Saturday, April 8, 2006
This story from The Auto Channel about GM's motion to dismiss being denied by a district court in Michigan in an ERISA fiduciary class action could not be more timely.
Yesterday, I participated in an Employee Benefits Symposium at the John Marshall Law School (which was excellent by the way) at which two management side attorneys spoke about the acute problem which is ERISA stock drop litigation.
Stock drop litigation occurs when a company stock loses value and drops in price and, as a result, the company's retirement funds which own sometimes substantial amount of company stocks (either through an employee stock ownership plan (ESOP) or an eligible individual account plan (EIAP), suffers significant losses too.
The allegation usually in such a stock drop case is that the officers of the company, who were also fiduciaries for the plan, had a fiduciary obligation to disclose certain material information about the company to the plan so that it would not continue its imprudent investment strategy of investing in the company.
These cases put companies like GM in a difficult position because on the one hand they must comply with securities law with regard to disclosure of material nonpublic information and, on the other hand, as ERISA fiduciaries must act in the best interests of the participants and beneficiaries of the plan under ERISA.
Consistent with the prediction of the conference speakers yesterday, companies are generally unsuccessful winning motions to dismiss in such cases. This is because there are just too many unknowns: from whether the relevant company officials were acting as fiduciaries to the plan in such circumstances to whether they had an affirmative obligation to disclose the pertinent information under ERISA's fiduciary provisions.
It will be interesting to see if yesterday's speakers are also accurate in predicting that once one of these cases makes it by the motion to dismiss stage, the case will inevitably settle on terms favorable to the plaintiffs.
This might be so, but the larger issue that lurks is how to reconcile conflicting securities and employee benefit laws in this area and how to prevent D&O and fiduciary insurance from becoming so expensive that no one wants to be a plan fiduciary for ERISA purposes anymore.