ERISA EMPLOYER STOCK CLASS ACTIONS

PLUS EMPLOYMENT & FIDUCIARY ISSUES SYMPOSIUM

April 13, 2005

Doug Hinson – Alston & BirdLeader, ERISA Litigation Practice Group

The Plaintiffs’ Securities Class Action Bar Has Discovered ERISA

– 70-80 employers hit with ERISA Class Action suits– Most “follow” in the wake of a Securities Class Action– Attempt to get around Private Securities Litigation

Reform Act of 1995 • Pleading Standards• Automatic Stay• Lead Plaintiff/Counsel selection

– A new pot of gold – often a separate/additional policy or tower from the D&O policy/tower

Nature Of The Claims

• Parties – – Plaintiff – any “participant” in 401k Plan – current or

former employee– Defendants – “fiduciaries”

• Committees/individuals responsible for plans/investments• Whoever appoints same – power to appoint comes with a

fiduciary duty to monitor• Officers/Directors involved in communications related to

Employer Stock or the business/fortunes of the Company• “Directed” Trustees

Nature Of The Claims (cont)

• BREACH OF FIDUCIARY DUTY – BOTH LOYALTY AND PRUDENCE

– Employer Stock is an imprudent investment option• Never should have been selected

• If Plan requires – should have overridden Plan

– Communications – both misrepresentation and failures to disclose

• Misrepresentations – lying is inconsistent with fiduciary duty

• Duty to disclose – anything a fiduciary knows “might be harmful”– Whether duty to participants or other fiduciaries

Nature Of The Claims (cont)

• Relief Requested– “Harm to the Plan”

• Difference between stock performance and performance of other “prudent” investment – usually the best performing plan option during class period

• Prejudgment Interest and Attorneys’ Fees

– Injunctive/Equitable relief• Removal of fiduciaries

• Removal of trading restrictions

• Education/Communication

Nature of the Defenses

• Whether Defendant was a “fiduciary” or was acting as such– “Named Fiduciaries” v “Functional

Fiduciaries” – “Two Hats Rule” – must be wearing fiduciary

hat when taking action at issue– Plan Sponsor activities – establishing Plan

terms or benefits/ amending same

Nature of the Defenses (cont)

• No Duty to Disclose under ERISA– Cannot selectively disclose – Reg FD– Disclosure to Market – price adjusts – no harm from

failure to disclose

• No Duty to Violate Securities Laws• No Duty to Foresee the Future

– Absent inside information – no way to predict future stock price

– Presumption of Prudence – statutory exemption to the usual duty to diversify and prudence (to the extent it would require diversification) with regard to employer securities

The Department of Labor’s View

– Filed an Amicus brief in Enron on the side of the Plaintiffs

• Those with the power to appoint have a duty to monitor, and this may require disclosure of inside information to fiduciaries and/or overriding the fiduciaries’ decisions

The Department of Labor’s View (cont)

– Fiduciaries have a duty to disclose if required to protect participants from “misstatements” or “misleading information”

• Duty to disclose “arises only in those circumstances where material information is essential to protect the interests of the beneficiaries” – “critical threat” – “extreme impact”

The Department of Labor’s View (cont)

– Securities laws do not insulate fiduciaries from such claims

• Could publicly disclose information or alert regulators

• Could “abstain” – avoid buying additional stock by eliminating it as an option

– Fiduciaries have a duty to override Plan terms and/or Participant Directions if they know they are imprudent

• Even in an ESOP, fiduciaries ultimately control whether to invest in employer securities and thus make a fiduciary decision

• But DOL recognized that a significant drop in the price is not alone sufficient – must have some inside information or “extraordinary circumstances” to deem publicly traded stock imprudent

KEY ISSUES/TRENDS• Motions to Dismiss

– Fiduciary status– Presumption of Prudence– Duty to Disclose

• Class Certification– Communications Claims v. Prudence Claims– 502(a)(2) v. 502(a)(3)

• Summary Judgment– WorldCom – directed trustee

SETTLEMENTS• The Good

– Ikon – agreed to amend the plan to allow participants to sell stock – relatively small amount of cash for attorneys’ fees

– Louisiana Pacific – agreed to put investment policy in place and provide new education materials – less than $400,000 in attorneys’ fees

• The (not too) Bad – RiteAid – approximately $10 million– Providian – approximately $8.5 million

• The Ugly– Global Crossing – approximately $80 million– Lucent – approximately $70 million– Enron – approximately $85 million

• Average (per Cornerstone Research): approximately $30 million

WHAT TO LOOK FOR

• Plan Design– Does the Plan hold employer stock?

– What does the Plan say about the stock?• Does it require participants to hold stock?

• Does it require Plan to offer stock?

• Is the stock held in an ESOP within the 401k Plan?

• Appointing Process – Reporting Process– Is the Plan clear on who the fiduciaries are – what their

role/responsibility is?

– Is it clear who appoints the fiduciaries?

– Is there a reporting/monitoring function in place?

WHAT TO LOOK FOR (cont)

• Communications– Plan prospectus for Employer Stock – do they

incorporate public filings by reference into the Summary Plan Description (SPD)?

– Who is responsible for Plan communications?– Do they distinguish between communications to

Participants v. Employees?

WHAT TO LOOK FOR (cont)

• Operations

– Is there an Investment Policy in place to guide the fiduciaries?

– Do the fiduciaries review Employer Stock like all other investment options?

– Have they kept good minutes/records of their monitoring activities?