Developments in Stock Drop Cases in 2007

Lawsuits continue to be filed in stock drop cases for ESOPs and, more often, 401(k) plans invested in company stock in 2007, but the pace of new filings has dropped to a trickle. About 80 cases are still in one stage of litigation or another, and few final settlements in or out of court have been reached.

The most significant development of the year was that three appeals courts each ruled that participants who had been paid out of plans and later alleged that fiduciary abuses had caused them to suffer losses could sue to recover their own alleged individual losses, rather than just being able to sue for equitable relief (meaning benefits would have to be restored in the plan, something of little practical value to them). Until 2007, courts generally ruled that paid out employees lacked standing to sue for individual damages, but the appeals courts all concluded this left employees with no practical remedy. Just how the tricky issue of how much the damage cost the employees (assuming the court agrees there were fiduciary abuses) remains unresolved. For instance, if the stock hit a high of $85, then fiduciaries ignored information that would lead it to fall to $35, is the damage $50 per share? Is the highest value the right reference point? Might the shares have dropped some amount even absent the impact of the information? Courts will have to sort that out in the future.

The lawsuits and changes in rules for diversification in 401(k) plans have led the amount of employer stock in 401(k) plans to drop from 19% in 2002 to 11% in 2006.