>Rejecting decisions by several other federal judges that have found that insider trading rules would not be violated by the disclosure of nonpublic information to plan participants, US District Judge Ronald Whyte of the US District Court for the Northern District of California threw out a lawsuit filed by plaintiffs Christine Chang and James Huffman.
>Whyte noted that “selective disclosure” of the nonpublic information would benefit plan participants “at the expense of general shareholders” and that nothing in the Employee Retirement Income Security Act (ERISA) suggests that it “renders federal securities statutes inapplicable.” Participants asserted that such a divesting of company stock would have been prudent once nonpublic accounting irregularities were discovered at HBO & Co. (HBOC) prior to and after its merger with McKesson.
>According to the court, “participants do not need a remedy under ERISA to obtain relief for a fiduciary’s false statements or omissions; indeed, they can invoke the securities laws.” In dismissing the participants’ lawsuit, Whyte noted that he was “unwilling to create new law under ERISA when plaintiffs may obtain the same relief elsewhere by conventional means.”
>The court opinion said that in mid-1998, McKesson and HBOC discussed the prospect of merging. An auditor hired by McKesson discovered at least four accounting problems at HBOC, including the fact that HBOC had overstated its revenue by not deferring certain revenue in violation of generally accepted accounting principles. Despite these accounting irregularities, McKesson and HBOC merged in January 1999 to form McKesson-HBOC, Whyte said.
>Prior to the merger, each company had its own 401(k) plan. McKesson’s plan, which had an employee stock ownership plan component, provided 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 would be converted to company stock “as soon as practicable.”
>Shortly after their merger, McKesson-HBOC publicly announced that HBOC had engaged in improper and illegal accounting practices. McKesson-HBOC’s stock price dropped sharply following the announcement and the McKesson plan alone lost over $800 million, according to the court.
>In their claims against HBOC, the plaintiffs argued that because of the accounting improprieties, HBOC stock was an imprudent and unsuitable retirement investment and HBOC violated its fiduciary duties by not disclosing the accounting irregularities before the merger.
>The opinion covering In re McKesson HBOC Inc. ERISA Litigation, N.D. Cal., No. C-00-20030 RMW, 7/29/05 is here .