Friday, May 7, 2010

Yet Another "Stock Drop" Decision...

In yet another “stock-drop” decision, the United States District Court for the Northern District of Illinois denied on Thursday a company’s motion to dismiss an ERISA lawsuit stemming from the offering of company stock in its 401(k) plan.

The facts of In re General Growth Properties Inc. ERISA Litigation, Case No. 08cv6680 (N.D. Ill.) are all too familiar. General Growth is a self-administered real estate investment trust that conducts most business through its operating partnership GGP Limited Partnership. General Growth and GGP both filed for bankruptcy protection in April 2009. In 2008 and 2009, General Growth was one of many U.S. companies devastated by the subprime lending crisis. During the relevant time period -- running from April 30, 2007, to April 16, 2009 -- General Growth's stock lost 99 percent of its value, falling from high of $65.81 per share to a low of $.49 per share. The participants alleged in their lawsuit that the General Growth and its top officials breached fiduciary duties by continuing to offer General Growth's stock in the Company's 401(k) plan during a time when they knew or should have known that the subprime lending crisis and declines in consumer spending made expansion of the company's real estate holdings “an ill-advised business plan.” The participants also alleged that the Company breached its fiduciary duties by failing to disclose to participants the adverse effect of the real estate market's collapse on the Company's real estate holdings.

The defendants filed a motion to dismiss, requesting the court to dismiss the entire lawsuit. In denying the defendants' motion to dismiss part of the participants' claims, the District Court refused to use the “presumption of prudence” analysis that many courts have applied in the context of stock-drop cases (the “presumption of prudence” analysis generally weighs in favor of company’s that offer company stock in their retirement plans). The Court determined that presumption would not apply here because the Company’s 401(k) plan did not mandate that Company stock be offered under the 401(k) plan. Further, the District Court determined that the participants had asserted sufficient facts that to allow a potential finding that it was imprudent for the fiduciaries to continue offering company stock in the Company’s 401(k) plan after the stock had lost nearly 99 percent of its value. The Court granted the motion to dismiss as to claims alleging that the defendants breached fiduciary duties by failing to tell participants about the company's financial struggles during the subprime mortgage meltdown and by incorporating misleading and inaccurate Securities and Exchange Commission filings in the plan documents. According to the court, “[w]hile Plaintiff is correct that some courts have found that incorporated SEC filings do constitute fiduciary speech, recent jurisprudence has declined to hold ERISA fiduciaries liable for SEC filings.” The Court further noted that any allegedly misleading statements made by the defendants to the participants were made in their corporate capacities, not in their plan fiduciary capacities.