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Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Employee Benefit Plan Review

September 17, 2009

These new class action stock drop cases are the offspring of the debacle at Enron.

What happened at Enron? The class action “stock drop” industry was, of course, born out of Enron’s bad facts. In early 2001, Enron Corporation shares were trading at $80.

Jeff Skilling unexpectedly resigned as chief executive officer of Enron in August 2001. Enron shares were then trading at $35. Ken Lay, the former chairman of Enron, returned as the CEO. Enron thereupon stunned Wall Street in October 2001 by announcing a $638 million loss and a $12 billion writedown. Between September 2001 and November 2001 the 401(k) plan was in “lock-down” mode.

To facilitate the transition to a new plan administrator, Enron 401(k) plan participants were not allowed to change any 401(k) plan investments or trade Enron stock. During the lockdown, Enron stock collapsed from $34 to $10 per share.

It was also during this same time period that Ken Lay made a speech in the Enron cafeteria extolling the virtues of buying Enron stock while he was busily selling all of his own Enron shares. All told, Enron’s 401(k) plan participants lost about $1 billion in their Enron stock investments. When the lawsuit ended, the ERISA plaintiffs recovered $442 million.

Just as disappointed public shareholders bring federal securities fraud lawsuits when they suffer investment losses, so too do ERISA plan participants when they think plan fiduciaries have done bad things. Following Enron, numerous ERISA “stock drop” cases have been filed based on allegations that plan fiduciaries, like the Enron 401(k) plan fiduciaries, knew or should have known that company stock was not a prudent retirement plan investment, yet they allowed participants to accumulate it anyway.

By now the circumstances leading to the filing of one of these stock drop cases are unfortunately all too familiar.

An employer includes its stock as an investment vehicle in the company’s retirement plan, participants invest heavily in the stock perhaps because it is the only stock they are truly familiar with – only to be followed sometime later by a precipitous decline in the share price, leading to the filing of a lawsuit by plan participants, alleging that the plan’s fiduciaries knew or should have known that employer stock was not a prudent investment option for the plan.


Employers with company stock in their sponsored-retirement plans need to heed the lessons from Enron and its progeny, especially in this time of economic upheaval.


BP recently sued Northern Trust alleging Northern Trust breached its fiduciary duties when it lost 401(k) plan money by lending out securities (held in certain investment funds) and then failed to tell BP about the losses. It turns out that BP is not alone.

Securities lending programs are commonly used by retirement funds as a means to produce additional income on stock portfolios. A 401(k) trustee is often authorized to lend stock out to short seller and other borrowers in exchange for cash as collateral.

Poll: How do you feel about crying at work?

Poll: How do you feel about crying at work?