Court Clarifies Responsibilities Regarding Co Stock Investments

March 27, 2006 ( - The US District Court for the District of New Jersey dismissed some defendants and left intact charges against others in a case charging fiduciary violations with regards to company stock investments in a defined contribution pension plan.

The court decided that Merrill Lynch Trust Co. did not breach its fiduciary duties by not removing RCN Corp stock as a plan investment after the stock lost value, BNA reports.   Noting that directed trustees have limited fiduciary duties, the court said the plaintiffs failed to allege any fact which, if proven, would establish that Merrill Lynch had a fiduciary duty to disregard the investment directions provided by the plan’s named fiduciaries.

Citing a Department of Labor Bulletin (See Rules/Regs: Divining Line  and Rules/Regs: Directed Verdict? ), the court said Merrill Lynch would only have breached its fiduciary duties if it had possession of material, non-public information necessary to evaluate the prudence of investing in RCN stock and had failed to act on that information.   The court also said Merrill Lynch did not have a duty to communicate negative public information regarding RCN’s financial status to the plan participants, saying it only had an obligation to “disclose non-public information that they possess to named fiduciaries prior to following investment decisions that may be affected by that information.”   (See also Directed Trustees Not Expected to Second Guess)

In a separate opinion a day earlier, the court dismissed numerous fiduciary breach claims brought by six current and former employees against RCN, its board of directors, RCN’s compensation committee, the plan’s administrative committee, and Merrill Lynch.

The employees alleged that each of the defendants breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by keeping RCN stock as an investment option when it was an imprudent investment.   They also alleged that RCN and the board of directors breached their fiduciary duties by failing to properly monitor those they had appointed to the administrative committee, and that the defendants failed to communicate complete and accurate information about RCN to plan participants.

The court dismissed RCN’s compensation committee as a defendant, saying the committee was not vested with nor had it exercised any power or fiduciary duty regarding the administration of the plan.   The court also rejected the employees’ contention that RCN’s board of directors acted as fiduciaries simply through their appointment of members of the plan’s administrative committee and that the directors breached their fiduciary duties by failing to protect the plan and its assets when RCN filed for bankruptcy.

The court dismissed the employees’ claim that RCN and its board of directors breached their duty to inform participants by failing to provide complete and accurate information about RCN.   The court said that the company and board had no duty under ERISA to communicate or otherwise present investment information to Plan participants, noting that the terms of the Plan’s governing documents assigned the duty to communicate with plan participants to the administrative committee.

The court also found that the employees failed to allege that communications the administrative committee provided to plan participants that “fostered a positive attitude” toward RCN’s stock were “inaccurate, incomplete and materially misleading.”

However, the court left intact the employees’ claim that the administrative committee breached its fiduciary duties by making matching contributions in RCN stock when it was imprudent to do so. The committee’s argument that it had no discretion to change the way matching contributions were made because the plan “dictated” that RCN matching contributions be invested in the RCN ESOP was rejected.   The court also denied dismissal of the employees’ claim that RCN and the board of directors breached their fiduciary duties by failing to monitor those they had appointed to the administrative committee.

Finally, the court found that five of the six named plaintiffs lacked standing. The employees had all received distributions from the plans and had no reasonable expectations of returning to work for RCN and, therefore, were no longer plan participants, the court said.

For the plan in question in the lawsuit, participants could direct the investment of their individual contributions into various investment options, but RCN’s matching contributions were made in RCN stock. In 2000, RCN’s stock lost 90% of its value, according to the court documents. Nearly three years later, the plan’s administrative committee modified the plan structure so that participants were no longer permitted to allocate any contributions to the RCN stock fund or move assets from other investments into the RCN stock fund.   The practice of making matching contributions in RCN stock was not stopped until 2004.

According to the court, RCN was removed from the NASDAQ in May 2004. On May 27, 2004, RCN filed for reorganization under Chapter 11 of the Bankruptcy Code, and emerged from Chapter 11 at the end of 2004.   At that time all outstanding shares of RCN stock, including those invested in the RCN stock fund, were canceled.

The rulings are In re RCN Litigation, D.N.J., No. 04-5068 (SRC), unpublished 3/21/06 and In re RCN Litigation, D.N.J., No. 04-5068 (SRC), unpublished 3/22/06.