It is axiomatic that bad facts make for bad law. One area of the law that is changing rapidly in response to the recent corporate scandals is Employee Retirement Income Security Act of 1974 (“ERISA”) litigation. ERISA creates a right of action against company executives overseeing employee stock ownership plans who violate their fiduciary duties to the plan participants.
The recent trend, however, is for employees who lost retirement savings as a result of their investment in company stock to file an ERISA class action against the company that parallels the pending securities class action on behalf of all investors. In other words, the employees allege the company and its officers violated their fiduciary duties under ERISA by making false statements that induced employees to invest in the stock at artificially inflated prices. These parallel ERISA class actions have been filed, for example, against Enron, Qwest, WorldCom, and Global Crossing.
ERISA class actions based on false statements to the market are problematic for two reasons. First, the suits attempt to significantly expand the scope of ERISA liability to include officers not responsible for the management of plan assets and statements that are not related to plan benefits. David Gische and Jo Ann Abramson of Ross, Dixon & Bell have an excellent overview of these issues in an article entitled “Corporate Fiduciary Liability Claims in the Post-Enron Era” that was written last year. (Thanks to the Securities Law Beacon for the link.) Second, the suits allow plaintiffs to make an end run around the procedural safeguards of the PSLRA. Because they are brought under ERISA, rather than the federal securities laws, plaintiffs can obtain early discovery and seek to force a quick settlement. An article in Monday’s edition of The Recorder discusses the growth of these suits and their overlap with securities class actions.
Quote of note (The Recorder): “One of the reasons companies don’t always mount the most aggressive defense to ERISA suits is that any settlement comes from a fiduciary liability insurance fund — separate from insurance for securities litigation — that’s often untapped. Consequently, the mainstream securities fraud bar usually has no problem with the ERISA suits.”
Quote of note II (The Recorder): “Courts are still working out the limits of fiduciary duties in these cases . . . For example, what if an executive has inside information that the company’s financial picture isn’t as good as touted? As fiduciaries, shouldn’t they divest employee stock? Sure. But wouldn’t that be insider trading?”