401(k) Committee Members May Have Breached Duties

March 16, 2004 (PLANSPONSOR.com)佩(k) administrative plan committee members may have breached their fiduciary duties by "encouraging" plan participants to examine financial reports that, unbeknownst to the participants, contained irregular accounting practices, the U.S. District Court for the Southern District of Texas ruled.

In a March 5 decision, the court denied a dismissal of a class action lawsuit, Schied v. Dynegy Inc. , filed by Constance K. Schied, an employee at natural gas marketer Dynegy Inc on behalf of all Dynegy 401(k) plan participants.   The lawsuit alleges that the 401(k) committee members breached their fiduciary duties by promoting the company’s false Securities and Exchange Commission (SEC) reports to plan participants, and also alleges that Dynegy company officers breached their fiduciary duties in a variety of ways, according to Washington-based legal publisher BNA.

Although the case was not dismissed, Judge Sim Lake said that, at trial, it must be proven that when the summary plan description (SPD) was released encouraging participants to “carefully review” Dynegy’s filings with the SEC, the committee members had access to nonpublic financial information.

Case History

Dynegy was originally known as Natural Gas Clearinghouse, shortened its name to NGC in 1995 and went public, but in 1997, the company acquired Destec Energy and became known as Dynegy.     During the years between April 1999 and January 2003, during which the company stock rose from $8 per share to roughly $50 per share, Dynegy claimed to have raised over $1.7 billion from issuing stock to investors, including Dynegy employees who participated in the company’s 401(k) plan.  

The lawsuit alleges that during this time, Dynegy engaged in irregular accounting practices, including round-trip trades, energy price manipulation, and other questionable business practices, that caused Dynegy stock to be artificially inflated.   Dynegy eventually was forced to restate its financial results and, as a result, Dynegy stock fell dramatically. Then, in January 2002, Dynegy 401(k) plan’s administrative committee members distributed an SPD that stated: “Each participant is encouraged to carefully review Dynegy’s most recent” SEC filings.

Schied alleged that, by passing out such SPD, the members of the 401(k) plan’s administrative committee violated their fiduciary duties of loyalty and prudence by disseminating the SPD that expressly incorporated false and material misrepresentations that were contained in Dynegy’s SEC filings, according to BNA.

Court Ruling

Although the court found that the committee members could not be sued for failing to disclose information needed in order to correct misstatements made to the public, the court did say that certain circumstances would require disclosure of information regarding earnings or business conditions to correct misstatements made to employees who invest in employer stock under ERISA’s general fiduciary requirements.

Additionally, the court rejected the committee members’ claim that that they should not be held liable for the misrepresentations contained in company SEC filings because they were simply complying with Department of Labor regulations require that 401(k) plans to make information contained in a plan sponsor’s SEC filings available to plan participants, according to BNA.

However, the court did dismiss Schied’s claim that the committee members breached their ERISA fiduciary duties by requiring that employer matching contributions to the 401(k) plan be made in Dynegy stock, BNA reported, because the plan mandated that matching contributions would be made in the company stock.   The court did tell Scheid however, that she could continue to allege that, because the committee officials did not remove company stock as an investment option, committee members did not fulfill their fiduciary obligations.

The court said that Dynegy, was not a fiduciary because it had appointed the 401(k) committee members and could not be sued for the alleged breaches; the company could however, be sued as a cofiduciary if Schied is able to prove at trial that Dynegy officers had knowledge of the committee members’ alleged breaches but failed to take remedial action, according to BNA.

Schied was represented by Robin L. Harrison and Justin M. Campbell III of Campbell Harrison, Houston; Ron Kilgard, Gary A. Gotto, and Laurie B. Ashton of Keller Rohrback, Phoenix; Lynn Lincoln Sarko, Erin M. Riley, Elizabeth A. Leland and Derek W. Loeser of Keller Rohrback, Seattle; Marc I. Machiz of Cohen Milstein, Washington, D.C.; and Marka A. Peterson of Washington, D.C.

Dynegy and the other defendants were represented by David D. Sterling of Baker Botts, Houston; Anthony C. Epstein, Paul J. Ondrasik Jr., F. Michael Kail, and Morgan D. Hodgson of Steptoe & Johnson, Washington, D.C.; Michael M. Wilson of Clements O’Neill, Houston; Thomas C. Godbold of Fulbright & Jaworski, Houston; and Jack C. Nickens of Nickens Keeton, Houston.

The full text of the opinion can be found at  http://pub.bna.com/pbd/h023076.pdf .