Court Allows Ambac Stock Drop Case to Proceed

A federal judge in New York rejected claims that plan fiduciaries are immunized against stock drop suits if the plan mandates company stock investments; a decision not commonly seen.

U.S. District Judge Harold Baer Jr. of the U.S. District Court for the Southern District of New York held that plan fiduciaries at Ambac Financial Group cannot blindly follow plan documents in contravention of the mandates of ERISA (Employee Retirement Income Security Act) and at the same time satisfy their fiduciary obligations.

With that ruling, Baer cleared the way for Ambac employees to proceed with their claims that fiduciaries breached their ERISA duties by continuing to offer company stock even after it was no longer prudent to do so. The employee lawsuit alleged that between 2004 and 2007, Ambac fundamentally changed its business strategy by lowering its underwriting and standards, exposing itself to billions of dollars of losses on high-risk transactions. Ambac shares dropped in value from $96 per share to $1 per share during the period covered by the suit.

However, Baer stopped short in deciding whether the Ambac fiduciaries should be accorded the presumption they acted prudently, which is frequently applied in stock drop decisions.  

The case is Veera v. Ambac Plan Administrative Committee, S.D.N.Y., No. 10 CV 4191 HB.