PD2007: Defending Against Company Stock Lawsuits

CHICAGO - Plans with company stock as an investment option have always been high on the target list for plaintiffs' lawyers.

But that doesn’t mean sponsors are defenseless to ward off legal action involving their company stock plan or in responding to a lawsuit, members of a company stock discussion panel told the audience at PLANSPONSOR’s recent PLAN DESIGNS conference.

Fred Reish, managing director in the Los Angeles law firm of Reish Luftman Reicher & Cohen, who specializes in Employee Retirement Income Security Act (ERISA) issues, told the group that the trouble often begins on an economic downturn or an internal company event that makes the company securities “speculative.”

Two important elements for a plan sponsor to have in that event, Reish advised: enough investment options to allow participants to diversify if they choose and a sufficiently robust education program focusing on the potential danger in holding too much of a single security.

“The courts say if you offer enough investment options and if you communicate clearly enough about the risk, then you’re okay,” Reish told the group.

Brian Ward, Managing Director, Wachovia Securities, offered three suggested issues sponsors with a company stock component should consider:

  • The risk profile of their company.
  • How the plan needs to be modified (for example, to include company stock ownership caps).
  • Whether the employer’s participant education plan is strong enough on the company securities issue.

Settlor versus Fiduciary

Meanwhile, Washington lawyer Sherwin Kaplan of the firm of Thelen Reid Brown Raysman & Steiner, advised audience members to amend their plan document to provide for a company stock fund to be an investment option. That way, he said, stock fund decisions are considered settler functions and not fiduciary matters.

Panelists also advised that it may well be worth It to hire an independent fiduciary to manage a company stock plan. That way, the panelists contended, the company effectively removes the opportunity for a lawsuit to successfully allege that the stock fund was administered in the company’s best interest and not participants’.

But, if an event occurs that knocks down the company’s share price, t he difficulty for sponsors or independent fiduciaries, can be to determine whether the decline is steep enough or long-standing enough to take action, Reish related. “As a single asset, it’s an extraordinarily difficult asset to evaluate,” Reish said. “It’s a tough, tough job for the fiduciaries.”

In any event, William N. Glasgow, Senior Vice President ,United States Trust Company, contended that careful sponsors who have instituted sufficient safeguards can make themselves an uninviting legal target. Declared Glasgow: “Plaintiffs’ lawyers will keep going if your defenses are in place.”


A company stock information sheet recommended by Reish is here .

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