March 23, 2011 (PLANSPONSOR.com) - Last week brought to light an aspect of 401(k) litigation that doesn’t generally get a lot of coverage—and the participant-plaintiff was presented with a $50,000 bill.
Now, at some level, this case was “just” another stock drop suit where some kinds of accounting issues contributed to a sudden (and ostensibly unexpected) drop in the price of company shares, including those held in the company’s 401(k) plan.1 These types of cases have cropped up one after another in the wake of the market downturn, and while the fact patterns behind the drop in share price vary slightly, the suits themselves allege pretty much the same thing: The plan fiduciaries kept the stock as a plan investment after it was no longer prudent to do so; to wit—after it suffered a precipitous drop in value.
Most of these cases don’t seem to get very far, the courts either deferring to a “presumption of prudence” (see “IMHO: Prudent Mien?” or, as in this case, finding that ERISA 404(c)’s safe harbor provided shelter (see”Court Gives Baxter 404(c) Protection in Stock Drop Suit”).
What’s interesting to me about this case isn’t that it is a stock drop suit, not that the judge found 404(c) applicability as a shield (honestly, I’m not “getting it” in this case), and certainly not that the employer prevailed (that seems a pretty common result in stock drop cases). No, what I found interesting—and what one would hope that plaintiffs who get lured to these actions in the future might want to keep in mind—is that they might lose more than just their day in court.
Not that it was an all-out victory for the defendants. Sure, they’ll get $50,000 from the participant-plaintiff, but they had asked for roughly $500,000—and that didn’t include attorney fees! But in this case, after spending some time discussing whether such awards could be made and on what grounds, Judge Gottschall decided that such fee awards were allowed—and then proceeded to pick apart the itemized requests for reimbursements with the fine-tooth comb of someone auditing a business expense reimbursement request (disallowing most for either a lack of specificity or an inability to document the origins of the expense).
Regardless, I found the list of expenses to be eye-opening2, and while the defendants may well have had other resources to tap to cover them, it was a stark reminder of just how expensive litigation can be, how much court costs, even when you win.
But, IMHO, maybe there’d be less of that if those who set such things in motion had to spend some of THEIR money when they’re wrong.
1 Specifically, U.S. District Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois granted the assessment of some $50,000 in costs associated with the litigation against David E. Rogers, who filed the suit against Baxter International in 2004. The suit, rejected by this same judge in 2010, alleged that Baxter continued offering company stock in its 401(k) plan after it was no longer prudent to do so (specifically, after its stock twice took tumbles after the reporting of disappointing earnings results, one involving fraud at a Brazilian subsidiary). Judge Gottschall ultimately dismissed the suit because she found that the employer qualified for protection under ERISA 404(c)’s safe harbor (see “Court Gives Baxter 404(c) Protection in Stock Drop Suit” at ).
2 From Baxter and former Baxter CEO Harry Kraemer:
(1) $23,163.44 for transcripts and video recordings of court hearings and depositions,
(2) $6,956.60 for photocopying court documents and preparation materials for depositions,
(3) $112,648.13 for exemplification and copying costs incurred in connection with responding to discovery requests (including nearly $78,500 in fees paid to an “e-discovery vendor” to process data into a readable format that could be reviewed and produced to plaintiff, as well as $15,000 spent digitalizing documents that existed in hardcopy format—at a rate the court said was about twice as expensive as simply copying them),
(4) $163,474.09 for the cost of computerized legal research.
From former Baxter CFO Brian Anderson:
(1) $4,070.95 for transcripts,
(2) $10,673.10 for photocopying,
(3) $2,687.04 for exemplification of trial exhibits,
(4) $173,150.00 for expert-witness expenses (apparently without providing any supporting documentation, so it was rejected).