Last week, participants who had brought a company stock suit against their employer won a settlement. No real surprise there, you say? Well, actually, in approving the relatively modest $11 million settlement in the case of In re: Broadwing, Inc. ERISA Litigation, the court essentially said that plaintiffs should take the money and be glad they could get it—since their odds of winning (“prevailing on the merits” in legalspeak) were uncertain.*
Now, admittedly, that might be something of an overstatement. In approving the settlement, the court basically did what courts are supposed to do in approving a settlement—they ran down a checklist of things that purport to establish that the settlement is fair, particularly in a class action, where most of the plaintiffs aren’t in the courtroom. And one of the conclusions courts are basically required to draw in approving such settlements is that it represents the best deal for a plaintiff under the circumstances.
In Broadwing, the action was brought on behalf of some 5,000 participants, and it claimed that the defendants breached their ERISA fiduciary duties by failing to provide employees with information about the firm’s true financial condition. (This, of course, has become an investigation trigger for any firm that has any kind of earnings “surprise” or some suggestion of accounting mal- or misfeasance. And, for good measure, they also typically charge that participants were not adequately informed of the risks of investing in company stock.)
Still, despite the Enron debacle’s financial shenanigans, and the myriad headlines generated each and every time (including in PLANSPONSOR’s NewsDash) a plaintiff’s law firm initiates an “investigation” and then actually finds a plaintiff or two to represent the litigation class, most of these cases seem to wind up one of two ways—a settlement or a finding for the employer/defendant. In fact, in recent days, there have been a series of these cases that have not only gone to trial, but have wound up in the latter category (see “No Breach in Fiduciary Duties of Airlines’ Co. Stock Cases”). This trend was referenced in a recent $100 million settlement for AOL TimeWarner participants (see “Court OKs $100M AOL Time Warner 401(k) Suit Settlement”).
Despite what, IMHO, is a reasonably rational application of fiduciary law in these cases, I’m not sure that plans with company stock investments can afford to be complacent. Their presence on a retirement plan menu draws a disproportionate, if not downright imprudent, interest from participants—not to mention litigators. There are costs to litigation that go well beyond lawyers’ fees**; the distraction from the business of making money, most obviously—and even winning can be losing on the PR front.
And, as an old boss of mine used to remind me, “You can spend a lot of money in court being right.”
- Nevin Adams firstname.lastname@example.org
* "Several district court decisions favor the possibility of establishing liability in cases alleging fiduciary breaches concerning holdings of risky company stock in individual retirement accounts, however, few of these cases reached the stage of a decision based on the merits." - In re: Broadwing, Inc. ERISA Litigation
** Not that one should begrudge professionals being fairly compensated for their expertise, but roughly 23% of the $11,000,000 Broadwing settlement will go to plaintiff’s counsel. Now, since contingent-fee cases routinely take a third of the settlement, one could certainly find that 23% is reasonable. However, that would leave, as best as I can estimate, only about $1,700 each for the roughly 5,000 participants.