing their benefits. With respect to plaintiff’s fiduciary breach claims, the court cited the Seventh Circuit in finding that a “fiduciary’s duty to investigate ‘only arises when there is some reason to suspect that investing in company stock may be imprudent—that is, there must be something akin to a ‘red flag’ of misconduct.’” The court, however, allowed the action to proceed against two members of the board of directors who knew of but failed to disclose potentially material information regarding the company’s stock value.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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