NCEO founder and senior staff member
Corey Rosen
In Yates v. Nichols, No. 3:17-cv-01389-JGC 2017 (N.D. Ohio, order granting defendant’s motion to dismiss December 18, 2017), a court ruled that fiduciaries of Marathon’s 401(k) plan did not breach their fiduciary duties by allowing employees to invest in company stock in the company’s 401(k) plan.
Corey Rosen
In Vespremi v. Tesla Motors, Nos. A142391 and A143550 (Calif. Ct. or Appeals, First District, Div. Two, October 30 2017), a state court ruled that a plaintiff who had received an offer for stock options in Tesla could not receive any of the stock options he claimed he deserved. Vespremi contended that the offer letter was ambiguous as to when the awards vested; Tesla contended that it was clear they vested at 25% per year over four years, at the end of each service year. Vespremi was laid off after seven months. The court at first ruled that the language was ambiguous, but on appeal reconsidered, ruling that subsequent written communications made it clear that the awards would not vest before completion of each year of service.
Corey Rosen
In two unpublished decisions, Laffen v. Hewlett-Packard Co., No. 15-16360, (Ninth Cir., unpublished Ja. 9, 2018) and Graham v. Fearon, No. 17-3407, (Sixth Cir., unpublished Ja. 8, 2018), two circuit courts ruled for the defendants in stock drop lawsuits involving company stock in 401(k) plans. In both cases, plaintiff argued that alleged fraudulent accounting and reporting caused a drop in stock prices, but the courts in both cases ruled that the plaintiffs had not established a plausible alternative course of action as required under the Dudenhoeffer doctrine. The fact that the decisions were not published suggests the courts regard this as settled doctrine. The cases continue to show that the Dudenhoeffer ruling has made successful litigation on this issue exceptionally difficult.
Corey Rosen
In Acosta v. Wilmington Tr., N.A., No. 1:17-cv-01755 (N.D. Ohio, order denying defendant’s motion to transfer venue 12/20/17), a court denied Wilmington Trust’s request to move jurisdiction in an ESOP lawsuit concerning valuation at Graphite Sales to Delaware. The court ruled that most of the plaintiffs are in Ohio and there was no cause to relocate the case.
Corey Rosen
In Paza Staffing Servs. v. Commissioner, No. 18-1407 (3rd Cir. Nov. 2, 2018, unpublished), a circuit court ruled the IRS correctly disqualified an ESOP set up for a surgeon as the sole participant. The surgeon had five other employees. He set up a management company just for himself and set up an ESOP. The five employees were in a separate company controlled by the management company. Because it was part of a control group, the plan had to cover at least 70% of all non-highly compensated employees, and this covered none.
Corey Rosen
In Acosta v. Potts, No. 2:16-cv-00612-JLG-CMV (S.D. Ohio, Oct. 17, 2018), the DOL and Thomas Potts agreed to a settlement of $465,000, pending additional amounts that may be recovered pending litigation with the fiduciary insurer. The DOL had reached a $2.475 million settlement with the company over an alleged improper valuation, but the defendants (the trustee and the company) demonstrated an inability to pay unless a pending lawsuit against the fiduciary insurance company over indemnification prevails. Potts could also end up paying more depending on his future income.
Corey Rosen
In Quatrone v. Gannett Co., Inc., No. 1:18-cv-00325 (E.D. Va., Sept. 26, 2018), a district court ruled that plaintiffs could not plead a plausible alternative course of action for plan trustees to take regarding the holding of company stock in Tegna’s 401(k) plan. In 2015, Gannett Corporation changed its name to Tegna and spun off its publishing business (USA Today and others) to the new Gannett Corporation. Tegna retained mostly broadcast holdings. Employees at Tegna had been able to buy stock in the company in their 401(k) plan. After the spinoff, Tegna employees could not buy more company stock, but they could continue to hold it, as well as sell and invest in other assets in the 401(k) plan. They could not buy more stock. Tegna stock dropped sharply, and employees sued, saying the trustees should have sold the shares in the plan even absent employee directions. They contended that the stock was much more volatile than other stocks, so trustees should have known that it was not a prudent holding. As in other cases, the court ruled this required a second guessing of the market and was not a plausible alternative course of action for trustees.
Corey Rosen
In In re SunEdison, Inc. ERISA Litig, No. 16-mc-2744 (S.D.N.Y., Aug. 6. 2018), the Second District Court for Southern New York continued its string of defeats for plaintiffs when it ruled that offering employer stock within an ESOP in the company’s 401(k) plan was not an ERISA violation. SunEdison faced a variety of financial challenges that eventually led to bankruptcy. Plaintiff S.D.N.Y. alleges that public information should have led the fiduciaries to view the stock as too risky and that inside information showing additional risk should have been disclosed. The court ruled the first claim required the trustees to outguess the market; the second proposed action could have driven the stock price down even further. Therefore, the court said, plaintiffs did not meet the “strenuous pleading standards” under Dudenhoeffer.
Corey Rosen
In Acosta v. Reliance Trust Co., Inc., No. 5:17-cv-00214-D (E.D.N.C., consent judgment Sept. 18, 2018), Reliance Trust agreed to settle a 2017 lawsuit over a $82.5 million ESOP transaction to buy the stock of Tobacco Rag Processors. The DOL alleged that Reliance did not determine the stock price in good faith, in particular by not sufficiently questioning key assumptions and financial projections. The settlement is for $4.545 million, plus 10% of that in civil penalties. Reliance agreed not to seek contribution or indemnification from the company.
Corey Rosen
In Acosta v. Zander Group Holdings, Inc., No. 3:17-cv-01187 (M.D. Tenn., Sept. 10, 2018, order to dismiss defendants’ motion to dismiss), a court ruled that the company and its top executives had to defend their actions in a case alleging excessive valuation for an ESOP. Jeffrey Zander was the trustee and beneficiary of two trusts that owned Zander Group; he was also Zander Group’s CEO. Stephen Thompson was hired as the trustee. Plaintiffs allege that Zander pressured the valuation firm to come up with a price in excess of fair market value. The company was also named as a defendant. The company sought to have the case dismissed because it said it was not a fiduciary, but the court ruled that it was a fiduciary through its direction by Zander. Zander argued he was not a fiduciary and that the trustee was. But the court ruled that Zander’s alleged efforts to pressure Thompson and failure to monitor his assessment of the appraiser as to the valuation made him a co-fidiuciary.
