Court Finds No ERISA Shield in Insider Trading Concerns

August 12, 2004 ( - Plan sponsors can't duck their fiduciary duties by citing insider trading rules, according to a federal court.

>The US District Court for Southern Ohio said that American Electric Power Co. (AEP) would not have violated insider trading rules if it had disclosed non-public information regarding the company to its employees.

>In denying AEP’s motion to dismiss a class-action suit brought by employees in July of 2003 regarding the company’s 401(k) plan, Judge Algenon L. Marbley stated that the fiduciary would not have been in violation of insider trading rules by complying with ERISA obligations.   “A fiduciary cannot escape liability merely by pointing to the Plan as requiring it to act as it did,” Marbley said in his opinion.

>The suit alleges that AEP and its representatives breached their fiduciary duties by continuing to offer company stock options in the company’s retirement plan when it was clear that it was imprudent to do so.

>Siding with numerous other courts – including cases involving Enron, CMS Energy, and McKesson HBOC – Marbley asserted that because AEP, in their plan document, gave the fiduciaries the option of halting trading of the AEP Stock Fund, disclosing the non-public information, and then selling the fund shares as an option, the Defendants’ claims of conflict with insider trading rules held no sway. Thus, the Court dismissed the defendants’ claim that they “lacked the power, authority or discretion to take such action.”

>In asserting its motion to dismiss the case, AEP claimed that, among other things, the suit failed to adequately show that each defendant was a plan fiduciary. Additionally, the defendants claimed that under section 404(c) of ERISA, the fiduciary of an individual account should not be liable for the investment choices made by plan participants. These claims were rejected by the court, which ruled that both were issues that should be decided at trial.

>Finally, the Court refused to accept AEP’s argument regarding a presumption of reasonableness. Because it was an employee stock ownership plan, the Defendants argued, AEP’s plan was entitled to a presumption of reasonableness regarding the decision to remain invested in the company stock. The Plaintiffs claim that this presumption would not apply because the plan was not an Employee Stock Ownership Plan (ESOP). Whether or not the plan was an ESOP, the court argued in dismissing the claim, was something that must be decided at trial.

>The case is in re AEP ERISA Litigation, S.D. Ohio, No. 03-CV-67, 8/10/04.

-Kip McDaniel

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