Krispy Kreme Settles Retirement Plan Mismanagement Suit for $4.75M

May 15, 2006 ( - Krispy Kreme Doughnuts Inc. says it has reached a proposed $4.75 million settlement in a class-action lawsuit brought by workers claiming that company executives mismanaged their 401(k) plans and the employee stock ownership fund.

The lawsuit was brought in a US District Court in Greensboro in March 2005 by workers who claimed company officers and board members had engaged in “ highly risky and inappropriate accounting practices” that artificially inflated the value of Krispy Kreme stock (See Krispy Kreme Hit with Company Stock Suit ). The suit was filed by Seattle law firm Keller Rohrback and alleged that the employees did not know that buying company stock was a risky investment that was likely to face a steep fall in value.

The Seattle-firm launched an investigation in January 2005 to see whether the company violated the Employee Retirement Income Security Act (ERISA) regarding investments in Krispy Kreme stock by two plans (See Krispy Kreme Being Investigated For Company Stock Problems ). The move by Keller Rohrback followed the announcement by the Winston-Salem company that it would be restating its earnings from fiscal year 2004. In a period from August 2003 to January 2005, the company’s stock had fallen from $47.50 to $9.70.

The class-action suit claimed that because the executives hid the company’s troubles, workers who bought Krispy Kreme stock for their 401(k) accounts, or were paid stock in bonus plans, had no way of knowing that were investing in risky stock, according to the Business Journal.

The newspaper reported that the company’s insurance company will pay the settlement money into a settlement fund. The money will then be used to cover attorney’s fees, and then divided among the members of the suit and put into their retirement accounts. The settlement applies to employees who were members of the retirement plan from January 1, 2003, through May 12 of this year.

The settlement, which still require approval by a federal judge, will also result in the donut-giant merging its Profit Sharing Stock Ownership Plan with the company’s 401(k) plan, according to a company statement.