Kmart Company Stock Lawsuit Survives First Challenge

August 22, 2003 (PLANSPONSOR.com) - In a harshly worded ruling, a federal judge has turned away requests by Kmart executives to toss a participant lawsuit alleging the executives breached their fiduciary duty by holding on to company stock in the retailer's 401(k) plan.

>US District Judge Avern Cohn of the US District Court for the Eastern District of Michigan rejected defendants’ arguments that the case should not go to trial because they shouldn’t be held accountable for the plan’s eventual losses as the company collapsed intro bankruptcy.

>According to Cohn’s decision, the Kmart 401(k) plan provided that the company’s match would be in company stock to be held in an ESOP whose assets would, at all times, be invested “primarily in (Kmart) stock.” Further, the stock had to stay in the ESOP until the participant reached age 55 and had been in the plan for at least five years. At that point, the participant could elect to have the match invested in any of the plan’s options, according to the plan.

>As have participants in numerous other 401(k) plans in recent months, plaintiff Quincie Rankin charged that Kmart and a number of its executives violated their responsibilities by:

  • not giving participants complete information about the company’s fiscal condition by, among other things, filing Securities and Exchange Commission reports with “misrepresentations” among the company’s financial picture
  • not giving participants accurate and complete information about composition of the plan’s portfolios
  • investing an unreasonably large percentage of the plans’ assets in Kmart stock
  • failing to investigate and monitor the merits of investing in Kmart stock
  • allowing continued investment in Kmart stock when a reasonable fiduciary would have known the investment was not prudent.

Securities Violations?

>Among other things, the defendants argued that they couldn’t disclose more financial information about the company than they did without running afoul of federal securities laws. Noting that the contention has become commonplace among corporate officials named in similar company stock litigation, Cohn said it was without merit (see  Duty Bound ).

“ERISA does not impose a higher standard than securities law; the duties under ERISA and duties under securities law can exist concomitantly,” the judge wrote.

>Cohn also turned aside contentions that the defendants couldn’t have acted differently because of the ESOP’s stated requirement to concentrate investments in company stock. “A fiduciary is not required to blindly follow the Plan’s terms,” Cohn wrote. “…the fact that the Plan requires investment in Kmart stock will not ipso facto relieve the Outside Directors of their fiduciary obligation to prudently invest or to diversify.”

>Finally, Cohn came down hard on defendants’ denial of responsibility for the plan’s losses as part of the retailer’s bankruptcy and said that Rankin can fill in details of the suit’s charges when the case goes to trial.

“There is implicit finger pointing among the defendants as to who is not a fiduciary with respect to the Plan and who was responsible for making Plan decisions during the relevant time,” Cohn wrote. “The Plan Documents imbue all of the defendants with some degree of authority over the Plan. However, the manner in which each defendant, that is in the universe of possible decision makers, operated is for now, something of a black box. To expect a plaintiff to be able to turn on a light and point to the particular individuals who exercised decision-making authority is simply too much to require at this stage of the case. To accept defendants’ positions that they are not fiduciaries would mean that there was no one responsible for discretionary decision making. Their position is reminiscent of the “old shell game.”

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