Stock-Drop Suit Passes First Hurdle

An employee 401(k) stock-drop suit survived its first major challenge when a federal judge in Tennessee turned away an early effort by the employer to have the claim dismissed.

U.S. District Judge Todd J. Campbell of the U.S. District Court for the Middle District of Tennessee ruled that employee Kenneth Banks had marshaled enough evidence to back up his claims that Healthways Inc. continued having a company stock investment option even after it was no longer prudent to do so. Banks also alleged the company did not properly disclose information about its finances to participants.

However, Campbell warned that he would toss out any claims Healthways did not disclose non-public financial information because such disclosure is not required under the Employee Retirement Income Security Act (ERISA).

The July 2008 lawsuit said Healthways and four other companies were involved in the Medicare Health Support (MHS) pilot program launched by the Centers for Medicare and Medicaid Services (CMS). The five companies failed to meet their health delivery cost savings targets set by CMS and were required to reimburse CMS for the fees they received through the program, according to the opinion.

The suit charges that Healthways minimized the problems it was encountering with MHS in public statements and regulatory filings, and when the full information was made public, the company’s share price dropped by 34%.

According to the opinion, Healthways matched employee contributions by $0.52 cents for every dollar with $0.5 cents invested in Healthways stock. The remainder of the matching contributions were invested as directed by employees.

For its part, the company argued its 401(k) was actually an employee stock ownership plan (ESOP) and that the court’s review of the plan fiduciaries’ decision to invest in Healthways stock should be under an abuse of discretion standard.

The case is Banks v. Healthways Inc., M.D. Tenn., No. 3:08-0734, 1/28/09.