Compliance December 10, 2003

Judge Clears Fiduciaries of Co. Stock Wrongdoing

October 24, 2002 (PLANSPONSOR.com) - 401(k) plan fiduciaries didn't breach their ERISA-imposed duties by not divesting their plan of employer stock before a public revelation that a company with which they had merged had accounting irregularities, a judge ruled.

Reported by

Fred Schneyer

US District Judge Ronald Whyte of the US District Court for the Northern District of California pointed out in his ruling that the fiduciaries would have violated federal securities laws had they dumped the employer stock before the announcement of the accounting issues, Washington-based legal publisher BNA reported. Whyte’s ruling dismissed a lawsuit filed by several employees.

“Fiduciaries are not obligated to violate the securities laws in order to satisfy their fiduciary duties,” the court said, adding that the plaintiffs in the case “offered no convincing argument . . .which would authorize an ERISA fiduciary to violate the law in order to protect” plan participants.

A January 1999 Merger Proves Problematic

The BNA report provided this case history:

In January 1999, McKesson Corp. merged with HBO & Co. (HBOC). Before the merger, each company had its own 401(k) plan. McKesson’s plan, which had an employee stock ownership plan component, required that all company matching contributions would be made in the form of company stock or cash.

The McKesson plan also provided that if the company made cash contributions to the plan, the cash contributions were to be converted to company stock “as soon as practicable.”

HBOC’s 401(k) plan, unlike the McKesson Plan, allowed participants to decide how the company’s matching contributions were to be invested.

Several months after the two companies joined, they also merged the two 401(k) plans. After the plans merged, McKesson-HBOC publicly announced that HBOC had engaged in improper and illegal accounting practices.

According to the court, McKesson-HBOC’s stock price dropped sharply following the announcement and the McKesson plan alone lost over $800 million.

Three McKesson employees brought suit against McKesson, its board of directors, HBOC, and the McKesson plan’s trustee, Chase Manhattan Bank. However, Whyte rejected the plaintiffs’ menu of complaints against the defendants, or demanded more proof from the employees’ lawyers.

The case is In re McKesson HBOC Inc. ERISA Litigation, N.D. Calif., No. C00-20030 RMW, 10/1/02.