Some SunTrust Stock Drop Claims Thrown Out

A federal judge in 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.

U.S. District Judge Richard W. Story of the U.S. District Court for the Northern District of Georgia contended that the plaintiffs’ stock-drop claims were a veiled attempt to impose a duty to diversify on the plan that the Employee Retirement Income Security Act (ERISA) does not include. ERISA, Story argued, ruled that there is no duty to diversify eligible individual account plans (EIAPs) that invest in employer stock.

The stock-drop suit charged that the company said publicly that it was tightening its underwriting standards for certain types of mortgages, but actually had substandard procedures in place that allowed it to grant loans to undeserving borrowers. The plaintiffs also alleged the company led investors to believe it had scoured its portfolio and found its loss exposure was “virtually zero” on loans known as “Alt A” transactions when that was untrue.

The participants argued they lost money when the company’s share price dropped during the mortgage meltdown as part of the recent economic crisis.

In his ruling, 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.

The case is In re SunTrust Banks Inc. ERISA Litigation, N.D. Ga., No. 1:08-CV-3384-RWS.