In rejecting the plaintiffs’ claim that defendants violated their duty of prudence by allowing the plan to continue holding and investing in the Tellabs stock fund during a time of financial hardship for the company, U.S. District Judge Matthew F. Kennelly noted that ordinarily a plan’s assets must be diversified so that it does not become overly concentrated in a single asset, but that rule does not apply to the plan’s ownership of Tellabs stock, because the plan qualifies as an eligible individual account plan (EIAP).
Kennelly wrote that “a fiduciary may permit a plan’s assets to become concentrated in company stock if doing so comports with the documents governing the plan and does not otherwise violate ERISA.” The court found that the plan documents required defendants to offer Tellabs stock as an investment option, but regardless of whether a presumption of prudence applies, plaintiffs failed to establish by a preponderance of the evidence that defendants breached their duty of prudence.
Additionally, Kennelly ruled the company and plan fiduciaries were entitled to judgment on the prudence claim because the evidence shows that a reasonably prudent individual in similar circumstances who undertook such an examination would not have sold the plan’s Tellabs stock or removed it as an investment option. “The fact that the stock price dropped significantly during the class period is not, on its own, conclusive,” Kennelly wrote. The court found that during the class period, there was never any real threat that Tellabs would go bankrupt or cease to exist, as reflected by Tellabs’ strong cash position, positive cash flow, and low amounts of debt.
The plaintiffs also contended that the fiduciaries made misrepresentations to them and to the public in general regarding Tellabs’ business and that they failed to disclose information that plaintiffs needed in order to make informed decisions about the allocation of their contributions to the plan. They pointed to a number of statements about Tellabs’ prospects that they claim gave employees a false sense of optimism about Tellabs’ future. However, the court said that though their predictions eventually proved wrong, at the time they were made they were based on a significant backlog of orders, internal forecasting reports, and communications with customers.
Additionally, Kennelly noted that the statements “were tempered by contemporaneous public statements acknowledging the developing problems in the telecommunications industry.”
In employee communications, the Tellabs stock fund was clearly described as the riskiest investment option, and Tellabs also provided its employees with extensive information through various media regarding the company, how it was performing, and how senior management expected it would perform in the future.
The case is Brieger v. Tellabs Inc., N.D. Ill., No. 06 C 1882, 6/1/09.
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