Court Clears CA Firm of ERISA Breach

January 18, 2006 ( - A federal judge in California has cleared a California company and two of its directors of breaching their fiduciary duty under the Employee Retirement Income Security Act (ERISA) by investing retirement plan assets in company stock.

US District Judge R. Gary Klausner of the US District Court for the Central District of California rebuffed allegations that the defendants committed the fiduciary breaches by keeping assets in Syncor stock even though the firm was, at the time, engaged in an international bribery scheme, BNA reported.

Klausner ruled that even if Syncor had engaged in the bribery scheme, the continued investment in Syncor stock was not imprudent because the company’s financial condition did not suffer after the scheme was publicly disclosed. Even though there was an immediate drop in Syncor’s stock price after public disclosure of the bribery scheme, this “mere stock fluctuation” was not sufficient to establish that it was imprudent to invest in Syncor stock, Klausner found.

To overcome the presumption that investment in Syncor stock was prudent, the participants were required to demonstrate that Syncor and the directors knew that the company’s financial condition was seriously deteriorating and that there was a genuine risk of insider self-dealing, Klausner asserted.

Among other things, the court noted that Syncor presented significant evidence showing the company’s financial viability was never threatened, even after the disclosure of the illegal overseas payments. According to Klausner, Syncor stock outperformed both the NASDAQ index and the S&P 500 index during the relevant time period.

According to the ruling, in June 2002, Syncor and Cardinal Health Inc. announced that Cardinal would acquire Syncor in a stock-for-stock merger. While conducting a due diligence investigation related to the merger, Cardinal discovered that illegal payments had been made by a subsidiary of Syncor in Taiwan and China. Syncor and Cardinal made public announcements regarding the discovery of the illegal payments, which caused Syncor’s stock price to drop temporarily.

Eight participants sued over the fiduciary breach allegations.

The case is In re Syncor ERISA Litigation, C.D. Cal., No. CV 03-2446-RGK (RCx), unpublished 1/10/06.