Judge Green Lights Fiduciary Breach Suit

July 14, 2003 (PLANSPONSOR.com) - Participants can sue a retirement savings plan for an ERISA fiduciary breach on behalf of only a portion of their fellow plan investors, a federal judge ruled.

>In his decision US District Judge Morris Lasker of the US District Court for the District of Massachusetts refused to throw out claims against the plan administrator and the directed trustee, Washington-based legal publisher BNA reported. Lasker ruled, in regards to the trustee, that a jury would have enough disputed facts to determine if the trustee had followed directions that were contrary to the plan or ERISA, thus making it liable for breach of fiduciary duty.

>According to the ruling, John Kling worked for Harnischfeger Industries Inc., a manufacturer of mining equipment and pulp and paper machinery, from 1974. Kling participated in the Harnischfeger Industries Employees’ Savings Plan, that was administered by an investment committee. A board of directors pension committee reviewed the actions of the investment committee. Fidelity Management Trust Co. was the plan trustee.

>Under the plan, participants could choose among several investment options, including the Harnischfeger Common Stock Fund, an undiversified fund investing almost exclusively in Harnischfeger common stock.

>According to the ruling, between October 1997 and April 1998, Harnischfeger engaged in accounting improprieties, and in June 1998, Harnischfeger announced it would restate its 1997 fiscal fourth quarter earnings. For the next year, Harnischfeger took massive writeoffs, closed businesses, and laid off employees. In June 1999, Harnischfeger filed for bankruptcy, and in December 1999, the stock was delisted from the New York Stock Exchange.

>Kling alleged that the pension committee and investment committee knew of, or should have known of, Harnischfeger’s financial problems as of October 1997 and should have closed the stock fund to participants at that time because it was no longer a prudent investment. The subsequent fund losses of $31 million affected approximately 3,500 plan participants, Kling alleged.

>In addition, Kling alleged that Fidelity breached its fiduciary duty by failing to close the stock fund, by failing to disclose to plan participants its selloff of half its stock holdings, and by engaging in self-dealing and prohibited transactions.

>The Harnischfeger director, officers, and employees named in the lawsuit moved to dismiss the claims against them, arguing that actions seeking recovery for a subset of participants rather than for the plan as a whole are not permitted under ERISA. Trying to determine if the action concerned a loss to the plan or to an individual, the court said this case fell within a “gray area” between these two extremes because Kling was suing for damages resulting from the decline of the value in the stock fund, but on behalf of a subset of participants who placed money in the stock fund.

>Fidelity also moved to dismiss the claims against it, arguing it owed no fiduciary duty to Kling or the plan because it was a “directed” trustee. In this case, the plan documents and trust agreement designated Fidelity as a directed trustee, and therefore Fidelity was exempt from fiduciary status. However, Fidelity may still be found liable if a jury determined that Fidelity followed directions that were contrary to the plan or ERISA, the court said. Therefore, these questions should be saved for trial, the court said in denying Fidelity’s motion to dismiss.

>The case is Kling v. Fidelity Management Trust Co., D. Mass., No. 01-CV-11939-MEL, 6/3/03.