The Administrative Office of the U.S. Courts reports an increase in new Employee Retirement Income Security Act (“ERISA”) case filings from 9,167 cases in 2000 to 11,499 cases in 2004. According to a March 2006 American Bar Association publication, about fifty stock-related lawsuits have been filed in the last two years, alleging employee benefit fiduciary violations and adding to a growing number of what some describe as “stock drop” actions.
The basic idea is this. Company stock is included as an investment choice for defined contribution plan participants. The stock falls in value. Employees suffer losses. Fiduciaries are asked to address whether: (a) their inclusion of company stock as an investment choice was appropriate (b) they conveyed accurate information about the company (c) they had put employees first or were influenced by conflicts of interest.
What has groups such as the Professional Liability Underwriting Society alarmed about the “startling” increase in these ERISA fiduciary breach cases? First, the amounts at stake are huge. Second, some experts suggest that it may be easier to bring suits on the basis of ERISA violations instead of securities fraud. (There is a lot written on this topic, including the requirements to become a lead plaintiff under the auspices of the Private Securities Litigation Reform Act of 1995, “PSLRA”). Third, various employee benefit reforms, expected out soon, could lead to financial restatements and unhappy investors.
Legal experts suggest that we’re in for a bumpy ride. Negative headlines, excessive executive compensation (perceived or real), market volatility, a dramatic shift away from defined benefit to defined contribution plans and regulatory reform that could force write-downs are some of the many factors that will continue to put fiduciaries in the spotlight.