Sixth Circuit Rejects Alternative-Investment Theory for Measuring Damages in Stock-Drop Case, Holds Plaintiff Benefitting from Alleged Fiduciary Breach Cannot Proceed

By: Ronald Kramer , Megan Troy and Sam Schwartz-Fenwick

On Friday, in Taylor v. KeyCorp, Nos. 10-4163, -4198, -4199, (6th Cir. May 25, 2012), the Sixth Circuit affirmed a district court’s dismissal in an ERISA stock-drop case, holding the remaining proposed named class plaintiff lacked standing because she could not establish an “injury in fact” when she sold the majority of her holdings in the company stock for a profit at a time she claims the stock was artificially inflated.

Plaintiffs alleged that defendants breached their fiduciary duty by concealing KeyCorp’s true financial and operating condition, rendering the KeyCorp stock an imprudent investment. Plaintiffs specifically argued that harm should be measured using an alternative-investment theory, namely, the difference between the investment as taken and the investment as it would have been had the KeyCorp holdings been placed in the S&P 500 Index. Under this theory, the name plaintiff alleged she was injured as she would have made more money had her KeyCorp holdings instead been invested in the S&P 500 Index.

The Court explicitly rejected this theory of damages under the circumstances. Explaining that when a plaintiff alleges that the withholding of information results in artificial inflation of company stock, the appropriate measure of damages is the amount of out-of-pocket loss by comparing the stock at its artificially-inflated price to a price it would have been if not tainted by the withheld information. The Court distinguished cases such as Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985), which adopted an alternative-investment theory for some ERISA claims. Because damages based upon an entirely different investment vehicle, such as the S&P 500, are not fairly “traceable” to the defendants’ breach in this instance, the alternative-investment theory is inappropriate.

The Court also held that netting of the named class plaintiff’s gains and losses in her KeyCorp holdings during the class period was required to determine whether the plaintiff suffered actual injury because it was attributable to a single breach of fiduciary duty, the alleged withholding of information.

This decision is consistent with the evolving trend of court skepticism toward efforts by plaintiffs to prove loss and causation by comparing the performance of a plan investment to an alternative investment that was never part of a plan’s investment menu. In addition, the decision offers a pragmatic approach to assessing loss for standing purposes, and gives defendants additional ammunition in responding to stock drop and other investment-related ERISA claims.