>The fiduciary breach suit was given renewed life after the U.S. District Court for the Northern District of Georgia denied the company’s motion to dismiss the lawsuit.
>The employees contend BellSouth breached its fiduciary duties in failing to remove BellSouth’s company stock as an investment option in the company’s retirement plan. Additionally, the suit argues BellSouth’s officers had a conflict of interest in their corporate and plan fiduciary roles because the officers’ annual incentive awards were tied to the company’s reported performance, and that BellSouth understated the risk the company took by concentrating much of its business in the Latin American market.
>This after the company overstated corporate revenues by $163 million and artificially inflated the company’s stock price. The lawsuit was originally filed in May 2002 after BellSouth announced the company had made accounting errors going back to January 2001.
>BellSouth had petitioned the court to dismiss the employee lawsuit since the disclosure of the accounting irregularities did not result in a drop of the company’s stock price and thus did not cause a loss in the retirement plan investment option’s value. Further, the company said the suit should be dismissed because any disclosure by the company’s executives of the irregularity to plan participants ahead of the wide release of news would have violated insider trading rules for the officers to disclose nonpublic information about BellSouth.
The court denied both motions for dismissal finding that even though it was undisputed that BellSouth stock did not lose value as a result of the disclosure of the overstated revenue, the employees had sufficiently argued that a prudent fiduciary would have removed BellSouth stock as an investment option upon learning of the accounting irregularity.
“Given the economic climate in which companies now operate after the Enron and WorldCom financial scandals, the court recognizes that the markets are now more unwilling than ever to tolerate corporate misstatement of earnings. Accordingly, the court can conceive of evidence which Plaintiffs might advance illustrating that a prudent investor, seeing discrepancies in Company’s reported profits, would hesitate to invest trust funds in Company stock,” Judge J. Owen Forrester said in the court’s opinion.
The case is Hill v. BellSouth Corp. , Northern District of Georgia, No. 1:02-CV-2440-JOF.
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