Securities Filings References in SPDs can Support Fiduciary Breach Suits

August 20, 2007 ( - While corporate financial disclosures may only be required under federal securities law, a plan sponsor referring to its securities filings in a summary plan description (SPD) is vulnerable to fiduciary breach claims from those documents.

U.S. District Judge Katharine S. Hayden of the U.S. District Court for the District of New Jersey came to that conclusion in her ruling that defined contribution participants in a plan sponsored by drugmaker Schering-Plough Corp. can keep pursuing their company stock-drop case, in which they alleged the employer misrepresented information about its financial situation and its stock. The plan included a company stock fund.

“Defendants cannot escape liability based solely on the absence of an express incorporation clause within the SPD,” Hayden wrote. “By including a reference to the prospectus within the SPD in this section, the drafters of the SPD explicitly stated that the prospectus contained important information and impliedly incorporated by reference the prospectus into the SPD. In so doing, the SPD’s drafters brought any statements made in the prospectus, or incorporated therein, into ERISA’s crosshairs.”

In addition to finding that the securities filings on which participants relied to show the misrepresentations leading to a fiduciary breach were not mandated by the Employee Retirement Income Security Act (ERISA), Hayden also asserted that once this information had been disclosed, the plan fiduciaries had a duty to provide all of the information truthfully.

“Information relating to the financial health of the Company was incorporated by reference into the SPD,” Hayden said. “Although ERISA does not require fiduciaries to disclose this type of information to Plan participants, fiduciaries who make the choice to provide such information must provide all pieces of information necessary to paint the full picture of the company’s financial health. This is especially true in a case such as this where the alleged fiduciaries are also directors and/or officers of the company and have ready access to company information. For this reason, plaintiffs allegation that defendants failed to disclose material information regarding the Company’s financial health after offering other information on the subject is sufficient to state a claim pursuant to ERISA.”

Finally, Hayden rejected assertions that the drugmaker’s officers could not be held liable for ERISA transgressions.

“While ERISA permits a corporate officer or director also to serve as a Plan fiduciary, the dual role cannot be used as a shield to insulate the fiduciary from liability for breaching a duty s/he otherwise owes to Plan participants,” the court wrote.

The class action alleged that Schering-Plough and its board of directors harmed the company financially by not complying with FDA regulations regarding good manufacturing practices when it tried to get approval for a new drug allergy medication to replace a previous one whose patent was set to expire.

The court said that during the relevant period, Schering-Plough’s stock plummeted in value from $60 per share to below $20 per share, resulting in large losses to plan participants who had invested in Schering-Plough stock.


The case is In re Schering-Plough Corp. ERISA Litigation, D.N.J., No. 03-1204 (KSH), unpublished 8/15/07).