When To Say When: The Company Stock Dilemma

August 17, 2001 (PLANSPONSOR.com) - Company stock has always been something of a mixed blessing for 401(k) plans, with plan sponsors torn between a desire for employee ownership and a concern that employees will tend to bet too much of their retirement security on a single investment.

Those conflicts are most evident when the employer is in financial trouble – as illustrated by the recent experience of two troubled firms.

About a month ago, auto parts maker Federal Mogul, in an unusual move, opted to close off its company stock investment option to new investment from employees.  Federal said it made the decision amidst concerns that its falling stock price was distracting its employees. 

The firm’s financial viability has been threatened by asbestos litigation, which has led a growing number of firms to seek Chapter 11 bankruptcy protection.  To some industry insiders this was a wise move (see Federal-Mogul Co. Stock Decision Unique, But Wise: Observers ).

Lucent Technologies, on the other hand, may have waited too long before taking action regarding its company stock option. On July 25, a federal class action suit was filed in the district court of New Jersey on behalf of several employee 401(k) investors, alleging that Lucent executives made misleading statements to the investing public about the firm’s financial condition, while continuing to allow participant investments in the plan (see Lucent Workers Sue Over Company Stock ). 

Popping Up

The developments in the Lucent case shouldn’t come as a surprise, according to Sherwin Kaplan, counsel at Washington, D.C.-based Piper, Marbury, Rudnick and Wolfe. He believes that litigation over company stock programs will begin popping up more and more.

“There are going to be a lot of suits coming like the Lucent suit,” he said. “The real reason the suits are going to be filed is because people lost money. Stocks went down in a market where everything was going down but this does not mean the company was imprudent.”

Representing the plaintiffs is the law firm of Bernstein, Leibhard & Lifshitz, LLP. Though Robert Berg, one of the lawyers working the case, told PLANSPONSOR.com that the suit has several primary plaintiffs, he declined to discuss the case in detail.

“We’re confident we will prevail and the case has no merit,” said Bill Price, a spokesperson for Lucent.

Read On: Part 2: It’s All About Prudence