Participant Gets Go-Ahead in Company Stock Drop Case

A federal judge in Massachusetts cleared the way for a participant invested in a company stock fund to pursue a fiduciary breach suit.

The judge gave the OK, despite the fact that the plaintiff had cashed out of the fund more than two years before the employer disclosed its stock option backdating practices.

U.S. District Judge Nancy Gertner of the U.S. District Court for the District of Massachusetts ruled that Soufiane Bendaoud had legal standing to sue over the Analog Devices Inc. (ADI) company stock fund under the Employee Retirement Income Security Act (ERISA). Bendaoud claimed defined contribution plan participants were subjected to too high a level of risk in the stock fund because of the then-undisclosed options backdating.

In turning away requests to throw out Bendaoud’s suit, Gertner asserted that he might eventually be able to receive money damages if he could prove another plan investment would have performed better than the company stock fund actually did.

While Gertner refused to allow Bendaoud to move forward with allegations that the company’s actions to set its executive compensation levels and to pursue options backdating practices represented an ERISA breach, she accepted the notion ADI’s alleged misrepresentation of its options practices in regulatory filings could be seen as a breach.

Gertner agreed with the defendants that the act of backdating stock options was a corporate business activity, not a plan activity. However, she found that the defendants may have been acting in their fiduciary capacities, rather than in their corporate capacities, when they incorporated into plan documents affirmative statements in regulatory filings about the company’s executive compensation practices.

According to the opinion, when Bendaoud first started investing in the ADI stock fund, the price of a share of ADI stock was approximately $71. Bendaoud cashed out of the ADI stock fund in December 2002, when the price per share was approximately $30.

Nearly two years later, ADI disclosed publicly that the Securities and Exchange Commission (SEC) had been investigating its stock options practices for the preceding five years. ADI later reached a tentative settlement with the SEC, admitting that it should have disclosed to the public that certain stock options had been backdated for its executives.

Bendaoud alleged that in November 2004 after the backdating scheme was disclosed, the value of ADI stock “plummeted.”

The case is Bendaoud v. Hodgson, D. Mass., No. 06cv11873-NG, 9/24/08.

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