Rulings Show Participants Invested in Co. Stock Have Recourse

August 30, 2005 ( - Two recent court rulings provide assurance to participants who invest their retirement savings in company stock that they have recourse when company actions cause the stock's value to drop, creating losses in their retirement accounts.

The US 3 rd Circuit Court of Appeals ruling in Schering-Plough Corp, ERISA Litigation, 04-3073 found that the two plaintiffs had a claim against the plan under ERISA since ERISA allows recovery for “any losses” to a plan and not just losses that will be distributed to all participants (See  Recovering Losses For Individual Participants Is Recovery For The Plan ).   A lower court had dismissed the case saying it sought recovery for individual losses and not for the plan as a whole.

Three days later, according to the New Jersey Law Journal,US District Judge John Bissell in Newark, New Jersey approved a $90-million settlement for current and former employees of Royal Dutch Shell who alleged that the company’s misstatements of oil reserves caused its stock price to fall, creating losses to their pension plan assets (See  Shell Agrees to $90M Pension Suit Settlement ).  

The New Jersey Law Journal reports that nearly 40 district courts have been split on whether 401(k) participants who elect to invest in company stock are protected under ERISA.   “The ruling is a major, major statement that immediately lays to rest any doubts about the fact that participants in 401(k) company-stock cases are entitled to sue when things go wrong and something imprudent went on,” says Ron Kilgard of Phoenix’s Keller Rohrback about the Schering-Plough ruling.   He is lead plaintiffs’ counsel in similar cases against WorldCom, Global Crossing and Enron.

In support of the two plaintiffs’ argument that individual losses represented plan losses in the Schering-Plough case, they pointed out that at the end of 2001 more than 60% of participants in the plan had some of their money invested in company stock.   The drop in the company’s stock price accounted for 87% of the plan’s drop in value by the end of 2001, and 50% of the plan’s drop in value in 2002, the New Jersey Law Journal reports.  

Lawyers for the Department of Labor (DoL) noted that, at the end of 2003,more than $2 trillion of all private pension plan assets were held in individual account plans.   The New Jersey Law Journal quotes DoL attorney Theresa Gee’s brief, “If the District Court and the defendants’ broad arguments are correct, participants in 401(k) plans and other individual account plans, such as the Enron plans, would be unable to recover losses to the plan caused by fiduciary breaches, even if the majority of the plan’s participants lost most of their retirement savings as a direct result of such breaches.”

Believing that they improperly seek relief for each plan participant and that they fail to show detrimental reliance by plan participants on the defendant’s alleged misrepresentations, Schering-Plough still says the case has no merit.

ERISA defense lawyer Matthew Renaud of Chicago’s Jenner & Block says participants in 401(k) plans who suffer company stock losses can join shareholders suing in 10(b) class actions, the Journal reports.   But plaintiffs’ lawyers say recovery in 10(b) cases is not enough to compensate participants for losses of their life savings.