Compliance April 28, 2006

Tech Firm Cleared of Co. Stock Misdeeds

April 28, 2006 (PLANSPONSOR.com) - A federal judge in New Jersey has cleared a networking company of wrongdoing in how officials handled the company stock shares in its retirement plans.
Reported by

US District Judge Stanley Chesler of the US District Court for the District of New Jersey said Avaya Inc. and its officials did not breach their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by offering its company shares as a retirement plan investment in mid-2005 when it announced it would not meet its 2005 announced financial projections.

Chesler ruled that t he one-day loss of 25% of Avaya’s stock value was insufficient to prove the defendants breached their duties in investing in Avaya stock.

Not only that, but Chesler found that Avaya and its officers did not mislead plan participants or the investment public when they issued positive statements and forecasts about the company prior to announcing on April 19, 2005 that the company had missed its financial projections for the first quarter of that year.

According to court background, the company maintained three eligible individual account pension plans for its employees. The plans each offered 23 different investment options for participants. One such option was the Avaya Stock Fund. According to the court, the plans were valued at approximately $1.4 billion as of December 31, 2004, with approximately 16% of the plans’ assets invested in the Avaya Stock Fund.

Participant Jane Edgar sued after the 25% loss, claiming the ERISA violation.

Granting the defendants’ motion to dismiss the lawsuit, Chesler said Edgar was unable to overcome the presumption that investment in Avaya stock was prudent.   Likewise, the court rejected Edgar’s contention that the defendants breached their fiduciary duties by providing materially false information to plan participants and others regarding Avaya’s financial state.

If Avaya had acted on its nonpublic knowledge before its formal April 2005 announcement and then divested the plan of their Avaya holdings, the company and its officers would have violated insider trading rules, Chesler asserted.

The case is Edgar v. Avaya Inc., D.N.J., No. 05-3598 (SRC), unpublished 4/24/06.

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