"Copycat" Employer Stock Cases Still Reach Mixed Conclusions

Since the implosion of Enron, more than 60 lawsuits have been filed against trustees, fiduciaries, boards, companies, plan committees, and corporate officers (all of whom may have overlapping roles) for violating ERISA by failing to protect participants in the company's 401(k) plan and/or ESOP from declines in company stock value. The suits variously allege that the plan should have diversified, that employees should not have been misled into investing in company stock, that critical information was withheld, or that boards failed to monitor plan fiduciaries. In a very useful analysis of these cases, Matt Chester and David Dodds find the courts have not come to consistent conclusions on any of these issues (Compensation & Benefits Review, December 2005). Few cases have actually been decided even at the trial court level, although a few more have been settled. Most decisions have been on motions to dismiss, meaning the courts have simply not ruled out the possibility of the issues being raised as worthy of a hearing. Courts have given mixed signals on whether the board has an affirmative duty to monitor fiduciaries and, if so, in what way and how much. Some courts lean toward seeing the only appropriate beneficiary of a suit as individuals covered by the class, while others see the plan itself as the logical beneficiary. Few, however, have given it careful analysis. Directed trustees have primarily been left off the hook, particularly in light of recent DOL guidance. On the tricky issues of whether disclosing non-public information in ways that ERISA may seem to require but securities laws do not (and that might, in any event, cause sharp drops in share price), courts have been all over the map. Given the likely appeal of some cases and the settlement of others, it may be some time before a clear, or at least clearer, course is set out for how to deal with employer stock in retirement plans. All of the suits, however, share common features. They all are in public companies, all involve sharp declines in share price, and all are either 401(k) plans or are ESOPs that are either combined with or operate alongside 401(k) plans or have employee deferral features. The typical ESOP-a plan in a closely held company with a separate 401(k) plan with diversified investments-has not been involved in these suits.