Compliance

Stock-Drop Lawsuit Alleges Disclosure Failures

Plaintiffs attempt in their complaint to establish that fraud was at least potentially occurring, and that this should have been enough to prevent plan fiduciaries from continuing to offer employer stock to participants.

By John Manganaro editors@plansponsor.com | June 15, 2017
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A new class action challenge filed in the U.S. District Court for the Southern District of New York, Giantonio vs. Chicago Bridge & Iron, accuses plan fiduciaries of improperly continuing to offer employer stock as an investment option in the company’s retirement plan while the company faced serious financial challenges.   

Similar to other stock-drop challenges, this Employee Retirement Income Security Act (ERISA) lawsuit alleges the employer knew its stock price was artificially inflated during the class period—October 29, 2013, through the present—making it an imprudent retirement investment for the plans. 

As the text of the lawsuit spells out, “Defendants knew or should have known that material facts about CB&I’s business had not been disclosed to the market, causing CB&I Stock to trade at prices above which it would have traded had such facts been disclosed.”

As a rule these claims are hard to prove in court, it should be stated, because even though the famous Supreme Court decision in Fifth-Third vs. Dudenhoeffer established that plan sponsors offering employer stock cannot rely on a blanket presumption of prudence, nevertheless the assertion that plan fiduciaries should have determined that the public stock price of their company was inflated (or indeed undervalued) is generally implausible—absent special circumstances such as massive willful fraud.

Knowing this, the plaintiffs attempt in their complaint to establish that fraud was at least potentially occurring, and that this should have been enough to prevent plan fiduciaries from continuing to offer employer stock to participants. As the complaint states: “During the class period, the company failed to disclose that it was responsible for hundreds of millions of dollars in liability and had improperly accounted for its goodwill during 2013 to cover losses associated with construction delays and cost overruns on contracts to complete construction of new nuclear power plants in Waynesboro, Georgia and Jenkinsville, South Carolina (the “Nuclear Projects”). Furthermore, the company faces potential fraud claims valued at over $2 billion, which exceeds its market capitalization as of the filing of this complaint.”

Given the totality of circumstances prevailing during the class period, plaintiffs assert that “no prudent fiduciary could have made the same decision as made by defendants here to retain and/or continue purchasing the clearly imprudent CB&I Stock as investment in the plans.”

NEXT: Details from the text of the suit 

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