Print Edition
August 2010 
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Employee Retirement Income Security Act (ERISA) Litigation |
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Muazzin Mehrban, November 2009 |
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ERISA-related litigation is on the rise. Several cases involving 401(k) plans, severance benefits and medical cutbacks have resulted in significant settlements paid out by plan fiduciaries. Recent decisions handed down by US courts, although sometimes favourable to defendants, are unlikely to stem the flow of ERISA-related disputes. As a result, companies need to be aware of the latest developments and prepare themselves for the threat of potential litigation.
Major losses across the US financial markets over the past two years significantly reduced the value of most ERISA retirement plans. Quoting recent studies, Lisa Brogan, a partner at Baker & McKenzie, highlights that ERISA plans lost $2.3 trillion, or 26 percent, of their value between late 2007 and the end of August 2009. “Turbulence in the financial industry and related housing and credit woes have battered retirement funds.
Large plan losses, against the backdrop of public outrage over executive compensation – such as golden parachutes for departed executives and stock option plans – as well as emerging disclosures of securities fraud, have created the ‘perfect storm’ for class action litigation against plans and their fiduciaries,” she says. Ms Brogan adds that the ERISA ‘stock drop’ class actions by pension plan participants first began to surface in wake of scandals such as Enron in 2001. Participants alleged that fiduciaries had misrepresented or failed to disclose information about the suitability of investing in company stock.
Influential court decisions
Although the increase in ERISA class actions began to take hold before the financial crisis set in, the ability of plaintiffs to make allegations of mismanagement and improper conduct was boosted by the case of LaRue v. DeWolff, Boberg & Associates in early 2008. “The US Supreme Court held that participants in a defined contribution pension plan can, under certain circumstances, sue a fiduciary whose alleged misconduct impaired the value of plan assets in the participant’s individual account,” explains Jonathan K. Youngwood, a partner at Simpson Thacher & Bartlett LLP. “Compounding this, fluctuations in the stock markets over the past year have caused a surge in filings of ERISA stock-drop actions. Often, these cases are filed as companion actions to securities suits,” he adds. Also, Ms Brogan informs that the market collapse last year saw a new wave of ERISA cases emerging, with financial institutions such as Lehman Brothers, American International Group, Bear Stearns, Wachovia and UBS all being targeted. According to the experts, the ongoing impact of the subprime mortgage crisis has allowed these cases to proliferate, with plaintiffs pointing to questionable investment decisions and short-term lending practices.
A number of recent ‘stock drop’ cases have emerged. In one involving Citigroup, plaintiffs alleged that the company invested extensively in subprime mortgages and related securities, despite knowing it would eventually sustain heavy losses through subprime loans. They also argued that the bank used various methods to mislead investors about its losses and exposures. “In this instance the court dismissed the plaintiffs’ ERISA breach of fiduciary duty claims and held that, because the plan mandated the offering of Citigroup stock to plan participants, Citigroup’s fiduciaries had no discretion to eliminate the option to offer company stock,” explains Mr Youngwood. “Therefore, it could not be held liable for failing to remove the option even if the stock became an imprudent investment.” The Citigroup case serves to underline the difference between a settler act, mandating the offering of company stock, and a fiduciary act, where investment options are chosen on a discretionary basis. The former could shield fiduciaries from investment claims liability in the future.
Last year, the US Supreme Court heard the MetLife v. Glenn case in which Metlife was accused of improperly withholding benefits. The court held that there was a conflict of interest as Metlife both administered and funded a benefit plan. Going further, it also suggested that in the future, a court should consider such conflict of interest to be a factor in its review of a plan administrator’s denial of benefits. In another case, Hecker v. Deere & Company, the Seventh Circuit Court of Appeals affirmed the district court’s motion to dismiss plaintiffs’ claims that the defendant violated its fiduciary duty by providing investment options which required excessive fees and also failed to provide adequate disclosure on the fee structure plan. The court held that under the service agreement at issue, the manager of a 401(k) plan did not have final authority over the choice of investment options and therefore did not owe fiduciary duties to the plan’s participants. In addition, the court also highlighted the plaintiffs’ failure to allege that the claimed misrepresentation of fee structure by the service provider was either intentionally misleading or a material admission.
As the spate of recent cases show, the risk of ERISA litigation has increased for companies. Heavy stock losses and the severity of punishments for scandals being handed out by courts have encouraged plaintiffs to test the boundaries of ERISA fiduciary law. Defendants may be exposed to a costly battle. “With any litigation, there is the risk of prolonged litigation and its attendant costs. That risk can be greater in ERISA litigation, where the complex benefit issues often require retention of experts and claims are brought on behalf of all participants in the plan,” explains Howard Shapiro, a partner at Proskauer Rose LLP. “While only equitable relief is available under ERISA, such relief can be costly if reformation of the plan, reversal of a plan amendment, or the removal of plan trustees is a possibility.” Also, directors’ and officers’ knowledge of inflated shares, accounting improprieties and other situations leading to stock drop are also being imputed to fiduciaries and used against them in legal cases. If a company finds itself subject to ERISA litigation, it needs to understand that this area of the law can be particularly technical and should only be tackled with the advice of experts.
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