Appellate Court Allows Stock Drop Suit to Move Forward

April 4, 2008 ( - 401(k) participants in a stock-drop case against medical products manufacturer Baxter International Inc. have won an important legal skirmish as a federal appellate court upheld the plaintiffs' right to sue for individual damages in a fiduciary breach suit.

The 7 th  U.S. Circuit Court of Appeals said   U.S. District Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois was correct in turning away Baxter’s request to dismiss the suit. Relying on a recent landmark Supreme Court ruling that individual defined contribution participants could pursue fiduciary breach suits, the appellate panel asserted that plaintiffs should get a chance to present their evidence that company officials wrongly offered company stock as an investment option (See Justices OK Individual ERISA Suits in Landmark Ruling ).

The lawsuit pointed to two episodes of decline in the price of Baxter’s stock, one in July 2002, when an announcement of quarterly results sent the price of its stock from $43 to $32, and the other in July 2004, when the announcement of fraud at its Brazilian subsidiary produced a drop of $1.48 a share.

Plaintiffs charged that Baxter and some of the plan’s trustees breached their fiduciary duty under the Employee Retirement Income Security Act (ERISA) because they allowed participants to invest in Baxter’s stock despite knowing that it was overpriced.

Commented Circuit Judge Frank Easterbrook in the ruling: “Pension fiduciaries are liable, or not, depending on what they know and what duties they have under trust law; that Baxter may have tried to deceive investors as a whole would not translate directly to liability for trustees of Baxter’s pension plan. All we hold today is that participants in defined-contribution plans may use 502(a)(2), and thus 409(a), to obtain relief if losses to an account are attributable to a pension plan fiduciary’s breach of a duty owed to the plan.”

The 7th Circuit ruling is here .