Legal Case Summary

We'll hear argument this morning in case 12-7-51, fifth third bank court versus Dutinhoffer. Mr. Long? Mr. Chief Justice and may it please the court. A fiduciary's decision to do exactly what an employee stock ownership plan is designed to do and what the plan requires by continuing to offer employer stock as an investment option is presumptively prudent. Statutory language, trust law, congressional policy and practical considerations all support this result. You want us to say that we have sort of a coach-class trustee. We're all traveling in coach-class when we have an ESOP. Once once we go down that road how do we define what the duty of the trustee are? Well we were not asking for a coach-class trustee. I mean we're saying to look at the statutory definition of the duty of prudence in section 1104 A1B which says that the duty of prudence must take into account the character and aims of the enterprise. So when we talk about ESOPs we're talking about a pension plan of a very specific kind. It is designed. The deficit should- This plan didn't require you to invest solely an employer stocked it. This part- It began to be the option to do it and to go above the 10 percent but it didn't require you to buy only employer stocked it. Well, well, Erissa the statute requires that an ESOP invest primarily in employer stock. This particular plan like many plans requires that all of the assets in the ESOP be invested in employer stock except the amount that needs to be in cash for short-term management requirements. So Congress- Could you point to the part of your plan that did that because I looked at it and I didn't see the plan requiring a hundred percent investment. If your honor if you look at page 735 of the joint appendix you find in our 3.3 it states however in all events the fifth third stock fund as described shall be an investment option and then if you look on 736 and then continuing on to 737 it says that the fund shall be invested primarily in fifth third stock. It says it may also be invested in short-term liquid investments to the extent the administrator determines they're desirable to accommodate expected short-run liquidity needs but then it says the trustee shall have no discretionary authority to sell fifth third bank corpse shares or refrain from acquiring additional fifth third bank corpse shares with funds not held for short-run liquidity needs. So we think- It gives the word primarily there's an allegation here that you should have stopped buying stock once you understood that there was a serious condition in the company that you've reached your duty of loyalty not of prudence what do you do with that allegation? Well our what we say is that these duties again we're not asking for coach class duties these are first class if you will duties but they have to be understood in the context of this special kind of plan with special purposes the purpose of an ESOP is the own company stock to give the employees a piece of the rock an ownership interest in the company and so when the issue is as you're as you're posing it just to so to my or at what point does a duty of prudence or a duty of loyalty either one require the trustee to break the plans of the term deviate from the plans. It doesn't say you have to it says primarily doesn't say you have to continue buying. Well again I mean I quoted the language as we read the plan and I think the government agrees with us on this the the instructions of the planner to invest all the money in fifth-thirds stock except as needed for short-term cash requirements now there is the duty of prudence and we're not asking for a second-class duty but we think in this context given this special kind of plan what that duty means is can the purpose on the Mr. Lohley is no presumption written into the statute there is an exception from the diversification requirements that if you're an ESOP the whole object is to buy the company stock and so you don't need to diversify but apart from that the statutory requirement on loyalty and prudence it's underleaded and so I don't know where this presumption comes from it's it's not in the statute itself. Well we do think it comes from the text of the statute it comes from the the duty of prudence itself which looks to the character and aims of the plan and then in section 1107 D6 and ESOP is defined in a rissa to be a plan that's designed to invest primarily in the employer's own stock so we think that defines the special character name of the plans Congress is also spoken to this in other statutory enactments. Section 1104 of a rissa which this this plan is not exempted from says that the fiduciaries must manage a plan and I quote for the exclusive purpose of providing benefits to participants and their beneficiaries you acknowledge that that's binding on it

. It is and the government adds the word retirement before benefits and they say an ESOP must be managed exclusively to provide the retirement benefits but that no I don't add that I'm just saying providing benefits I mean that's you know that's different from we can see running a plan to to own stock in the company that's that's not the basic purpose of it. Well well justice Scalia plans the rissa plans provide different kinds of benefits the pension plans themselves can provide death benefits hardship benefits disability benefits so if the benefit is stock in the company a piece of the rock you know the duty of the fiduciary is to manage that as best as it can be managed to produce the largest benefit for the participants but it's but it's not to go back to your question to say well you know it looks like some other investment would be a better investment this week or this month is there anything in the trust law or the common law that allows us to define benefits that way well I mean I don't think we're asking for a special definition of benefits we're just saying that what this plan provide and trust law does say the set law has a great deal of leeway to define the the benefits that are being provided this is a particular kind of benefit though that Congress not only authorized but has strongly encouraged I mean employers are strongly encouraged to offer this benefit so to say that crudence or loyalty or any of these fiduciary duties requires a sort of continuous monitoring of the company to see whether this is no longer such a good investment. Providing benefits to participants and you're saying the benefits to participants is their ownership of company stock including worthless company stock. Well no not at all Justice Scalia I mean the idea is that the company stock is valuable and the hope that when it ceases to be valuable it seems to be you're not and and we agree as every court of appeals has has held that has looked at this all seven that there does come a time when the purpose of the esop of allowing the employees to build an ownership stake in the company can no longer be realized because the company is in serious peril serious check. There are occasions Mr. Long outside of that very narrow category of cases that you define in which the stock is going to be way way way overvalued relative to what the fiduciaries know is the company's actual value. Let's just say it the market price is four times more than the actual value and the fiduciaries know that because of inside information that they have. It just sort of defies language to say that some approved and person would retain the investment in that kind of wildly overvalued stock doesn't it? Well I mean if I could take that in several steps I mean that material overvaluation standard which no court has ever accepted we think is unworkable. I mean first of all before you get to the inside information which I think is the kernel of it that's left at the end if you have a stock that is traded on an active market you really can't tell the fiduciary absent possibly inside information where you need to outsmart the market. No but I'm talking about a case in which the fiduciary has inside information that that enables him to know that the stock price is way over valuing the actual value of the company. But when you when you get to that point of the analysis and this is what all the courts have recognized you have to then bring in securities law and you have to recognize to trade on that inside information would violate securities law so prudence or loyalty cannot require a violation of securities law so what what are the other options you could halt trading that would not itself violate securities law but that could do great damage to the participants if the company if the company's own ESOP said well we think something is so wrong that we're shutting down the... Well I suppose it could but a prudence manager might say that it would do greater damage to the participants in the plan to enable this misinformation to exist and to keep putting to keep buying stock to keep putting more and more of their retirement investments into something that is really overvalued. Well I mean our point is that that public announcement that the ESOP has stopped allowing purchases of company stock could cause a sort of collapse in the stock price that would be terrible for the participants and saying that prudence requires that. Well he was from the truthful information will out in the end and is it better to go on putting more money into something that is is is you know it's really not a good investment for the participants and beneficiaries. But by you know stopping immediately you cause even greater harm but I think you're so what's wrong with following the law and disclosing that material information to the public and stopping the the employees from losing more money and worthless stock. And I think that's almost worth this. That's ultimately where the government comes on now we've moved a huge distance from let's you know shut down the ESOP to let's release information but there we would say again we think you have to consider this in connection with securities law that if you announce well there's this sort of general duty to release information. I mean first of all that would be quite a big change in Arissa there's there many specific requirements for disclosure of information in Arissa. It's just background information for this point you're discussing. Can you tell me is it a very common practice for the directors and officers of the company themselves to be the trustees? I had just assumed that that didn't happen much anymore. Can you just tell me because a lot of these problems would be taken care of insider information and so forth if there was an outside trustee. And I assume tell me if I'm wrong that the reason for the the trust for the company themselves to do it is because it saves money. It's cheaper than hiring an outside investment maybe I'm wrong about that

. Well I mean several just tell us what the what what the landscape is. First of all it is common so this this happens quite a lot. You know second of all this idea of what we could appoint an independent trustee would not really solve all the problems because you then you have to have a monitoring trustee who would have to give the independent trustee any inside information that they had. So the government suggestion as well okay you get a low-level employee to be the monitoring trustee. Well that could itself violate Arissa if you had somebody so low down that they wouldn't know anything that that also could be a violation. I mean so it's I'm sorry if you're going to. So it's really not a solution but it is common to have the officers of the company and I think it's not just to save money it's because it's a very important part of what the company does and they want to have their top people running it. I mean the dilemma we're talking about which is you've got inside information and if you do something with it it's going to hurt the beneficiary. I mean isn't that just a reflection of the fact that these are really bad investments. I mean you're putting all your eggs in one basket your your your job depends on the company and your your retirement depends on well on the company so that's why you're in this awkward position of say if the company's doing something bad you know having inside inside information that should be disclosed because it affects the stock price and it's going to hurt not only the company do you but also the your retirement stock. Well I mean first of all it's quite right that an ESOP because it's totally undiversified is not by itself a good retirement plan and we think that just confirms that the the special nature and aims of an ESOP is not solely for retirement benefit. But it is it is a purpose Mr. Long isn't it? You said before the statute the statute just has benefits but isn't the plant doesn't plan itself mentioned retirement? Oh yes and and the hope of course is that these plans will produce lots of retirement benefits the third plan for long periods of its history has been extremely successful at producing retirement benefits are our basic argument is though that because of the nature of this plan because it is linked to the company stock and because Congress recently looked at this exact issue after Enron and said we want employees to have choices but company stock can still be a choice and we actually encourage that. The courts. The courts. You don't shut it down as soon as there's trouble. Why do you need a special rule for ESOPs? I mean the the factors that you mentioned it seems to me apply to any trustee who's managing you say oh you should have sold because the stock was overvalued on the on the stock market. Well how's the trustee supposed to know that? Is he going to help guess the market? You know demand that a prudent trustee outgets the market okay so if it's not the market that's overvalued it must be inside knowledge. And you have the same problem about not being able to use that inside knowledge. You can't use it and let me come back. So why do we need a special rule for ESOPs? I'm saying all the points you make apply to any any kind of trustee whether it's only company stock or not. Why do we need a special rule for company stock operations? Well because if it were just ordinary investment right where the purpose really is just to maximize retirement. It's there you do look at the risk return ratio and the expenses. But you have the same the same the same problems that that you justify doing nothing for the ESOP justifies doing nothing in the other in the other plans. Namely you can't expect me to to outsmart the market number one nor can you expect me to use my inside knowledge that violates the securities laws

. So those are your two points but it seems to me those points apply we don't have to adopt a special rule for them. Well then just to Scalia we are agreeing with the lower courts there is absolutely a duty of prudence. We don't deny that with their would come a point when he proves that it's up fiduciary. But even in saying that Mr. Long you have a category where you would say the duty of prudence applies and it's this category where the company is on the verge of collapse. But even there you would face the exact same securities law problems that your saying should preclude the government's test because they're two. You would have this kind of I don't know what to do. I'm between a rock and a hard place. The securities laws prevent me from selling on inside information the same problem supply. Well no what what we're saying is using public information the chances that the company is going to be able to provide employee ownership for the long term may become so low that a prudence fiduciary would decide to shut it down. But I do I do want to answer your question on inside information because I think that's the nub of it. And you raised the point of the fiduciary actually knows the inside information. Don't they have to do something make it public? We talked about the securities law problem with trading on it. The government says well just just make it public just release it to the public. There we think the problem is first of all that that would create this new sort of general erissa duty to provide information when it's not spelled out in erissa as you know which has very specific. It's not an erissa responsibility. It's an SEC responsibility. It's a 10 to 5 responsibility. Aren't you supposed to disclose any information that a reasonable investor? And that would be that's really exactly our point just to so to my or this is if there's inside information that has to be disclosed the securities law provides a complete legal regime for this. The government even agrees that in terms of the timing of disclosure the SEC timing so what would that electron with the rule that simply says a fiduciary has to do whatever it's possible to protect beneficiaries within the bounds of the law. And so if the law requires you to disclose it and you didn't you've reached your duty of prudence and of loyalty because you've protected the company but not the beneficiaries. It sounds good but I think it would create serious problems. I mean you would have then two sources of information about the company the esophagusary which you'd be saying would have an independent duty to decide when it thinks there's been some material misstatement or some inside information and the company which could create great confusion. You don't hear it. You have an absolute duty to the beneficiary

. Well but I guess the point is just to so to my or from the fiduciary can say look if there has been a securities law violation about disclosure or material misstatements there's a securities law remedy for that and the plan participants will get that remedy. Well there might be an issue. In an esophagus can the fiduciary take into account the interests of the participants as employees as opposed to their interests as investors. It doesn't seem to me that those will necessarily always be the same and there may be situations in which something that would be potentially good for the participants as investors would be quite bad for them as employees. They want to keep their jobs. They want the company to stay afloat. Can that properly be taken into account or is that outside of the bank? I mean I don't think you have to do that. I think you know you look at the interest of the participants who are both employees and participants in the plan. You know so I don't think it's necessary to say well we're not even looking at them as participants in the plan. We're looking at them only as employees. We think. No I'm not saying only as employees but I'm saying can you take that into account at all. If you're in the situation where stopping stopping purchases in company stock would be a signal that would potentially trigger bankruptcy and liquidation for the company. Can that be taken into account? It might not be in the best interest if the if the if these participants were simply investors. It might be in their best interest to stop buying the stock but if taking that step would have the consequences that I mentioned. It might be very much not in their best interest as employees. Well I mean I think I'd say that would be one way to sort of work this out. That's another way of getting to the bottom line that we think is correct here which is that an ESOP is a special kind of pension plan and the whole nature of it is the own company stock. Well how do you find to define the standard or the duty that's responsive to Justice Alito's concern and I had the same problem. Let's assume that trustees in non-E-subplan have a duty to maximize returns and provide stable investments. Is it somehow different when it's an ESOP? Yes I think it is. And if so what is the duty? I think the duty is to maximize the returns for this special kind of a vehicle which is a vehicle that own stock and only one company the employees company and for reasons that this kind of goes to Justice Alito's point but in a different way for reasons that go beyond just the returns. It is because it is the the employees company. Congress thought it was beneficial for many reasons to encourage employee ownership of companies and so you don't look to whether this appears to be a bad investment as compared to a mutual. Well if I'm the trustee I don't know what my duty is based on your answer

. I don't know what I'm supposed to do. Well I mean the courts of appeals have had a fairly uniform approach to this for now almost 20 years and it has not been causing a great deal of trouble. The approach they've all been taking is that because of the special nature of ESOPs and you know when the plan requires that all the funds be invested in the ESOP at least that's what the fiduciary must do and that is presumptively prudent. It's not necessarily prudent and there would be you know the way we think the courts have best expressed it if they draw this from trust law if the special aims of this plan employee ownership can no longer reasonably be achieved then prudence requires the plan to be shut down. That is not a bright line standard but that is the standard the courts have adopted. I'd like to save the balance of my time. Thank you Mr. Long. Mr. Man. Thank you Mr. Chief Justice and may it please the court. I think what I can most usefully do is talk first about the question of the relevant benefits that was raised by so-of-you and then second address this so-called rock and hard-place problem which we think is essentially a confession of disloyalty by my most able opposing counsel. First the nature of the benefits in the statute the reference to benefits in 404A2A is quite plain. It refers to the basic type of plan that's covered by a RISC which is an employee benefit plan as defined in Section 10223. I think you would help if you raised the podium a bit. So you're closer to the next slide. Section 10223 describes employee benefit plans which are the subject of RISC and there are two types of employee benefit plans as defining that section there are plans that provide welfare benefits and plans provide pension benefits. I think there's no doubt that the benefits that must be the exclusive purpose of an RISC plan are those benefits that are required to be covered by RISC. And I think we need to remember the grand bargain of a RISC reflected in the statute is if employees are going to provide these kinds of benefits the people that manage the retirement and welfare plans must accept fiduciary duties. That's the bargain of a RISC. If you can provide these kinds of benefits you have to accept fiduciary duties and the sole purpose of the plan under the statute is to provide those benefits. Now I'd like to talk about this idea of this rock in a hard place it was first raised by Justice Kagan. I think that the best way to think about this is essentially what the petitioners are saying is if I decide to put myself in a position where I owe duties to two different people by employer on the one hand and the benefits use of the plan because I've put myself in a conflicted situation it's perfectly right for me to just do nothing. That's not the way it works

. You can imagine a lawyer that undertakes to represent two clients with conflicting interests. If it comes to the point where they're interested in conflictable the lawyers already made a mistake. The lawyer cannot simply say, well, I choose to protect one client not the other. They have to be something and they're going to violate some of the decisions. Sotomayor, can you give me any example of any case? There may be so many you can't even give me your best one. But the costs have been around for probably 800 years and can you give me an example of one where a court said trustee has breached his fiduciary obligation because he failed to use inside information? Oh, no. I think there probably isn't such a case, but I would say. I think there is not such a case. I think there probably is not such a case. If there is not such a case, what's the problem? Because what's the rock in the hard place? Well, the person has an obligation to act prudently in respect to the fiduciaries, to the beneficiaries, of course, but he cannot, irrespective of that, have an obligation to use inside information and, of matter. What's wrong with saying just that? I'm not sure what you mean by that, but I'd like to... Meenbite is just what I said. There is no rule of trust or a whistle-law that you can breach a duty to a beneficiary by failing to use inside information, period. I don't know what the SEC's brief is. I'm going to ask the SVP, but their opinion is, because they don't seem to appear on this brief. I think I would respectfully disagree with that. I think it's important to understand why Justice Breyer and Justice Kagan. So is there's not been a case ever holding the contrary, but you yourself disagree with it. Now, what is the reason you disagree with it? That is because the courts of appeals unanimously, as Mr. Long says, have held that the trustees of these plans have no duties at all. And so if trustees have no duties at all, it's of course quite difficult for them to breach the duties. Now, my.

.. Sorry, I'm saying go back to England. There are many cases where set-loars have said what kinds of things you should invest in. And they invest in them. They have inside information that it is a bad investment. Is there any case that says they have a duty of obligation not to do what the set-loar says? I wouldn't have been surprised if you've found some cases, but I'm also not surprised that there aren't any. That's why I asked the question. With respect to that particular question, I did not understand your question that way. And I don't... I can't say whether there is or has never been such a case. But what's important from our perspective is the trustees in this case undertook to represent conflicting interests. Ordinarily when people undertake to represent conflicting interests... Let me just continue to... Just as Briar's question. There are some legal duties. I don't know of a trustee who has to break the law. They can't sell on the basis of inside information. That's a legal prohibition. I think that's clearly true, but I think they at the same time, at their peril, breach their duties of loyalty to those for whom they've accepted a fiduciary duty

. So your claim rises and falls on the fact that you think they've breached their duty of loyalty by having the inside information. Or exactly what is your claim? What could they have done that wouldn't breach the law? My claim does not rise or fall at all in that, and I don't think there's any reason why you need to address that given the particular nature of the complaint. The complaint in this case alleges that the trustees knew or would have known if they had undertaken a reasonable investigation of the type that is required by ordinary principles of prudence that the stock was maturely overvalued, and the stock was a much more risky investment than it was at the time that the plan was designed. So what would they have to do then? You say they can't sell the stock based on that information. What are they supposed to do? Or is it your argument that you never should have insiders serving as trustees? You always have to have an outsider running these e-sops. Well, I wouldn't say that you always have to, but I do think that the situation is quite parallel to the situation that corporate directors face when they come into a conflicted situation in the corporate context where directors ordinarily are protected by the business judgment rule. If a situation arises in which their interests patently diverge from the interests of the shareholders, they don't simply decide to represent both interests, but pick one over the other. They instead step aside in a point and allow independent people to represent the shareholders. So you're basically saying that if it's not flatly prohibited, it's very unwise. It generally shouldn't happen. You're putting yourself in an impossible position if you are an insider and you're going to serve as the trustee of an e-sop. Well, I think it's a plain implication of Justice Kennedy's opinion in Glenn, and the majority opinion in Glenn, that the structure of the fiduciary and the relationship to the trust being conflicted should raise a red flag. So Eric, here when you say, I am totally with you on this. We walk into the trustee's office. It's like Ralph Nader investigating the FTC years ago. There is someone asleep on the sofa. In his inbox is ten feet of papers telling him about all public, telling him about the corporation's condition. It's apparent he's never read them. If he had read them, he would have taken action. Of course you'd have a case, I would think. But that is not a plain explanation. No, our complain is they have the information. And step one, they didn't do anything. Step one, they did not. I not just information, remember, I carefully said all this was publicly available information

. You want to say it also applies when it's not publicly available information. Am I right or wrong? You are correct, I would also like to say that, but I would like to point out our complain alleges a large amount of information that is one public, two false information promulgated by the petitioners, the fallstie of which perhaps could have been undertaken by, considered, discovered by, considerable investigation. And instead of conducting a reasonable investigation that a trustee for a billion-dollar pension plan ordinarily would conduct, and just to be clear for the early discussion, this is not a plan that is invested solely in fifth-third stock. This plan has a variety of investments. There is one particular fund that has one to two hundred million dollars. I suppose you were a legislator at Congressman. You are absolutely committed to the idea that it's important and salutary to have employees on stock in the company for which they work. How would you write this, Tash? I think Congress has done a great job of writing a statute. Congress wrote a statute that tells employers you can set up these plans and the trustees don't have to diversify, which is inherent in having a plan that is a waste of time. Well, once you say the trustee doesn't have the duty to diversify, it seems to me you're living in something of a different world. I think that that's right, and that's why we believe that the standard of prudence is affected by the fact that it's an employee stock ownership plan. Well, there's a portion of the fund that I was employer stock, but that doesn't mean that there's no duty of loyalty. It shouldn't affect that at all. Well, but affected is not quite enough. I mean, this trustee job is to buy the company stock. In that particular fund, it's 100% other than the money you need to buy and sell. So, I mean, he has the easiest job in the world to get up, gets up in the morning and says, I think I'll buy some of this company stock. That's what he's supposed to do. And I think that what every court of appeals has recognized is that that is by definition prudent because that is the settlers objective with one exception. If everything's going south and the company's collapsing, well, then he does have the obligation to do something. So, I don't understand how you can say that he has breached a fiduciary duty of prudence when the people investing in this ought to know what they're going to get is the company stock. I think it's... I'm glad that you asked that question because I think that's central that the disagreement between respondents and petitioners

. Now, the first answer, of course, is that you can't look at the statute without thinking that Congress had a different understanding of the duties. Now, I just could mention a couple things about the statute. It's not only the point that Justice Gleam made that Section 404A2 specifically cars out some duties but not others. It's also that it only forgives prudence to the extent of diversification, which means that prudence has to mean something about diversification. And then, it still further limits the scope of forgiveness. It only forgives it with respect to the acquisition or holding of qualifying employee securities, employer securities, which is much narrower than the fiduciary duty to find in Section 403 to manage and control the assets of the plan. But what's important for our purposes, it would not... You asked the question, although I think the statute results it, it would not have been sensible for Congress to tell the people that manage employer stock ownership plans that they have no duties of prudence or loyalty to the employers whose retirement funds are at stake. But what is exactly the duty of prudence? Presumably, you invest the funds in the company stock, whether it's going up or going down, right? If you have the funds, all you can do is invest them. The stock is down half a point or whatever. You still buy it, right? Okay, so I'd like to say first, there is a duty of loyalty, and it does be a duty of loyalty, for example, is the court said in veriting a dolingous controversy to lie to the beneficiaries. What's the answer to my question? With respect to the duty... So the duty of loyalty is enough to sustain our... No, I didn't ask a question about the duty of loyalty. I have said to my question of whether or not the trustee is prudent because he buys the stock because it's gone down 10 percent. Okay. The most fundamental thing about the duty of prudence that you would get from the restatement of trust is that the outcome of the investment is not what's relevant. What's relevant is, and Justice Scalia, when he's on the DC Circuit, wrote a long opinion and think, which discusses in detail, and you'd see the same thing in the comments to Section 90, the restatement. The most important thing is what you might call procedural prudence. Okay. These people are managing a fund of a billion dollars. The role of the question is, what would a reasonable trustee of a billion dollar fund have done to investigate the situation? Would someone with a billion dollar fund and a hundred to two hundred million dollars and fifth-thirds stock have routinely been collecting information about the nature of that investment, whether they should take some action? It will might be that they should not in a flighty or haphazard way, just pose of the stock because that's the baseline of this plan is going to invest in the stock. But that's entirely different from doing absolutely nothing, not telling the information. Do you think the clear is information? Has a duty to acquire inside information? I trustee say, I don't want to know inside information. I'm going to put myself in exactly the position of an outside trustee. So I'm going to take into account only public information. I'm not going to do an investigation. Our position is that the duty of the trustee is to behave as a prudent producer who would behave. And if the trustee is unable to do that because the trustee is conflicting, if you can interest a serve, then the trustee is violating the duty of loyalty and should arrange a decision. Well, what was the answer to my question? Assuming that the answer to your question for an insider to be in this position can the insider behave like an outsider? I think it's plainly the case that if the trustee does not undertake the investigation that a prudent producer would take because of their concern about acquiring inside information to the employer, then they would violate the ordinary standard of prudence. Well, can we talk concretely instead of saying that they've got to do what a prudent producer could do? Are they allowed to take into account the impact of a decision to stop buying on the beneficiaries? The stock is going down if the trustee stops buying, that's going to cause it drop in the value of the shares, and that's going to hurt the beneficiaries. So what does he do? Does he say, I shouldn't buy any more because I think it's going to go down some more or should he say, I should keep buying because otherwise all the holdings, and this is all they're invested in, their holdings are going to go down. I think the obligation of the fiduciary at all times is to behave prudently and manage the investment prudently. I asked for an answer to the question, and it's not going to help me to have this mantra that he's supposed to ask. I don't believe that the question is whether they must sell or mustn't sell. I think they have to decide, would it be based on the facts we know right now, do we believe that this is a short-term blip in the stocks and rise back up in which case we... No way, what happens is that the trustee knowing that the company is announced an enormous oil strike has happened to sit on a private meeting where three people come in and you say, yeah, there was an oil strike, but it's impossible to get the oil out. Ha ha, we put one over on that time. Okay, now what's that trustee supposed to do? I think I lost track of whether the oil strike was true or false. There's a false. He alone, and two other people know that this oil is worthless, the market doesn't, it's totally inside information, what in your opinion is he supposed to do? I believe that the trustee violates the duty of loyalty and the duty of prudence. If the trustee believing that the stock is overvalued, in fact, does not take action to protect the benefit of the company

. Okay. These people are managing a fund of a billion dollars. The role of the question is, what would a reasonable trustee of a billion dollar fund have done to investigate the situation? Would someone with a billion dollar fund and a hundred to two hundred million dollars and fifth-thirds stock have routinely been collecting information about the nature of that investment, whether they should take some action? It will might be that they should not in a flighty or haphazard way, just pose of the stock because that's the baseline of this plan is going to invest in the stock. But that's entirely different from doing absolutely nothing, not telling the information. Do you think the clear is information? Has a duty to acquire inside information? I trustee say, I don't want to know inside information. I'm going to put myself in exactly the position of an outside trustee. So I'm going to take into account only public information. I'm not going to do an investigation. Our position is that the duty of the trustee is to behave as a prudent producer who would behave. And if the trustee is unable to do that because the trustee is conflicting, if you can interest a serve, then the trustee is violating the duty of loyalty and should arrange a decision. Well, what was the answer to my question? Assuming that the answer to your question for an insider to be in this position can the insider behave like an outsider? I think it's plainly the case that if the trustee does not undertake the investigation that a prudent producer would take because of their concern about acquiring inside information to the employer, then they would violate the ordinary standard of prudence. Well, can we talk concretely instead of saying that they've got to do what a prudent producer could do? Are they allowed to take into account the impact of a decision to stop buying on the beneficiaries? The stock is going down if the trustee stops buying, that's going to cause it drop in the value of the shares, and that's going to hurt the beneficiaries. So what does he do? Does he say, I shouldn't buy any more because I think it's going to go down some more or should he say, I should keep buying because otherwise all the holdings, and this is all they're invested in, their holdings are going to go down. I think the obligation of the fiduciary at all times is to behave prudently and manage the investment prudently. I asked for an answer to the question, and it's not going to help me to have this mantra that he's supposed to ask. I don't believe that the question is whether they must sell or mustn't sell. I think they have to decide, would it be based on the facts we know right now, do we believe that this is a short-term blip in the stocks and rise back up in which case we... No way, what happens is that the trustee knowing that the company is announced an enormous oil strike has happened to sit on a private meeting where three people come in and you say, yeah, there was an oil strike, but it's impossible to get the oil out. Ha ha, we put one over on that time. Okay, now what's that trustee supposed to do? I think I lost track of whether the oil strike was true or false. There's a false. He alone, and two other people know that this oil is worthless, the market doesn't, it's totally inside information, what in your opinion is he supposed to do? I believe that the trustee violates the duty of loyalty and the duty of prudence. If the trustee believing that the stock is overvalued, in fact, does not take action to protect the benefit of the company. In case your answer is, I just, totally inside information, he sells. Right? I didn't say that, I think he needs to do something. I just don't see what the trustee is supposed to do. You have the company stock. By comparing it with other stock, there'll be many investments that are just as good or better. When does he have to make the investment and was just as good or better? I don't understand. I don't understand how we're going to implement what Congress wanted to implement. Well, we believe that the traditional fiduciary standard is not that hard to implement. It's a standard that's been imposed on fiduciaries for centuries. It's a standard that all managers have trusted undertaken. The only thing that's really different about these particular trustees is that they're managing funds that are worth, you know, billions dollars. And you said you were going to deal with the rock and the hard place, but it's been put to you that if the trustee goes out and sells, that'll be a signal that things are bad with the company. So it will end up being worse for the beneficiaries of the plan. Well, we certainly believe that if the trustees view based on the information, is it selling the stock would be bad for beneficiaries, then a decision not to sell is prudent. If the trustee decides selling would be bad for beneficiaries, so we're not going to sell that to prudent decision. It might be right, it might be wrong. But if that's their decision, I think that's prudent. If the trustee decides selling would be beneficial to beneficiaries, it might be right, it might be wrong. And if that's what they actively decide, then I think they need to do something. And that's our position. Now, the rock and the hard place, I understand that some of the justice is disagree, but I mean, our position on that is quite clear. The only reason practitioners are between the rock and the hard place is they've undertaken to have interests that directly conflict with their fiduciary obligation to these employees' retirement benefits. There's nothing in the statute, there's no practical consideration that practitioners have suggested. There's no reason that these funds need to be managed by insiders. For the argument that you have outside trustees, they have to get information

. In case your answer is, I just, totally inside information, he sells. Right? I didn't say that, I think he needs to do something. I just don't see what the trustee is supposed to do. You have the company stock. By comparing it with other stock, there'll be many investments that are just as good or better. When does he have to make the investment and was just as good or better? I don't understand. I don't understand how we're going to implement what Congress wanted to implement. Well, we believe that the traditional fiduciary standard is not that hard to implement. It's a standard that's been imposed on fiduciaries for centuries. It's a standard that all managers have trusted undertaken. The only thing that's really different about these particular trustees is that they're managing funds that are worth, you know, billions dollars. And you said you were going to deal with the rock and the hard place, but it's been put to you that if the trustee goes out and sells, that'll be a signal that things are bad with the company. So it will end up being worse for the beneficiaries of the plan. Well, we certainly believe that if the trustees view based on the information, is it selling the stock would be bad for beneficiaries, then a decision not to sell is prudent. If the trustee decides selling would be bad for beneficiaries, so we're not going to sell that to prudent decision. It might be right, it might be wrong. But if that's their decision, I think that's prudent. If the trustee decides selling would be beneficial to beneficiaries, it might be right, it might be wrong. And if that's what they actively decide, then I think they need to do something. And that's our position. Now, the rock and the hard place, I understand that some of the justice is disagree, but I mean, our position on that is quite clear. The only reason practitioners are between the rock and the hard place is they've undertaken to have interests that directly conflict with their fiduciary obligation to these employees' retirement benefits. There's nothing in the statute, there's no practical consideration that practitioners have suggested. There's no reason that these funds need to be managed by insiders. For the argument that you have outside trustees, they have to get information. And if they get the information from an insider, then we're back in the same place. Of course, if you wait until you're in possession of information and you know the stock is overvalued, you can't sell the problem by stepping aside then. But if you set up the trust in hands of an independent investment manager in the beginning, we believe that if you look carefully to provisions of Section 11 of 5C and D, you'll see that Congress has provided a great deal of protection for the person that appoints. Of course, it's true that if the person in the company that appoints a fiduciary knows that there's a breach of fiduciary duty by the investment manager, they're still liable. But what else could Congress possibly say? Congress couldn't run a statute that says people that knowingly breach fiduciary duties of the employees are not supposed to be liable. So the status of the trustee, whether it's an interested party or a disinterested fiduciary is disclosed to the beneficiaries, I take it, at the outset. They can decide that they don't want to invest in that particular fund and they're nine other options because of that potential conflict. Yes, they are advised of that. Their ability not to invest in that particular fund is limited during the class period because all of the matching contributions for all of the class period went directly into this fund. So employees would have to take the active step to remove them from the fund. If they wanted to. Frontly. They got 4% matching funds if they were in that fund. That is correct. I think the most important thing for us to emphasize is the point of Arissa is that if an employer is going to provide employee benefits, the people that manage those benefits have to accept fiduciary duties. There's nothing unusual about that. The standard is not unworkable. It's a standard that is provided for centuries. And if the only reason that the people managing the fund can't comply with those duties is because they have obligations to the employers, then that is not something that Arissa can tolerate. Thank you. Thank you, Council. Mr. Nieder? Mr. Chief Justice, and may it please the court. Several points at the outset

. And if they get the information from an insider, then we're back in the same place. Of course, if you wait until you're in possession of information and you know the stock is overvalued, you can't sell the problem by stepping aside then. But if you set up the trust in hands of an independent investment manager in the beginning, we believe that if you look carefully to provisions of Section 11 of 5C and D, you'll see that Congress has provided a great deal of protection for the person that appoints. Of course, it's true that if the person in the company that appoints a fiduciary knows that there's a breach of fiduciary duty by the investment manager, they're still liable. But what else could Congress possibly say? Congress couldn't run a statute that says people that knowingly breach fiduciary duties of the employees are not supposed to be liable. So the status of the trustee, whether it's an interested party or a disinterested fiduciary is disclosed to the beneficiaries, I take it, at the outset. They can decide that they don't want to invest in that particular fund and they're nine other options because of that potential conflict. Yes, they are advised of that. Their ability not to invest in that particular fund is limited during the class period because all of the matching contributions for all of the class period went directly into this fund. So employees would have to take the active step to remove them from the fund. If they wanted to. Frontly. They got 4% matching funds if they were in that fund. That is correct. I think the most important thing for us to emphasize is the point of Arissa is that if an employer is going to provide employee benefits, the people that manage those benefits have to accept fiduciary duties. There's nothing unusual about that. The standard is not unworkable. It's a standard that is provided for centuries. And if the only reason that the people managing the fund can't comply with those duties is because they have obligations to the employers, then that is not something that Arissa can tolerate. Thank you. Thank you, Council. Mr. Nieder? Mr. Chief Justice, and may it please the court. Several points at the outset. Justice Alito asked about taking into account the interest of employees as employees. But Section 1104 speaks in terms of operating the plan for the exclusive purpose of providing benefits to participants and their beneficiaries, which means the interests of employees are taken into account only in so far as they are participants in the plan, not more generally. And the second and related point I'd like to make with respect to that is the use of the word benefits in 1104A that says that the plan must be operator for the exclusive purpose of providing benefits to participants. We had that on page 6A of our petition appendix. Further up on that is the definition in 1234 of an individual account plan, which is- This is a stock drop in and of itself. I don't think can prove a lack of proofs. You agree with that? Yes, we do. There are situations in which there may be additional unusual circumstances, but simply a stock drop would not, but I think that as Justice Scalia pointed out, that would also be true in a diversified plan. Exactly. It's true almost anywhere because you can't outsmart the market. So we're not insisting that a fiduciary in order to be proved- So how do you deal with what's been vexing us? The issue of what a fiduciary should or can do when they're an insider and have only inside information, not public information. Right. So where is the breach of fiduciary duty? Where's the breach of loyalty? What can it consist of? And what does someone have to prove in a complaint? This has to do with the pleading presumption and a merits presumption. Right. If this is a- If there's a substantive principle here, that would have to be pleaded if it's an evidentiary presumption, as the Sixth Circuit said, that would not have to be pleaded in the complaint. But several points on that. First of all, in response to Justice Breyer's question about inside information, we point out page 31 of our brief, quoting Scott, that if a fiduciary has peculiar knowledge about a corporation's stocks value, that is a factor to be taken into account in terms of the way the trusty exercises. His response to the union brief says the thing to do in that situation is without saying anything. Turn the trusty ship over to a person who doesn't have that knowledge that takes care of the problem. And the reason I raised the question, of course, is there trillions of dollars probably managed by a RISFundz? I don't know what percentage of those involved stocks, a lot of this kind, of this kind of a- maybe you know, but my guess is a lot. And obviously, before I wrote it a word that said what you have to do or don't have to do, with inside information, I would like to know directly, not indirectly, what the SEC thinks. Well, and maybe you can tell me, but the SEC isn't here, at least there's no SEC lawyer that signed your brief. So I don't know the extent to which that's primarily a labor case. It might be you might have a good reason for it. Right now I am supposed to write some words or join some words

. Justice Alito asked about taking into account the interest of employees as employees. But Section 1104 speaks in terms of operating the plan for the exclusive purpose of providing benefits to participants and their beneficiaries, which means the interests of employees are taken into account only in so far as they are participants in the plan, not more generally. And the second and related point I'd like to make with respect to that is the use of the word benefits in 1104A that says that the plan must be operator for the exclusive purpose of providing benefits to participants. We had that on page 6A of our petition appendix. Further up on that is the definition in 1234 of an individual account plan, which is- This is a stock drop in and of itself. I don't think can prove a lack of proofs. You agree with that? Yes, we do. There are situations in which there may be additional unusual circumstances, but simply a stock drop would not, but I think that as Justice Scalia pointed out, that would also be true in a diversified plan. Exactly. It's true almost anywhere because you can't outsmart the market. So we're not insisting that a fiduciary in order to be proved- So how do you deal with what's been vexing us? The issue of what a fiduciary should or can do when they're an insider and have only inside information, not public information. Right. So where is the breach of fiduciary duty? Where's the breach of loyalty? What can it consist of? And what does someone have to prove in a complaint? This has to do with the pleading presumption and a merits presumption. Right. If this is a- If there's a substantive principle here, that would have to be pleaded if it's an evidentiary presumption, as the Sixth Circuit said, that would not have to be pleaded in the complaint. But several points on that. First of all, in response to Justice Breyer's question about inside information, we point out page 31 of our brief, quoting Scott, that if a fiduciary has peculiar knowledge about a corporation's stocks value, that is a factor to be taken into account in terms of the way the trusty exercises. His response to the union brief says the thing to do in that situation is without saying anything. Turn the trusty ship over to a person who doesn't have that knowledge that takes care of the problem. And the reason I raised the question, of course, is there trillions of dollars probably managed by a RISFundz? I don't know what percentage of those involved stocks, a lot of this kind, of this kind of a- maybe you know, but my guess is a lot. And obviously, before I wrote it a word that said what you have to do or don't have to do, with inside information, I would like to know directly, not indirectly, what the SEC thinks. Well, and maybe you can tell me, but the SEC isn't here, at least there's no SEC lawyer that signed your brief. So I don't know the extent to which that's primarily a labor case. It might be you might have a good reason for it. Right now I am supposed to write some words or join some words. And those words will tell trustees of possibly, I have no idea, but maybe hundreds of billions, or maybe billions anyway, of assets in the stock market. What they're supposed to do, when they learn some inside information that affects the company's stock. And I hate to tell you I don't know anything in this area about what the likely effects are, and therefore I'd like to know what they think. And the closest I came to it was the AFL-CIOBree, frankly, where they said what you're supposed to do here is turn this over. So what do I do? Well, that is, of course, one option. If circumstances get very bad, this was true in the WR race situation. The inside trustees appointed an outside trustee to do any evaluation. But the first step that Mr. Mann pointed out is I think a fundamental one that should not be overlooked here. And that is that the fiduciaries have an obligation to actually exercise their discretion and actually investigate. And here the allegation is that these trustees did not even do that. So if you're going to be giving deference to a trustee under the administration. I'm sorry, investigate what? The non-public information? Investigate the consequences of the non-public information. This would be true of public information too. This is not a plan like this, even though it is exempt from requirements of diversification. There are still prudent duties which include investigation and monitoring of the investment. So the fiduciaries of a plan like this do have an ongoing obligation to investigate and to keep themselves apprised of how the company is doing. Well, what exactly concrete terms? What do you do as the trustee? You have this information, inside information, that says that the stock is overvalued. Do you sell in which case the beneficiaries holdings go way down and they sue you? Or do you not sell in which case when the information comes out? The beneficiaries sue you because their value goes down. But what are you supposed to do? In the category of cases we're talking about here and these are the ones that are the greatest concern to the Department of Labor. The stock is materially overvalued because of the inside information. And that situation, and I think this is the point Justice Kagan was making, it would ordinarily be the right thing to do to sell. The truth will out eventually, but there may be a precipitous drop. The stock has already been at a level and stock has already been purchased at an inflated level which means that the employees are not getting what they were entitled to. But you say you sell? You can sell based on the inside information? No, he can't sell on the basis of inside information

. And those words will tell trustees of possibly, I have no idea, but maybe hundreds of billions, or maybe billions anyway, of assets in the stock market. What they're supposed to do, when they learn some inside information that affects the company's stock. And I hate to tell you I don't know anything in this area about what the likely effects are, and therefore I'd like to know what they think. And the closest I came to it was the AFL-CIOBree, frankly, where they said what you're supposed to do here is turn this over. So what do I do? Well, that is, of course, one option. If circumstances get very bad, this was true in the WR race situation. The inside trustees appointed an outside trustee to do any evaluation. But the first step that Mr. Mann pointed out is I think a fundamental one that should not be overlooked here. And that is that the fiduciaries have an obligation to actually exercise their discretion and actually investigate. And here the allegation is that these trustees did not even do that. So if you're going to be giving deference to a trustee under the administration. I'm sorry, investigate what? The non-public information? Investigate the consequences of the non-public information. This would be true of public information too. This is not a plan like this, even though it is exempt from requirements of diversification. There are still prudent duties which include investigation and monitoring of the investment. So the fiduciaries of a plan like this do have an ongoing obligation to investigate and to keep themselves apprised of how the company is doing. Well, what exactly concrete terms? What do you do as the trustee? You have this information, inside information, that says that the stock is overvalued. Do you sell in which case the beneficiaries holdings go way down and they sue you? Or do you not sell in which case when the information comes out? The beneficiaries sue you because their value goes down. But what are you supposed to do? In the category of cases we're talking about here and these are the ones that are the greatest concern to the Department of Labor. The stock is materially overvalued because of the inside information. And that situation, and I think this is the point Justice Kagan was making, it would ordinarily be the right thing to do to sell. The truth will out eventually, but there may be a precipitous drop. The stock has already been at a level and stock has already been purchased at an inflated level which means that the employees are not getting what they were entitled to. But you say you sell? You can sell based on the inside information? No, he can't sell on the basis of inside information. I'm sorry, he could stop purchasing with that market. We'll see through that in about two seconds. But that isn't really my question, it's a numerical question. I was making up numbers wildly. What are the actual numbers that is approximately how much in assets is accounted for by ownership of the companies? This kind of a plan, were you by the company stock? I know. I don't know the amount of assets out. As I recall, I think there are perhaps 12 or 14,000 ESOP plans. Some about half the employees covered are in publicly traded corporations. I want to make another point in terms of the purposes of an ESOP. Congress has provided for investment in employer stock, but it has not accepted the fiduciaries from the general duty of prudence. The statute makes that clear. And in 2006, Congress provided that employees of publicly traded companies must be given the right to diversify. You're argument at least according to the petitioner's brief, and I think they're correct. You go away from the purity standard. You have your own standard, whether or not it's materially overvalued in this instance. Or you say that. Or inside, whether it's inside information, and is materially overvalued. But then you are creating a special standard, which is just what you're accusing the petitioners of doing. Well, the question is what's a general standard of prudence, and it would always be improved for diversified or non-diversified plan for the fiduciaries to purchase an asset that they or hold on to, an asset that they know to be or should know with reasonable investigation, is materially. Let me give you this example. It's helpful to have something concrete here and not just general statements about fiduciary duty. Let's say that the trustee receives inside information that someone has alleged that corporate office, a particular corporate officer, has engaged in illegal conduct. And if it turns out that that conduct actually took place, that information, if that will cause damage to the company. But it hasn't been proven. There's simply been an allegation

. I'm sorry, he could stop purchasing with that market. We'll see through that in about two seconds. But that isn't really my question, it's a numerical question. I was making up numbers wildly. What are the actual numbers that is approximately how much in assets is accounted for by ownership of the companies? This kind of a plan, were you by the company stock? I know. I don't know the amount of assets out. As I recall, I think there are perhaps 12 or 14,000 ESOP plans. Some about half the employees covered are in publicly traded corporations. I want to make another point in terms of the purposes of an ESOP. Congress has provided for investment in employer stock, but it has not accepted the fiduciaries from the general duty of prudence. The statute makes that clear. And in 2006, Congress provided that employees of publicly traded companies must be given the right to diversify. You're argument at least according to the petitioner's brief, and I think they're correct. You go away from the purity standard. You have your own standard, whether or not it's materially overvalued in this instance. Or you say that. Or inside, whether it's inside information, and is materially overvalued. But then you are creating a special standard, which is just what you're accusing the petitioners of doing. Well, the question is what's a general standard of prudence, and it would always be improved for diversified or non-diversified plan for the fiduciaries to purchase an asset that they or hold on to, an asset that they know to be or should know with reasonable investigation, is materially. Let me give you this example. It's helpful to have something concrete here and not just general statements about fiduciary duty. Let's say that the trustee receives inside information that someone has alleged that corporate office, a particular corporate officer, has engaged in illegal conduct. And if it turns out that that conduct actually took place, that information, if that will cause damage to the company. But it hasn't been proven. There's simply been an allegation. Now, at that point, what does the trustee, what do you think the trustee has to do? If that information were available to the public, let's say it would cause the price of the stock to go down. So it's material, it's material information, but at a somewhat preliminary stage. What do you do? Completely stop buying the stock? You can't sell, disclose the information? What is it? What's to be done? There's no absolute answer in that situation. Stopping buying might be the right approach. That's not uncommon. And there are blackout periods where plans and companies bar trading in the stock. But if it's material information that the securities laws required to be disclosed, there's no reason why the participants in an ERISA plan should be unprotected when that material information... But with that information, have to be disclosed under the securities laws. Let's say there was no prior misleading statement regarding this matter. It would have to be disclosed eventually. If it's major, it might have to be disclosed within four days under 8K, otherwise it would be quarterly or annually. And we are suggesting that disclosure obligations should be geared to what the securities law applied to. The Chief Justice indicated I can't ask this one question. Is this a case in which we must decide what the fiduciary standard is? Quite with that regard inside information. Is inside information just an added issue in the case or is it the key issue in the case? We think in this case it is the key issue. The Court does not have to decide what fiduciary obligations, the fiduciary of an ESOP, would have in dire circumstances where you have a failing company or mismanagement or something like that. We are focused here on inside information that materially enhances the value of the stock, overvalues it. And in that situation we think that fiduciary of an ESOP, just like the fiduciary of any other plan, has a duty of prudence not to remain invested in or to purchase materially overvalued stock. Thank you, Council. Mr. Long, you have five minutes. On the ESOP Association brief reports at page 2 that there are $1.07 trillion in these employee stock plans

. Now, at that point, what does the trustee, what do you think the trustee has to do? If that information were available to the public, let's say it would cause the price of the stock to go down. So it's material, it's material information, but at a somewhat preliminary stage. What do you do? Completely stop buying the stock? You can't sell, disclose the information? What is it? What's to be done? There's no absolute answer in that situation. Stopping buying might be the right approach. That's not uncommon. And there are blackout periods where plans and companies bar trading in the stock. But if it's material information that the securities laws required to be disclosed, there's no reason why the participants in an ERISA plan should be unprotected when that material information... But with that information, have to be disclosed under the securities laws. Let's say there was no prior misleading statement regarding this matter. It would have to be disclosed eventually. If it's major, it might have to be disclosed within four days under 8K, otherwise it would be quarterly or annually. And we are suggesting that disclosure obligations should be geared to what the securities law applied to. The Chief Justice indicated I can't ask this one question. Is this a case in which we must decide what the fiduciary standard is? Quite with that regard inside information. Is inside information just an added issue in the case or is it the key issue in the case? We think in this case it is the key issue. The Court does not have to decide what fiduciary obligations, the fiduciary of an ESOP, would have in dire circumstances where you have a failing company or mismanagement or something like that. We are focused here on inside information that materially enhances the value of the stock, overvalues it. And in that situation we think that fiduciary of an ESOP, just like the fiduciary of any other plan, has a duty of prudence not to remain invested in or to purchase materially overvalued stock. Thank you, Council. Mr. Long, you have five minutes. On the ESOP Association brief reports at page 2 that there are $1.07 trillion in these employee stock plans. And we think really that's the key here. All of the courts of appeals, considering many cases, you know, with many different fact patterns, have not disagreed. There is no circuit split on the issue that we have spent all our time discussing this morning. The only circuit split is on whether this presumption applies at the motion to dismiss stage. The real point here is, as Justice Kennedy said, Congress strongly supports ESOPs. It wants to encourage them. I appreciate that. But if I'm listening to the government carefully and understanding its position, it's basically saying if there's been a violation of the securities law that a fiduciary knows, then why shouldn't it be liable both under the company under 10B5, and the director of the plan or the trustee of the plan as a breach of loyalty to or of prudence to the beneficiaries? Yes, it's a double remedy. There's lots of things that provide double remedies. So if that person should have disclosed. Well, I mean, securities law will provide the first remedy, and if you're going to add it, it will be a good remedy. Well, but the additional risk of remedy in this ESOP context is going to create these tremendous problems. I couldn't begin to understand what the ESOP fiduciary was supposed to do in these circumstances. I think that that's the simple answer. Well, but you'll create two different centers of communication now out of each corporation within ESOP. The corporation's own statements, and then the ESOP fiduciary will have to come to independent. You know, they could be at the conflict. Well, I'm not treading my shoulder out of lack of sympathy, but out of reality, the loyalty is to the beneficiaries. If you're going to place someone there who comes to not inside knowledge, you're going to create potentially a problem. Well, but I think your adversary was saying that's a self-induced problem. Not one that the law should excuse you. Well, I'm following whatever the law is. Well, but two points. I mean, you should, I would submit. You should be very cautious about interpreting these duties in ways that will make ESOPs unworkable

. And we think really that's the key here. All of the courts of appeals, considering many cases, you know, with many different fact patterns, have not disagreed. There is no circuit split on the issue that we have spent all our time discussing this morning. The only circuit split is on whether this presumption applies at the motion to dismiss stage. The real point here is, as Justice Kennedy said, Congress strongly supports ESOPs. It wants to encourage them. I appreciate that. But if I'm listening to the government carefully and understanding its position, it's basically saying if there's been a violation of the securities law that a fiduciary knows, then why shouldn't it be liable both under the company under 10B5, and the director of the plan or the trustee of the plan as a breach of loyalty to or of prudence to the beneficiaries? Yes, it's a double remedy. There's lots of things that provide double remedies. So if that person should have disclosed. Well, I mean, securities law will provide the first remedy, and if you're going to add it, it will be a good remedy. Well, but the additional risk of remedy in this ESOP context is going to create these tremendous problems. I couldn't begin to understand what the ESOP fiduciary was supposed to do in these circumstances. I think that that's the simple answer. Well, but you'll create two different centers of communication now out of each corporation within ESOP. The corporation's own statements, and then the ESOP fiduciary will have to come to independent. You know, they could be at the conflict. Well, I'm not treading my shoulder out of lack of sympathy, but out of reality, the loyalty is to the beneficiaries. If you're going to place someone there who comes to not inside knowledge, you're going to create potentially a problem. Well, but I think your adversary was saying that's a self-induced problem. Not one that the law should excuse you. Well, I'm following whatever the law is. Well, but two points. I mean, you should, I would submit. You should be very cautious about interpreting these duties in ways that will make ESOPs unworkable. And I think that would basically cause many companies to say we can't put fiduciaries in that situation. So we're not going to have ESOPs at all. And the, you know, again, because the special purpose of an ESOP is to give the employees a piece of the rock, ownership in the company. If the company is going through temporary hard times, even if there's a situation where there's some, you know, material misinformation that is out in the market, that may all be corrected in the long term. You know, in this case, if the fiduciaries had shut down the ESOP, they would certainly have been sued because they would have violated the plan terms. And the plan has done very well. It's gone up from $2 to over $22. So they might have had a very hard time winning that case because they would have been challenged that prudence didn't really require you to shut it down. Yes, we were going through some severe problems, but we came through them. That's the razor's edge. That's the rock in the hard place. They're going to be sued. And unless you recognize this presumption that every court of appeals is recognized to give the ESOP fiduciaries some leeway, they're going to be different from any other fiduciary in any other plan because it's the company stock. And if they, you know, if the stock goes down under this open end to duty prudence, they're going to be sued for not having anticipated that and done something sold, stop trading, put out information. But if they don't do it and the stock goes up, they're going to be sued for that. And in fact, you know, if you recognize the government's approach, there'll be a whole new class of cases, which is if the stock goes up, the plaintiff's lawyers will be able to argue, well, the fiduciary should have anticipated that. And the participants who were selling and deciding to move over to the S&P 500 fund, you let them sell their stock too cheaply and that's a violation. So it's it's unworkable. We submit. Thank you, counsel. The case is submitted.

We'll hear argument this morning in case 12-7-51, fifth third bank court versus Dutinhoffer. Mr. Long? Mr. Chief Justice and may it please the court. A fiduciary's decision to do exactly what an employee stock ownership plan is designed to do and what the plan requires by continuing to offer employer stock as an investment option is presumptively prudent. Statutory language, trust law, congressional policy and practical considerations all support this result. You want us to say that we have sort of a coach-class trustee. We're all traveling in coach-class when we have an ESOP. Once once we go down that road how do we define what the duty of the trustee are? Well we were not asking for a coach-class trustee. I mean we're saying to look at the statutory definition of the duty of prudence in section 1104 A1B which says that the duty of prudence must take into account the character and aims of the enterprise. So when we talk about ESOPs we're talking about a pension plan of a very specific kind. It is designed. The deficit should- This plan didn't require you to invest solely an employer stocked it. This part- It began to be the option to do it and to go above the 10 percent but it didn't require you to buy only employer stocked it. Well, well, Erissa the statute requires that an ESOP invest primarily in employer stock. This particular plan like many plans requires that all of the assets in the ESOP be invested in employer stock except the amount that needs to be in cash for short-term management requirements. So Congress- Could you point to the part of your plan that did that because I looked at it and I didn't see the plan requiring a hundred percent investment. If your honor if you look at page 735 of the joint appendix you find in our 3.3 it states however in all events the fifth third stock fund as described shall be an investment option and then if you look on 736 and then continuing on to 737 it says that the fund shall be invested primarily in fifth third stock. It says it may also be invested in short-term liquid investments to the extent the administrator determines they're desirable to accommodate expected short-run liquidity needs but then it says the trustee shall have no discretionary authority to sell fifth third bank corpse shares or refrain from acquiring additional fifth third bank corpse shares with funds not held for short-run liquidity needs. So we think- It gives the word primarily there's an allegation here that you should have stopped buying stock once you understood that there was a serious condition in the company that you've reached your duty of loyalty not of prudence what do you do with that allegation? Well our what we say is that these duties again we're not asking for coach class duties these are first class if you will duties but they have to be understood in the context of this special kind of plan with special purposes the purpose of an ESOP is the own company stock to give the employees a piece of the rock an ownership interest in the company and so when the issue is as you're as you're posing it just to so to my or at what point does a duty of prudence or a duty of loyalty either one require the trustee to break the plans of the term deviate from the plans. It doesn't say you have to it says primarily doesn't say you have to continue buying. Well again I mean I quoted the language as we read the plan and I think the government agrees with us on this the the instructions of the planner to invest all the money in fifth-thirds stock except as needed for short-term cash requirements now there is the duty of prudence and we're not asking for a second-class duty but we think in this context given this special kind of plan what that duty means is can the purpose on the Mr. Lohley is no presumption written into the statute there is an exception from the diversification requirements that if you're an ESOP the whole object is to buy the company stock and so you don't need to diversify but apart from that the statutory requirement on loyalty and prudence it's underleaded and so I don't know where this presumption comes from it's it's not in the statute itself. Well we do think it comes from the text of the statute it comes from the the duty of prudence itself which looks to the character and aims of the plan and then in section 1107 D6 and ESOP is defined in a rissa to be a plan that's designed to invest primarily in the employer's own stock so we think that defines the special character name of the plans Congress is also spoken to this in other statutory enactments. Section 1104 of a rissa which this this plan is not exempted from says that the fiduciaries must manage a plan and I quote for the exclusive purpose of providing benefits to participants and their beneficiaries you acknowledge that that's binding on it. It is and the government adds the word retirement before benefits and they say an ESOP must be managed exclusively to provide the retirement benefits but that no I don't add that I'm just saying providing benefits I mean that's you know that's different from we can see running a plan to to own stock in the company that's that's not the basic purpose of it. Well well justice Scalia plans the rissa plans provide different kinds of benefits the pension plans themselves can provide death benefits hardship benefits disability benefits so if the benefit is stock in the company a piece of the rock you know the duty of the fiduciary is to manage that as best as it can be managed to produce the largest benefit for the participants but it's but it's not to go back to your question to say well you know it looks like some other investment would be a better investment this week or this month is there anything in the trust law or the common law that allows us to define benefits that way well I mean I don't think we're asking for a special definition of benefits we're just saying that what this plan provide and trust law does say the set law has a great deal of leeway to define the the benefits that are being provided this is a particular kind of benefit though that Congress not only authorized but has strongly encouraged I mean employers are strongly encouraged to offer this benefit so to say that crudence or loyalty or any of these fiduciary duties requires a sort of continuous monitoring of the company to see whether this is no longer such a good investment. Providing benefits to participants and you're saying the benefits to participants is their ownership of company stock including worthless company stock. Well no not at all Justice Scalia I mean the idea is that the company stock is valuable and the hope that when it ceases to be valuable it seems to be you're not and and we agree as every court of appeals has has held that has looked at this all seven that there does come a time when the purpose of the esop of allowing the employees to build an ownership stake in the company can no longer be realized because the company is in serious peril serious check. There are occasions Mr. Long outside of that very narrow category of cases that you define in which the stock is going to be way way way overvalued relative to what the fiduciaries know is the company's actual value. Let's just say it the market price is four times more than the actual value and the fiduciaries know that because of inside information that they have. It just sort of defies language to say that some approved and person would retain the investment in that kind of wildly overvalued stock doesn't it? Well I mean if I could take that in several steps I mean that material overvaluation standard which no court has ever accepted we think is unworkable. I mean first of all before you get to the inside information which I think is the kernel of it that's left at the end if you have a stock that is traded on an active market you really can't tell the fiduciary absent possibly inside information where you need to outsmart the market. No but I'm talking about a case in which the fiduciary has inside information that that enables him to know that the stock price is way over valuing the actual value of the company. But when you when you get to that point of the analysis and this is what all the courts have recognized you have to then bring in securities law and you have to recognize to trade on that inside information would violate securities law so prudence or loyalty cannot require a violation of securities law so what what are the other options you could halt trading that would not itself violate securities law but that could do great damage to the participants if the company if the company's own ESOP said well we think something is so wrong that we're shutting down the... Well I suppose it could but a prudence manager might say that it would do greater damage to the participants in the plan to enable this misinformation to exist and to keep putting to keep buying stock to keep putting more and more of their retirement investments into something that is really overvalued. Well I mean our point is that that public announcement that the ESOP has stopped allowing purchases of company stock could cause a sort of collapse in the stock price that would be terrible for the participants and saying that prudence requires that. Well he was from the truthful information will out in the end and is it better to go on putting more money into something that is is is you know it's really not a good investment for the participants and beneficiaries. But by you know stopping immediately you cause even greater harm but I think you're so what's wrong with following the law and disclosing that material information to the public and stopping the the employees from losing more money and worthless stock. And I think that's almost worth this. That's ultimately where the government comes on now we've moved a huge distance from let's you know shut down the ESOP to let's release information but there we would say again we think you have to consider this in connection with securities law that if you announce well there's this sort of general duty to release information. I mean first of all that would be quite a big change in Arissa there's there many specific requirements for disclosure of information in Arissa. It's just background information for this point you're discussing. Can you tell me is it a very common practice for the directors and officers of the company themselves to be the trustees? I had just assumed that that didn't happen much anymore. Can you just tell me because a lot of these problems would be taken care of insider information and so forth if there was an outside trustee. And I assume tell me if I'm wrong that the reason for the the trust for the company themselves to do it is because it saves money. It's cheaper than hiring an outside investment maybe I'm wrong about that. Well I mean several just tell us what the what what the landscape is. First of all it is common so this this happens quite a lot. You know second of all this idea of what we could appoint an independent trustee would not really solve all the problems because you then you have to have a monitoring trustee who would have to give the independent trustee any inside information that they had. So the government suggestion as well okay you get a low-level employee to be the monitoring trustee. Well that could itself violate Arissa if you had somebody so low down that they wouldn't know anything that that also could be a violation. I mean so it's I'm sorry if you're going to. So it's really not a solution but it is common to have the officers of the company and I think it's not just to save money it's because it's a very important part of what the company does and they want to have their top people running it. I mean the dilemma we're talking about which is you've got inside information and if you do something with it it's going to hurt the beneficiary. I mean isn't that just a reflection of the fact that these are really bad investments. I mean you're putting all your eggs in one basket your your your job depends on the company and your your retirement depends on well on the company so that's why you're in this awkward position of say if the company's doing something bad you know having inside inside information that should be disclosed because it affects the stock price and it's going to hurt not only the company do you but also the your retirement stock. Well I mean first of all it's quite right that an ESOP because it's totally undiversified is not by itself a good retirement plan and we think that just confirms that the the special nature and aims of an ESOP is not solely for retirement benefit. But it is it is a purpose Mr. Long isn't it? You said before the statute the statute just has benefits but isn't the plant doesn't plan itself mentioned retirement? Oh yes and and the hope of course is that these plans will produce lots of retirement benefits the third plan for long periods of its history has been extremely successful at producing retirement benefits are our basic argument is though that because of the nature of this plan because it is linked to the company stock and because Congress recently looked at this exact issue after Enron and said we want employees to have choices but company stock can still be a choice and we actually encourage that. The courts. The courts. You don't shut it down as soon as there's trouble. Why do you need a special rule for ESOPs? I mean the the factors that you mentioned it seems to me apply to any trustee who's managing you say oh you should have sold because the stock was overvalued on the on the stock market. Well how's the trustee supposed to know that? Is he going to help guess the market? You know demand that a prudent trustee outgets the market okay so if it's not the market that's overvalued it must be inside knowledge. And you have the same problem about not being able to use that inside knowledge. You can't use it and let me come back. So why do we need a special rule for ESOPs? I'm saying all the points you make apply to any any kind of trustee whether it's only company stock or not. Why do we need a special rule for company stock operations? Well because if it were just ordinary investment right where the purpose really is just to maximize retirement. It's there you do look at the risk return ratio and the expenses. But you have the same the same the same problems that that you justify doing nothing for the ESOP justifies doing nothing in the other in the other plans. Namely you can't expect me to to outsmart the market number one nor can you expect me to use my inside knowledge that violates the securities laws. So those are your two points but it seems to me those points apply we don't have to adopt a special rule for them. Well then just to Scalia we are agreeing with the lower courts there is absolutely a duty of prudence. We don't deny that with their would come a point when he proves that it's up fiduciary. But even in saying that Mr. Long you have a category where you would say the duty of prudence applies and it's this category where the company is on the verge of collapse. But even there you would face the exact same securities law problems that your saying should preclude the government's test because they're two. You would have this kind of I don't know what to do. I'm between a rock and a hard place. The securities laws prevent me from selling on inside information the same problem supply. Well no what what we're saying is using public information the chances that the company is going to be able to provide employee ownership for the long term may become so low that a prudence fiduciary would decide to shut it down. But I do I do want to answer your question on inside information because I think that's the nub of it. And you raised the point of the fiduciary actually knows the inside information. Don't they have to do something make it public? We talked about the securities law problem with trading on it. The government says well just just make it public just release it to the public. There we think the problem is first of all that that would create this new sort of general erissa duty to provide information when it's not spelled out in erissa as you know which has very specific. It's not an erissa responsibility. It's an SEC responsibility. It's a 10 to 5 responsibility. Aren't you supposed to disclose any information that a reasonable investor? And that would be that's really exactly our point just to so to my or this is if there's inside information that has to be disclosed the securities law provides a complete legal regime for this. The government even agrees that in terms of the timing of disclosure the SEC timing so what would that electron with the rule that simply says a fiduciary has to do whatever it's possible to protect beneficiaries within the bounds of the law. And so if the law requires you to disclose it and you didn't you've reached your duty of prudence and of loyalty because you've protected the company but not the beneficiaries. It sounds good but I think it would create serious problems. I mean you would have then two sources of information about the company the esophagusary which you'd be saying would have an independent duty to decide when it thinks there's been some material misstatement or some inside information and the company which could create great confusion. You don't hear it. You have an absolute duty to the beneficiary. Well but I guess the point is just to so to my or from the fiduciary can say look if there has been a securities law violation about disclosure or material misstatements there's a securities law remedy for that and the plan participants will get that remedy. Well there might be an issue. In an esophagus can the fiduciary take into account the interests of the participants as employees as opposed to their interests as investors. It doesn't seem to me that those will necessarily always be the same and there may be situations in which something that would be potentially good for the participants as investors would be quite bad for them as employees. They want to keep their jobs. They want the company to stay afloat. Can that properly be taken into account or is that outside of the bank? I mean I don't think you have to do that. I think you know you look at the interest of the participants who are both employees and participants in the plan. You know so I don't think it's necessary to say well we're not even looking at them as participants in the plan. We're looking at them only as employees. We think. No I'm not saying only as employees but I'm saying can you take that into account at all. If you're in the situation where stopping stopping purchases in company stock would be a signal that would potentially trigger bankruptcy and liquidation for the company. Can that be taken into account? It might not be in the best interest if the if the if these participants were simply investors. It might be in their best interest to stop buying the stock but if taking that step would have the consequences that I mentioned. It might be very much not in their best interest as employees. Well I mean I think I'd say that would be one way to sort of work this out. That's another way of getting to the bottom line that we think is correct here which is that an ESOP is a special kind of pension plan and the whole nature of it is the own company stock. Well how do you find to define the standard or the duty that's responsive to Justice Alito's concern and I had the same problem. Let's assume that trustees in non-E-subplan have a duty to maximize returns and provide stable investments. Is it somehow different when it's an ESOP? Yes I think it is. And if so what is the duty? I think the duty is to maximize the returns for this special kind of a vehicle which is a vehicle that own stock and only one company the employees company and for reasons that this kind of goes to Justice Alito's point but in a different way for reasons that go beyond just the returns. It is because it is the the employees company. Congress thought it was beneficial for many reasons to encourage employee ownership of companies and so you don't look to whether this appears to be a bad investment as compared to a mutual. Well if I'm the trustee I don't know what my duty is based on your answer. I don't know what I'm supposed to do. Well I mean the courts of appeals have had a fairly uniform approach to this for now almost 20 years and it has not been causing a great deal of trouble. The approach they've all been taking is that because of the special nature of ESOPs and you know when the plan requires that all the funds be invested in the ESOP at least that's what the fiduciary must do and that is presumptively prudent. It's not necessarily prudent and there would be you know the way we think the courts have best expressed it if they draw this from trust law if the special aims of this plan employee ownership can no longer reasonably be achieved then prudence requires the plan to be shut down. That is not a bright line standard but that is the standard the courts have adopted. I'd like to save the balance of my time. Thank you Mr. Long. Mr. Man. Thank you Mr. Chief Justice and may it please the court. I think what I can most usefully do is talk first about the question of the relevant benefits that was raised by so-of-you and then second address this so-called rock and hard-place problem which we think is essentially a confession of disloyalty by my most able opposing counsel. First the nature of the benefits in the statute the reference to benefits in 404A2A is quite plain. It refers to the basic type of plan that's covered by a RISC which is an employee benefit plan as defined in Section 10223. I think you would help if you raised the podium a bit. So you're closer to the next slide. Section 10223 describes employee benefit plans which are the subject of RISC and there are two types of employee benefit plans as defining that section there are plans that provide welfare benefits and plans provide pension benefits. I think there's no doubt that the benefits that must be the exclusive purpose of an RISC plan are those benefits that are required to be covered by RISC. And I think we need to remember the grand bargain of a RISC reflected in the statute is if employees are going to provide these kinds of benefits the people that manage the retirement and welfare plans must accept fiduciary duties. That's the bargain of a RISC. If you can provide these kinds of benefits you have to accept fiduciary duties and the sole purpose of the plan under the statute is to provide those benefits. Now I'd like to talk about this idea of this rock in a hard place it was first raised by Justice Kagan. I think that the best way to think about this is essentially what the petitioners are saying is if I decide to put myself in a position where I owe duties to two different people by employer on the one hand and the benefits use of the plan because I've put myself in a conflicted situation it's perfectly right for me to just do nothing. That's not the way it works. You can imagine a lawyer that undertakes to represent two clients with conflicting interests. If it comes to the point where they're interested in conflictable the lawyers already made a mistake. The lawyer cannot simply say, well, I choose to protect one client not the other. They have to be something and they're going to violate some of the decisions. Sotomayor, can you give me any example of any case? There may be so many you can't even give me your best one. But the costs have been around for probably 800 years and can you give me an example of one where a court said trustee has breached his fiduciary obligation because he failed to use inside information? Oh, no. I think there probably isn't such a case, but I would say. I think there is not such a case. I think there probably is not such a case. If there is not such a case, what's the problem? Because what's the rock in the hard place? Well, the person has an obligation to act prudently in respect to the fiduciaries, to the beneficiaries, of course, but he cannot, irrespective of that, have an obligation to use inside information and, of matter. What's wrong with saying just that? I'm not sure what you mean by that, but I'd like to... Meenbite is just what I said. There is no rule of trust or a whistle-law that you can breach a duty to a beneficiary by failing to use inside information, period. I don't know what the SEC's brief is. I'm going to ask the SVP, but their opinion is, because they don't seem to appear on this brief. I think I would respectfully disagree with that. I think it's important to understand why Justice Breyer and Justice Kagan. So is there's not been a case ever holding the contrary, but you yourself disagree with it. Now, what is the reason you disagree with it? That is because the courts of appeals unanimously, as Mr. Long says, have held that the trustees of these plans have no duties at all. And so if trustees have no duties at all, it's of course quite difficult for them to breach the duties. Now, my... Sorry, I'm saying go back to England. There are many cases where set-loars have said what kinds of things you should invest in. And they invest in them. They have inside information that it is a bad investment. Is there any case that says they have a duty of obligation not to do what the set-loar says? I wouldn't have been surprised if you've found some cases, but I'm also not surprised that there aren't any. That's why I asked the question. With respect to that particular question, I did not understand your question that way. And I don't... I can't say whether there is or has never been such a case. But what's important from our perspective is the trustees in this case undertook to represent conflicting interests. Ordinarily when people undertake to represent conflicting interests... Let me just continue to... Just as Briar's question. There are some legal duties. I don't know of a trustee who has to break the law. They can't sell on the basis of inside information. That's a legal prohibition. I think that's clearly true, but I think they at the same time, at their peril, breach their duties of loyalty to those for whom they've accepted a fiduciary duty. So your claim rises and falls on the fact that you think they've breached their duty of loyalty by having the inside information. Or exactly what is your claim? What could they have done that wouldn't breach the law? My claim does not rise or fall at all in that, and I don't think there's any reason why you need to address that given the particular nature of the complaint. The complaint in this case alleges that the trustees knew or would have known if they had undertaken a reasonable investigation of the type that is required by ordinary principles of prudence that the stock was maturely overvalued, and the stock was a much more risky investment than it was at the time that the plan was designed. So what would they have to do then? You say they can't sell the stock based on that information. What are they supposed to do? Or is it your argument that you never should have insiders serving as trustees? You always have to have an outsider running these e-sops. Well, I wouldn't say that you always have to, but I do think that the situation is quite parallel to the situation that corporate directors face when they come into a conflicted situation in the corporate context where directors ordinarily are protected by the business judgment rule. If a situation arises in which their interests patently diverge from the interests of the shareholders, they don't simply decide to represent both interests, but pick one over the other. They instead step aside in a point and allow independent people to represent the shareholders. So you're basically saying that if it's not flatly prohibited, it's very unwise. It generally shouldn't happen. You're putting yourself in an impossible position if you are an insider and you're going to serve as the trustee of an e-sop. Well, I think it's a plain implication of Justice Kennedy's opinion in Glenn, and the majority opinion in Glenn, that the structure of the fiduciary and the relationship to the trust being conflicted should raise a red flag. So Eric, here when you say, I am totally with you on this. We walk into the trustee's office. It's like Ralph Nader investigating the FTC years ago. There is someone asleep on the sofa. In his inbox is ten feet of papers telling him about all public, telling him about the corporation's condition. It's apparent he's never read them. If he had read them, he would have taken action. Of course you'd have a case, I would think. But that is not a plain explanation. No, our complain is they have the information. And step one, they didn't do anything. Step one, they did not. I not just information, remember, I carefully said all this was publicly available information. You want to say it also applies when it's not publicly available information. Am I right or wrong? You are correct, I would also like to say that, but I would like to point out our complain alleges a large amount of information that is one public, two false information promulgated by the petitioners, the fallstie of which perhaps could have been undertaken by, considered, discovered by, considerable investigation. And instead of conducting a reasonable investigation that a trustee for a billion-dollar pension plan ordinarily would conduct, and just to be clear for the early discussion, this is not a plan that is invested solely in fifth-third stock. This plan has a variety of investments. There is one particular fund that has one to two hundred million dollars. I suppose you were a legislator at Congressman. You are absolutely committed to the idea that it's important and salutary to have employees on stock in the company for which they work. How would you write this, Tash? I think Congress has done a great job of writing a statute. Congress wrote a statute that tells employers you can set up these plans and the trustees don't have to diversify, which is inherent in having a plan that is a waste of time. Well, once you say the trustee doesn't have the duty to diversify, it seems to me you're living in something of a different world. I think that that's right, and that's why we believe that the standard of prudence is affected by the fact that it's an employee stock ownership plan. Well, there's a portion of the fund that I was employer stock, but that doesn't mean that there's no duty of loyalty. It shouldn't affect that at all. Well, but affected is not quite enough. I mean, this trustee job is to buy the company stock. In that particular fund, it's 100% other than the money you need to buy and sell. So, I mean, he has the easiest job in the world to get up, gets up in the morning and says, I think I'll buy some of this company stock. That's what he's supposed to do. And I think that what every court of appeals has recognized is that that is by definition prudent because that is the settlers objective with one exception. If everything's going south and the company's collapsing, well, then he does have the obligation to do something. So, I don't understand how you can say that he has breached a fiduciary duty of prudence when the people investing in this ought to know what they're going to get is the company stock. I think it's... I'm glad that you asked that question because I think that's central that the disagreement between respondents and petitioners. Now, the first answer, of course, is that you can't look at the statute without thinking that Congress had a different understanding of the duties. Now, I just could mention a couple things about the statute. It's not only the point that Justice Gleam made that Section 404A2 specifically cars out some duties but not others. It's also that it only forgives prudence to the extent of diversification, which means that prudence has to mean something about diversification. And then, it still further limits the scope of forgiveness. It only forgives it with respect to the acquisition or holding of qualifying employee securities, employer securities, which is much narrower than the fiduciary duty to find in Section 403 to manage and control the assets of the plan. But what's important for our purposes, it would not... You asked the question, although I think the statute results it, it would not have been sensible for Congress to tell the people that manage employer stock ownership plans that they have no duties of prudence or loyalty to the employers whose retirement funds are at stake. But what is exactly the duty of prudence? Presumably, you invest the funds in the company stock, whether it's going up or going down, right? If you have the funds, all you can do is invest them. The stock is down half a point or whatever. You still buy it, right? Okay, so I'd like to say first, there is a duty of loyalty, and it does be a duty of loyalty, for example, is the court said in veriting a dolingous controversy to lie to the beneficiaries. What's the answer to my question? With respect to the duty... So the duty of loyalty is enough to sustain our... No, I didn't ask a question about the duty of loyalty. I have said to my question of whether or not the trustee is prudent because he buys the stock because it's gone down 10 percent. Okay. The most fundamental thing about the duty of prudence that you would get from the restatement of trust is that the outcome of the investment is not what's relevant. What's relevant is, and Justice Scalia, when he's on the DC Circuit, wrote a long opinion and think, which discusses in detail, and you'd see the same thing in the comments to Section 90, the restatement. The most important thing is what you might call procedural prudence. Okay. These people are managing a fund of a billion dollars. The role of the question is, what would a reasonable trustee of a billion dollar fund have done to investigate the situation? Would someone with a billion dollar fund and a hundred to two hundred million dollars and fifth-thirds stock have routinely been collecting information about the nature of that investment, whether they should take some action? It will might be that they should not in a flighty or haphazard way, just pose of the stock because that's the baseline of this plan is going to invest in the stock. But that's entirely different from doing absolutely nothing, not telling the information. Do you think the clear is information? Has a duty to acquire inside information? I trustee say, I don't want to know inside information. I'm going to put myself in exactly the position of an outside trustee. So I'm going to take into account only public information. I'm not going to do an investigation. Our position is that the duty of the trustee is to behave as a prudent producer who would behave. And if the trustee is unable to do that because the trustee is conflicting, if you can interest a serve, then the trustee is violating the duty of loyalty and should arrange a decision. Well, what was the answer to my question? Assuming that the answer to your question for an insider to be in this position can the insider behave like an outsider? I think it's plainly the case that if the trustee does not undertake the investigation that a prudent producer would take because of their concern about acquiring inside information to the employer, then they would violate the ordinary standard of prudence. Well, can we talk concretely instead of saying that they've got to do what a prudent producer could do? Are they allowed to take into account the impact of a decision to stop buying on the beneficiaries? The stock is going down if the trustee stops buying, that's going to cause it drop in the value of the shares, and that's going to hurt the beneficiaries. So what does he do? Does he say, I shouldn't buy any more because I think it's going to go down some more or should he say, I should keep buying because otherwise all the holdings, and this is all they're invested in, their holdings are going to go down. I think the obligation of the fiduciary at all times is to behave prudently and manage the investment prudently. I asked for an answer to the question, and it's not going to help me to have this mantra that he's supposed to ask. I don't believe that the question is whether they must sell or mustn't sell. I think they have to decide, would it be based on the facts we know right now, do we believe that this is a short-term blip in the stocks and rise back up in which case we... No way, what happens is that the trustee knowing that the company is announced an enormous oil strike has happened to sit on a private meeting where three people come in and you say, yeah, there was an oil strike, but it's impossible to get the oil out. Ha ha, we put one over on that time. Okay, now what's that trustee supposed to do? I think I lost track of whether the oil strike was true or false. There's a false. He alone, and two other people know that this oil is worthless, the market doesn't, it's totally inside information, what in your opinion is he supposed to do? I believe that the trustee violates the duty of loyalty and the duty of prudence. If the trustee believing that the stock is overvalued, in fact, does not take action to protect the benefit of the company. In case your answer is, I just, totally inside information, he sells. Right? I didn't say that, I think he needs to do something. I just don't see what the trustee is supposed to do. You have the company stock. By comparing it with other stock, there'll be many investments that are just as good or better. When does he have to make the investment and was just as good or better? I don't understand. I don't understand how we're going to implement what Congress wanted to implement. Well, we believe that the traditional fiduciary standard is not that hard to implement. It's a standard that's been imposed on fiduciaries for centuries. It's a standard that all managers have trusted undertaken. The only thing that's really different about these particular trustees is that they're managing funds that are worth, you know, billions dollars. And you said you were going to deal with the rock and the hard place, but it's been put to you that if the trustee goes out and sells, that'll be a signal that things are bad with the company. So it will end up being worse for the beneficiaries of the plan. Well, we certainly believe that if the trustees view based on the information, is it selling the stock would be bad for beneficiaries, then a decision not to sell is prudent. If the trustee decides selling would be bad for beneficiaries, so we're not going to sell that to prudent decision. It might be right, it might be wrong. But if that's their decision, I think that's prudent. If the trustee decides selling would be beneficial to beneficiaries, it might be right, it might be wrong. And if that's what they actively decide, then I think they need to do something. And that's our position. Now, the rock and the hard place, I understand that some of the justice is disagree, but I mean, our position on that is quite clear. The only reason practitioners are between the rock and the hard place is they've undertaken to have interests that directly conflict with their fiduciary obligation to these employees' retirement benefits. There's nothing in the statute, there's no practical consideration that practitioners have suggested. There's no reason that these funds need to be managed by insiders. For the argument that you have outside trustees, they have to get information. And if they get the information from an insider, then we're back in the same place. Of course, if you wait until you're in possession of information and you know the stock is overvalued, you can't sell the problem by stepping aside then. But if you set up the trust in hands of an independent investment manager in the beginning, we believe that if you look carefully to provisions of Section 11 of 5C and D, you'll see that Congress has provided a great deal of protection for the person that appoints. Of course, it's true that if the person in the company that appoints a fiduciary knows that there's a breach of fiduciary duty by the investment manager, they're still liable. But what else could Congress possibly say? Congress couldn't run a statute that says people that knowingly breach fiduciary duties of the employees are not supposed to be liable. So the status of the trustee, whether it's an interested party or a disinterested fiduciary is disclosed to the beneficiaries, I take it, at the outset. They can decide that they don't want to invest in that particular fund and they're nine other options because of that potential conflict. Yes, they are advised of that. Their ability not to invest in that particular fund is limited during the class period because all of the matching contributions for all of the class period went directly into this fund. So employees would have to take the active step to remove them from the fund. If they wanted to. Frontly. They got 4% matching funds if they were in that fund. That is correct. I think the most important thing for us to emphasize is the point of Arissa is that if an employer is going to provide employee benefits, the people that manage those benefits have to accept fiduciary duties. There's nothing unusual about that. The standard is not unworkable. It's a standard that is provided for centuries. And if the only reason that the people managing the fund can't comply with those duties is because they have obligations to the employers, then that is not something that Arissa can tolerate. Thank you. Thank you, Council. Mr. Nieder? Mr. Chief Justice, and may it please the court. Several points at the outset. Justice Alito asked about taking into account the interest of employees as employees. But Section 1104 speaks in terms of operating the plan for the exclusive purpose of providing benefits to participants and their beneficiaries, which means the interests of employees are taken into account only in so far as they are participants in the plan, not more generally. And the second and related point I'd like to make with respect to that is the use of the word benefits in 1104A that says that the plan must be operator for the exclusive purpose of providing benefits to participants. We had that on page 6A of our petition appendix. Further up on that is the definition in 1234 of an individual account plan, which is- This is a stock drop in and of itself. I don't think can prove a lack of proofs. You agree with that? Yes, we do. There are situations in which there may be additional unusual circumstances, but simply a stock drop would not, but I think that as Justice Scalia pointed out, that would also be true in a diversified plan. Exactly. It's true almost anywhere because you can't outsmart the market. So we're not insisting that a fiduciary in order to be proved- So how do you deal with what's been vexing us? The issue of what a fiduciary should or can do when they're an insider and have only inside information, not public information. Right. So where is the breach of fiduciary duty? Where's the breach of loyalty? What can it consist of? And what does someone have to prove in a complaint? This has to do with the pleading presumption and a merits presumption. Right. If this is a- If there's a substantive principle here, that would have to be pleaded if it's an evidentiary presumption, as the Sixth Circuit said, that would not have to be pleaded in the complaint. But several points on that. First of all, in response to Justice Breyer's question about inside information, we point out page 31 of our brief, quoting Scott, that if a fiduciary has peculiar knowledge about a corporation's stocks value, that is a factor to be taken into account in terms of the way the trusty exercises. His response to the union brief says the thing to do in that situation is without saying anything. Turn the trusty ship over to a person who doesn't have that knowledge that takes care of the problem. And the reason I raised the question, of course, is there trillions of dollars probably managed by a RISFundz? I don't know what percentage of those involved stocks, a lot of this kind, of this kind of a- maybe you know, but my guess is a lot. And obviously, before I wrote it a word that said what you have to do or don't have to do, with inside information, I would like to know directly, not indirectly, what the SEC thinks. Well, and maybe you can tell me, but the SEC isn't here, at least there's no SEC lawyer that signed your brief. So I don't know the extent to which that's primarily a labor case. It might be you might have a good reason for it. Right now I am supposed to write some words or join some words. And those words will tell trustees of possibly, I have no idea, but maybe hundreds of billions, or maybe billions anyway, of assets in the stock market. What they're supposed to do, when they learn some inside information that affects the company's stock. And I hate to tell you I don't know anything in this area about what the likely effects are, and therefore I'd like to know what they think. And the closest I came to it was the AFL-CIOBree, frankly, where they said what you're supposed to do here is turn this over. So what do I do? Well, that is, of course, one option. If circumstances get very bad, this was true in the WR race situation. The inside trustees appointed an outside trustee to do any evaluation. But the first step that Mr. Mann pointed out is I think a fundamental one that should not be overlooked here. And that is that the fiduciaries have an obligation to actually exercise their discretion and actually investigate. And here the allegation is that these trustees did not even do that. So if you're going to be giving deference to a trustee under the administration. I'm sorry, investigate what? The non-public information? Investigate the consequences of the non-public information. This would be true of public information too. This is not a plan like this, even though it is exempt from requirements of diversification. There are still prudent duties which include investigation and monitoring of the investment. So the fiduciaries of a plan like this do have an ongoing obligation to investigate and to keep themselves apprised of how the company is doing. Well, what exactly concrete terms? What do you do as the trustee? You have this information, inside information, that says that the stock is overvalued. Do you sell in which case the beneficiaries holdings go way down and they sue you? Or do you not sell in which case when the information comes out? The beneficiaries sue you because their value goes down. But what are you supposed to do? In the category of cases we're talking about here and these are the ones that are the greatest concern to the Department of Labor. The stock is materially overvalued because of the inside information. And that situation, and I think this is the point Justice Kagan was making, it would ordinarily be the right thing to do to sell. The truth will out eventually, but there may be a precipitous drop. The stock has already been at a level and stock has already been purchased at an inflated level which means that the employees are not getting what they were entitled to. But you say you sell? You can sell based on the inside information? No, he can't sell on the basis of inside information. I'm sorry, he could stop purchasing with that market. We'll see through that in about two seconds. But that isn't really my question, it's a numerical question. I was making up numbers wildly. What are the actual numbers that is approximately how much in assets is accounted for by ownership of the companies? This kind of a plan, were you by the company stock? I know. I don't know the amount of assets out. As I recall, I think there are perhaps 12 or 14,000 ESOP plans. Some about half the employees covered are in publicly traded corporations. I want to make another point in terms of the purposes of an ESOP. Congress has provided for investment in employer stock, but it has not accepted the fiduciaries from the general duty of prudence. The statute makes that clear. And in 2006, Congress provided that employees of publicly traded companies must be given the right to diversify. You're argument at least according to the petitioner's brief, and I think they're correct. You go away from the purity standard. You have your own standard, whether or not it's materially overvalued in this instance. Or you say that. Or inside, whether it's inside information, and is materially overvalued. But then you are creating a special standard, which is just what you're accusing the petitioners of doing. Well, the question is what's a general standard of prudence, and it would always be improved for diversified or non-diversified plan for the fiduciaries to purchase an asset that they or hold on to, an asset that they know to be or should know with reasonable investigation, is materially. Let me give you this example. It's helpful to have something concrete here and not just general statements about fiduciary duty. Let's say that the trustee receives inside information that someone has alleged that corporate office, a particular corporate officer, has engaged in illegal conduct. And if it turns out that that conduct actually took place, that information, if that will cause damage to the company. But it hasn't been proven. There's simply been an allegation. Now, at that point, what does the trustee, what do you think the trustee has to do? If that information were available to the public, let's say it would cause the price of the stock to go down. So it's material, it's material information, but at a somewhat preliminary stage. What do you do? Completely stop buying the stock? You can't sell, disclose the information? What is it? What's to be done? There's no absolute answer in that situation. Stopping buying might be the right approach. That's not uncommon. And there are blackout periods where plans and companies bar trading in the stock. But if it's material information that the securities laws required to be disclosed, there's no reason why the participants in an ERISA plan should be unprotected when that material information... But with that information, have to be disclosed under the securities laws. Let's say there was no prior misleading statement regarding this matter. It would have to be disclosed eventually. If it's major, it might have to be disclosed within four days under 8K, otherwise it would be quarterly or annually. And we are suggesting that disclosure obligations should be geared to what the securities law applied to. The Chief Justice indicated I can't ask this one question. Is this a case in which we must decide what the fiduciary standard is? Quite with that regard inside information. Is inside information just an added issue in the case or is it the key issue in the case? We think in this case it is the key issue. The Court does not have to decide what fiduciary obligations, the fiduciary of an ESOP, would have in dire circumstances where you have a failing company or mismanagement or something like that. We are focused here on inside information that materially enhances the value of the stock, overvalues it. And in that situation we think that fiduciary of an ESOP, just like the fiduciary of any other plan, has a duty of prudence not to remain invested in or to purchase materially overvalued stock. Thank you, Council. Mr. Long, you have five minutes. On the ESOP Association brief reports at page 2 that there are $1.07 trillion in these employee stock plans. And we think really that's the key here. All of the courts of appeals, considering many cases, you know, with many different fact patterns, have not disagreed. There is no circuit split on the issue that we have spent all our time discussing this morning. The only circuit split is on whether this presumption applies at the motion to dismiss stage. The real point here is, as Justice Kennedy said, Congress strongly supports ESOPs. It wants to encourage them. I appreciate that. But if I'm listening to the government carefully and understanding its position, it's basically saying if there's been a violation of the securities law that a fiduciary knows, then why shouldn't it be liable both under the company under 10B5, and the director of the plan or the trustee of the plan as a breach of loyalty to or of prudence to the beneficiaries? Yes, it's a double remedy. There's lots of things that provide double remedies. So if that person should have disclosed. Well, I mean, securities law will provide the first remedy, and if you're going to add it, it will be a good remedy. Well, but the additional risk of remedy in this ESOP context is going to create these tremendous problems. I couldn't begin to understand what the ESOP fiduciary was supposed to do in these circumstances. I think that that's the simple answer. Well, but you'll create two different centers of communication now out of each corporation within ESOP. The corporation's own statements, and then the ESOP fiduciary will have to come to independent. You know, they could be at the conflict. Well, I'm not treading my shoulder out of lack of sympathy, but out of reality, the loyalty is to the beneficiaries. If you're going to place someone there who comes to not inside knowledge, you're going to create potentially a problem. Well, but I think your adversary was saying that's a self-induced problem. Not one that the law should excuse you. Well, I'm following whatever the law is. Well, but two points. I mean, you should, I would submit. You should be very cautious about interpreting these duties in ways that will make ESOPs unworkable. And I think that would basically cause many companies to say we can't put fiduciaries in that situation. So we're not going to have ESOPs at all. And the, you know, again, because the special purpose of an ESOP is to give the employees a piece of the rock, ownership in the company. If the company is going through temporary hard times, even if there's a situation where there's some, you know, material misinformation that is out in the market, that may all be corrected in the long term. You know, in this case, if the fiduciaries had shut down the ESOP, they would certainly have been sued because they would have violated the plan terms. And the plan has done very well. It's gone up from $2 to over $22. So they might have had a very hard time winning that case because they would have been challenged that prudence didn't really require you to shut it down. Yes, we were going through some severe problems, but we came through them. That's the razor's edge. That's the rock in the hard place. They're going to be sued. And unless you recognize this presumption that every court of appeals is recognized to give the ESOP fiduciaries some leeway, they're going to be different from any other fiduciary in any other plan because it's the company stock. And if they, you know, if the stock goes down under this open end to duty prudence, they're going to be sued for not having anticipated that and done something sold, stop trading, put out information. But if they don't do it and the stock goes up, they're going to be sued for that. And in fact, you know, if you recognize the government's approach, there'll be a whole new class of cases, which is if the stock goes up, the plaintiff's lawyers will be able to argue, well, the fiduciary should have anticipated that. And the participants who were selling and deciding to move over to the S&P 500 fund, you let them sell their stock too cheaply and that's a violation. So it's it's unworkable. We submit. Thank you, counsel. The case is submitted