Compliance August 9, 2013

Case Dismissed on Presumption of Prudence

A federal appeals court found the application of the presumption of prudence to be appropriate at the motion to dismiss stage.
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In Kopp v. Klein, the 5th U.S. Circuit Court of Appeals supported the decision by the U.S. District Court for the Northern District of Texas to dismiss the Employee Retirement Income Security Act (ERISA) lawsuit for the plaintiff’s failure to state a claim.

The appellate court said “regardless of whether the Idearc Defendants had discretion to cease permitting new Fund investments in Idearc stock or liquidate Fund investments in Idearc stock, the ‘presumption of prudence’ applies at the motion to dismiss stage, and Kopp failed to allege sufficient facts to overcome the presumption.” The court also found the plaintiff did not allege sufficient public information to overcome the presumption that the defendants acted prudently by choosing not to liquidate Idearc stock. The court pointed out that “much of the information Kopp relied on to show the defendants were aware of threats to Idearc’s viability is nonpublic information.”

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In addition, according to the court opinion, “the amended complaint did not state a claim for violating the duty of candor by ‘omitting material information, making allegedly incorrect statements about Idearc’s financial stability, or failing to correct these alleged misstatements in the filings’ because the Summary Plan Description did not incorporate Idearc’s public filings. No general duty to disclose non-public information exists under ERISA or under our precedents.”

The plaintiff, Randy Kopp, was an employee of Idearc, Inc. and a participant in its retirement plan. He filed the lawsuit against various members of the company’s board of directors, officers, Plan Benefits Committee and Human Resources Committee (aka, Idearc Defendants). The suit represented plan participants whose individual accounts the plan purchased or held shares of the Idearc Stock Fund (aka, the Fund). When the company later declared bankruptcy, the stock became worthless.

Kopp alleged the Idearc Defendants breached their fiduciary duties. While the district court dismissed his original complaint for failure to state a claim, they allowed him to file an amended complaint, which claimed seven bases for relief.

  • Counts I and IV alleged the Idearc Defendants violated a fiduciary duty by allowing plan participants to buy and hold Idearc stock when it was no longer prudent to do so;
  • Count II alleged the defendants violated ERISA fiduciary duties by making materially inaccurate representations and failing to disclose material information about the fund;
  • Count V alleged the defendants breached a fiduciary duty to appoint, inform and monitor the Benefits Committee and Members of the Benefits Committee;
  • Count VI alleged the defendants breached co-fiduciary duties; and
  • Counts III and VII alleged the defendants breached fiduciary duties to avoid divided loyalties and conflicts of interest.

With regard to Count III, the court said, “Kopp does not allege the defendants’ compensation was impermissibly tied to the price of Idearc’s stock, but that their compensation was impermissibly tied to Idearc’s financial performance. Kopp cites no provision of ERISA or case that supports his contention that such a compensation scheme violates ERISA’s duty to avoid conflicts of interest.”

Counts V, VI and VII were found to be derivative claims, with “no underlying breach of fiduciary duty.”

The full text of the appeals court decision can be found here.

Compliance August 8, 2013

DOL Seeks Removal of Plan Fiduciaries

The U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) announced default judgments have been entered against the fiduciaries of two retirement plans.
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In both cases, an investigation by the EBSA found plans had not been terminated when the companies’ ceased operations.

Custom Patio Rooms Inc., a Pittsburgh, Pennsylvania-based company, had established a profit-sharing 401(k) plan for certain employees and a union employee 401(k) plan for other employees. The plans were not terminated nor the assets distributed to all of the participants and beneficiaries when the company ceased operations in 2009. As of July 2013, the profit-sharing plan had 22 participants and $155,745 in assets, and the union plan had eight participants and $12,875 in assets.

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GEI International Inc., a Wayne, Pennsylvania-based company, established a 401(k) plan for its employees, and although the company ceased operations in 2003, the plan had not been terminated nor its assets distributed to participants and beneficiaries. As of February 2012, the plan had 16 participants and $146,209.32 in assets.

The DOL filed complaints in federal court against the companies, seeking removal of the companies as  fiduciaries and the appointment of an independent fiduciary to terminate the plans and distribute assets to participants and beneficiaries. Both companies failed to defend the complaints.

For Custom Patio Rooms, the U.S. District Court for the Western District of Pennsylvania granted a default judgment on August 5, appointing Metro Benefits Inc. as an independent fiduciary. For GEI International the United States District Court for the Eastern District of Pennsylvania granted a default judgment on August 2, appointing Lefoldt & Co., P.A., as the plan’s independent fiduciary.

The default judgment document for Custom Pation Rooms, Docket Number: 2:13-cv-77-RCM, is here.The default judgment for GEI International, Docket Number: 2:13-cv-01171-EL-77-RCM, is here.

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