A new class action challenge filed in the U.S. District Court for the Southern District of New York, Giantonio vs. Chicago Bridge & Iron, accuses plan fiduciaries of improperly continuing to offer employer stock as an investment option in the company’s retirement plan while the company faced serious financial challenges.
Similar to other stock-drop challenges, this Employee Retirement Income Security Act (ERISA) lawsuit alleges the employer knew its stock price was artificially inflated during the class period—October 29, 2013, through the present—making it an imprudent retirement investment for the plans.
As the text of the lawsuit spells out, “Defendants knew or should have known that material facts about CB&I’s business had not been disclosed to the market, causing CB&I Stock to trade at prices above which it would have traded had such facts been disclosed.”
As a rule these claims are hard to prove in court, it should be stated, because even though the famous Supreme Court decision in Fifth-Third vs. Dudenhoeffer established that plan sponsors offering employer stock cannot rely on a blanket presumption of prudence, nevertheless the assertion that plan fiduciaries should have determined that the public stock price of their company was inflated (or indeed undervalued) is generally implausible—absent special circumstances such as massive willful fraud.
Knowing this, the plaintiffs attempt in their complaint to establish that fraud was at least potentially occurring, and that this should have been enough to prevent plan fiduciaries from continuing to offer employer stock to participants. As the complaint states: “During the class period, the company failed to disclose that it was responsible for hundreds of millions of dollars in liability and had improperly accounted for its goodwill during 2013 to cover losses associated with construction delays and cost overruns on contracts to complete construction of new nuclear power plants in Waynesboro, Georgia and Jenkinsville, South Carolina (the “Nuclear Projects”). Furthermore, the company faces potential fraud claims valued at over $2 billion, which exceeds its market capitalization as of the filing of this complaint.”
Given the totality of circumstances prevailing during the class period, plaintiffs assert that “no prudent fiduciary could have made the same decision as made by defendants here to retain and/or continue purchasing the clearly imprudent CB&I Stock as investment in the plans.”
NEXT: Details from the text of the suit
Attempting to establish that plan fiduciaries should have known their employer’s stock price was inflated, and to established alternative actions the fiduciaries should have known to take, the text of the lawsuit offers extensive background on the recent development of the Chicago Bridge & Iron company, particularly the acquisition of Shaw Group Inc. and the company’s effort to serve contracts related to the nuclear power industry. The background info shows that eventually Chicago Bridge & Iron entered into a merger agreement with Westinghouse, which plaintiffs say partially contributed to that company’s own eventual bankruptcy.
As of June 5, 2017, CB&I’s stock was down 40.8% over the prior three months and 40.2% over the prior six months. The stock has returned -49.7% over the last year, plaintiffs claim, and the company’s market capitalization is less than its potential liabilities as of the filing of the complaint.
The complaint continues: “Disclosure might not have prevented the plans from taking an inevitable loss on company stock it already held, but it would have prevented the plans from acquiring (through participants’ uninformed investment decisions and continued investment of matching contributions) additional shares of artificially inflated company stock. The longer the concealment continued, the more of the plans’ good money went into a bad investment; full disclosure would have cut short the period in which the plans bought company stock at inflated prices.”
A number of alternative actions are proposed: “Defendants should have closed the company stock fund to further contributions and directed that contributions be diverted from company stock into prudent investment options based upon the participants’ instructions or, if there were no such instructions, the plans’ default investment option … Neither of these actions would have implicated, let alone been in violation of, federal securities laws or any other laws. Nor would the plans ceasing to purchase additional company stock likely send a negative signal to the market.”
Alternatively, plaintiffs allege, “defendants could have disclosed (or caused others to disclose) CB&I’s construction delays and cost overruns on contracts to complete construction of the nuclear projects so that CB&I Stock would trade at a fair value … Given the relatively small number of shares of CB&I stock purchased by the plans when compared to the market float of CB&I Stock, it is extremely unlikely that this decrease in the number of shares that would have been purchased, considered alone, would have had an appreciable impact on the price of CB&I Stock.”