Fifth Third Fiduciary Breach Suit Lives On
In denying Fifth Third requests to throw out the employee suit, U.S. Magistrate Judge Timothy S. Black of the U.S. District Court for the Southern District of Ohio ruled that the plaintiffs’ case under the Employee Retirement Income Security Ac (ERISA) was strong enough for the matter to proceed further.
Black turned aside Fifth Third’s argument that it did not commit an ERISA fiduciary breach by misrepresenting company financial information in press releases and Securities and Exchange Commission (SEC) regulatory filings.
Black pointed out the workers’ charge that the news releases and SEC documents – allegedly containing the misrepresented information – were incorporated into materials sent to participants in the company stock portion of the Fifth Third’s 401(k) plan.
The Old Kent Financial Corp. Deal
According to court records, the issues contained in the lawsuit grew out of financial losses experienced by Fifth Third after it made a deal to purchase Old Kent Financial Corp. in April 2001 but ran into operational glitches in trying to merge the two corporation’s operations.
“Plaintiffs allege that defendants concealed the difficulties encountered in integrating Old Kent into Fifth Third, and the lack of adequate financial controls at Fifth Third necessary to properly manage the Company and account for Fifth Third’s assets and liabilities, and thereby artificially inflated the Company’s publicly traded stock,” Black asserted.
Two months later, after the bank said it would be taking a $54 million after-tax charge, Fifth Third revealed that banking regulators and the SEC were investigating whether the company’s rapid growth had moved beyond its internal controls. Plaintiffs charged in the suit that news of the investigation caused company stock to drop from a November 14, 2002 close of $62.53 to a close at $57.42 the next day.
On January 31, 2003, Fifth Third issued a statement that banking regulators would likely take formal action against it. The employees alleged that as a result of this statement, the price of Fifth Third common stock closed at $52.21 per share.
Informing Participants
The lawsuit, filed against Fifth Third and its directors and officers, alleged that the defendants should have known that Fifth Third stock was not a prudent investment for the 401(k) plan. Among other things, the employees asserted that the defendants did not provide participants with information regarding Fifth Third’s allegedly improper activities and failed to protect participants against unnecessary losses.
In trying to get the case thrown out, the defendants argued that the 401(k) plan was actually an employee stock ownership plan (ESOP) that was exempt from ERISA’s diversification requirements and the plan fiduciaries were entitled to a presumption of reasonableness for their continued offering of and investment in Fifth Third stock.
Black said it was premature for him to rule on the issue at this point in the litigation.
“Plaintiffs allege that Defendants knew or should have known that Fifth Third was engaged in numerous practices . . . that put Fifth Third at risk, that they failed to take into account whether the stock was inflated in value, that they created or maintained public misconceptions concerning the true financial health of the Company, and despite the availability of other investment options, continued to invest and allow investment in the Plan’s assets in Fifth Third stock even as Fifth Third’s questionable practices came to public light,” Black wrote in the ruling.
The case is Shirk v. Fifth Third Bancorp,S.D. Ohio, No. 05-cv-49, 4/10/07.