The Markets August 17, 2011

Most Stock Drop Cases Involve 401(k) Plans

In a new review of litigation on the issue of employer stock in retirement plans, the National Center for Employee Ownership has found almost all of the stock drop cases involve 401(k) plans, not employee stock ownership plans (ESOPs).
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Altogether, there were 43 401(k) cases the NCEO identified during the last 12 months. In the ESOP area specifically, there were no groundbreaking decisions or consistent trends among the 23 cases.

The NCEO says what is most striking in the ESOP area is the small number of lawsuits given the more than 11,000 existing plans. Of particular note is that only one of the cases involved improper valuation. The Department of Labor has made a very controversial proposal to make appraisers ESOP fiduciaries, partly because it believes there are a lot of inaccurate appraisals (see “Law Firm Supports Making ESOP Valuators Fiduciaries“). Over the last 20 years, however, there are rarely more than a few valuation cases that reach court per year.

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The review also found in the last 12 months, courts have largely continued to favor defendants. Two circuit courts (the 2nd and 9th) have ruled if a 401(k) plan mandates investment in employer securities, that alone precludes action against fiduciaries. By a two-one margin, district courts, and one appeals court, ruled defendants deserve a presumption of prudence for holding employer stock. Under that theory, participants can only prevail if they can prove that the fiduciaries knew or should have known that the company was in imminent danger of collapse. 

Ten of 11 courts also ruled that fiduciaries were not required under Securities Laws to make disclosure of non-public information to plan participants. Courts were split of whether former participants retained standing to sue.  

There were also a number of settlements during the year, most providing participants with fairly small amounts of money (in the $1,000 to $2,000 range often).
 
The report can be ordered from http://www.nceo.org/ESOP-401k-Employer-Stock-Litigation/pub.php/id/258/.

Compliance August 17, 2011

DoL Files Brief in SunTrust Stock Drop Case

U.S. Secretary of Labor Hilda L. Solis is asking an appellate court to uphold a district court's decision refusing to dismiss a claim that SunTrust plan fiduciaries breached their duties. 
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Plaintiffs alleged that SunTrust fiduciaries failed to disclose to participants information regarding SunTrust’s precarious financial status and the resulting high risk of investing in SunTrust stock, which was a breach of duties.

In an amicus brief filed with the 11th U.S. Circuit Court of Appeals, Solis says the district court was correct to decline to dismiss plaintiffs’ participant disclosure claim. She notes that under the Employee Retirement Income Security Act (ERISA), defendants were obligated to truthfully communicate to participants’ information material to the protection of their plan investments, and SunTrust defendants’ arguments to the contrary do not have merit.  

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The brief contends plaintiffs plausibly alleged that defendants not only failed to adequately warn participants of the risk of investing in SunTrust stock, but also misled them concerning that risk. They have therefore sufficiently stated a claim that defendants failed to adhere to their disclosure obligations as fiduciaries under ERISA. 

Solis also says defendants incorrectly assert the formal reporting and disclosure obligations of ERISA sections 101 through 111 limit the obligations of ERISA fiduciaries to disclose information to plan participants and beneficiaries. “There simply is no such limitation in the text of ERISA’s reporting provisions or in any other section of the Act, as is evident from defendants’ failure to cite such statutory language. Instead, ERISA expressly imposes on plan fiduciaries broad obligations of prudence and loyalty, without any qualification of the sort defendants seek to invent,” the brief states.

Solis says the court should also reject defendants' argument that ERISA-imposed disclosure requirements conflict and interfere with disclosure requirements under securities laws. As a general matter, "when two statutes are capable of co-existence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective." 

“The obligations and purposes of ERISA and the securities laws are completely congruent in the context of this case… Neither the securities laws nor ERISA permits regulated parties to mislead investors, and both legal regimes authorize full public disclosure of the true facts about a company's financial condition.” 

In the case In re SunTrust Banks Inc. ERISA Litigation, U.S. District Judge Richard W. Story of the U.S. District Court for the Northern District of Georgia rejected claims SunTrust Banks breached its fiduciary duty by keeping company stock as an investment option in its 401(k) plan after it was no longer prudent. He contended the plaintiffs’ stock-drop claims were actually a veiled attempt to impose a duty to diversify on the plan that ERISA does not include.

Story also threw out claims plan fiduciaries breached their ERISA duties by making false statements in Securities and Exchange Commission (SEC) filings and other documents that were distributed to plan participants. The court said the plaintiffs had not identified specific false or misleading statements in the SEC filings.  

However, Story said the employees could continue with their claim that the plan fiduciaries breached their ERISA duties by failing to provide plan participants with information about SunTrust stock that would allow them to accurately evaluate their investment in the stock (see "Some SunTrust Stock Drop Claims Thrown Out"). 

The Amicus brief is at http://www.dol.gov/sol/media/briefs/fisch(A)-8-12-2011.htm.

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