ERISA Class Action Lawsuits on the Rise

Transcription

1 presents ERISA Class Action Lawsuits on the Rise Litigation Trends and Effective Trial and Settlement Strategies A Live 90-Minute Audio Conference with Interactive Q&A Today's panel features: James O. Fleckner, Partner, Goodwin Procter, Boston Howard Pianko, Partner, Seyfarth Shaw, New York Evan Miller, Partner, Jones Day, Washington, D.C. Tuesday, April 7, 2009 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions ed to registrants to access the audio portion of the conference. CLICK ON EACH PDF IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS. If you need assistance or to register for the audio portion, please call Strafford customer service at ext. 10

2 Strafford Teleconference April 7, 2009 Current Developments In ERISA Litigation James O. Fleckner Goodwin Procter LLP This presentation has been prepared as a general discussion of these matters. It is not, and does not attempt to be, comprehensive in nature. It should not be regarded as legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Any discussion of U.S. Federal tax law contained in this presentation was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. Federal tax law Goodwin Procter LLP

3 Recent Trends in Retirement Plans In September 2008, $15.9 trillion was invested in U.S. retirement vehicles (ICI) Retirement assets continue migrating from defined benefit ( DB ) plans to defined contribution ( DC ) plans, such as 401(k) plans In 1988, 56.7% of workers with an employment based retirement plan identified a DB plan as their primary retirement vehicle, and 25.8% identified DC (EBRI) By 2006, 30.9% identified a DB plan as their primary plan, and 67.1% identified DC (EBRI) 2

4 The Changing Face of ERISA Litigation Historically, ERISA litigation had focused principally on claims for benefits or on one-off cases of egregious behavior by plan fiduciaries The last eight years have seen burgeoning litigation charging breach of fiduciary duty Brought against named fiduciaries, directors, sponsors, independent fiduciaries, plan trustees (including directed trustees), investment managers, record-keepers and consultants Complex suits, generally class actions Large loss claims particularly with market volatility and large market cap losses ( tech bubble; subprime and credit issues) Frequently companion piece to securities fraud actions 3

5 The Increase in ERISA Litigation Even before the stock market began its precipitous fall in early October 2008, litigation over alleged mismanagement of defined contribution pension plans was becoming common. This type of litigation received a boost when, in LaRue v. DeWolff, Boberg & Associates, Inc., U.S., 128 S.Ct. 1020, 169 L.Ed.2d 847 (2008), the Supreme Court held that a participant in a defined contribution pension plan [may] sue a fiduciary whose alleged misconduct impaired the value of plan assets in the participant's individual account. 128 S.Ct. at Hecker v. Deere, 556 F.3d 575, 577 (7th Cir. Feb. 12, 2009) (Wood, J.) 4

6 ERISA Stock Drop Litigation: The Claims Allegations under ERISA 404(a), 29 U.S.C. 1104(a), include: plan fiduciaries breached duties of prudence and loyalty by investing plan assets in employer stock or offering it as an option for plan participants at a time when the employer was encountering significant financial problems plan fiduciaries breached their duties by failing to disclose to plan participants information regarding the company s financial condition that would be material to the participants decision whether to invest in employer stock under the plan 5

7 Stock Drop Litigation: A Few Recent Cases In re Huntington Bancshares Inc. ERISA Litigation, Case No. 2:08-cv-0165, 2009 WL (S.D. Oh. Feb. 9, 2009) (granting motion to dismiss) Employer stock fund allegedly lost over $100 million when stock price declined 65% as a result of exposure to subprime loans The court held that allegations of drop in stock price and references to general difficulties in U.S. mortgage market did not raise the type of red flag that would have required investigation into the prudence of retaining employer stock as an investment option, as ERISA was simply not intended to be a shield from the sometimes volatile financial markets 6

8 Stock Drop Litigation: A Few Recent Cases In re Ford Motor Company ERISA Litigation, 590 F. Supp. 2d 883 (E.D. Mi. Dec 22, 2008) (denying motion to dismiss) Employer stock fund allegedly lost approximately $6 billion when stock price declined over 75% Plaintiffs could overcome the presumption that an employer stock investment is prudent by demonstrating that holding the stock had become so risky that no prudent fiduciary would invest any plan assets in it In the court s view, a standard that focused solely on the market price and not on participants risk tolerance, would demote the ERISA duty of prudence from being the highest known to the law... to being largely illusory This litigation presents a question that has challenged federal courts: given that the Employee Retirement Income Security Act ( ERISA ) excuses certain retirement-plan fiduciaries from any duty to diversify the holdings of the plans they manage, but otherwise requires them to engage in prudent management, how is a court to determine when an undiversified plan of this kind has been imprudently managed? 7

9 Stock Drop Litigation: Recent Appellate Decisions In re Syncor ERISA Litigation, 516 F.3d 1095 (9th Cir. 2008) (reversed summary judgment) Stock drop of nearly 50% in two days after company announced illegal payments by overseas subsidiaries While financial viability is a factor to be considered, it is not determinative of whether the fiduciaries failed to act with care, skill, prudence, or diligence Kirschbaum v. Reliant Energy, 526 F.3d 243 (5th Cir. 2008) (affirmed summary judgment) Stock dropped about 40% in one week, when company disclosed that some employees had engaged in round-trip energy trades A fiduciary cannot be placed in the untenable position of having to predict the future of the company stock's performance. In such a case, he could be sued for not selling if he adhered to the plan, but also sued for deviating from the plan if the stock rebounded 8

10 ERISA Fee and Revenue Sharing Litigation: The Claims Cases evolving since first wave filed in At least 30 cases filed to date Allegations include Breach of ERISA 404(a) fiduciary duty for allowing plans to pay excessive fees, receiving or failing to take into account revenue sharing payments, and/or disclosure issues Engaging in ERISA 406(b) prohibited self-dealing by accepting allegedly excessive fees or revenue sharing 9

11 ERISA Fee and Revenue Sharing Litigation: The First Appellate Decision of the Current Wave Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. Feb. 12, 2009) Affirms Rule 12(b)(6) dismissal of claims against named fiduciary, recordkeeper and investment adviser for alleged breach of fiduciary duty Rejects claims that fees were excessive where plan made available core options and 2,500 additional investments through a brokerage window whose cost ranged from 0.07% to just over 1%. [N]othing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems) ERISA 404(c), 29 U.S.C. 1104(c), protect[s] a fiduciary that satisfies the criteria of 1104(c) and includes a sufficient range of options so that the participants have control over the risk of loss Petition for rehearing and rehearing en banc filed, joined by amici including Department of Labor 10

12 ERISA Revenue Sharing Litigation: Recent District Court Decisions Taylor v. United Tech. Corp., No , 2009 WL (D. Conn. March 3, 2009) Court grants summary judgment, including as to allegations of imprudence arising from assertion that actively managed funds generally underperform passive funds and that cheaper alternatives to retail mutual funds exist Abbott v. Lockheed Martin Corp., No , 2009 WL (S.D. Ill March 31, 2009) Court grants, in part, motion for summary judgment as to claims regarding revenue sharing payments and use of one mutual fund where non-retail product was allegedly available Court denies, in part, motion for summary judgment as to whether overall plan fees were reasonable, and whether company stock fund and stable value fund investment options were prudent 11

13 ERISA Revenue Sharing Litigation: Other Pension Cases On Appeal Young and Brewer v. General Motors Investment Mgmt. Corp., Nos , 1534 (2d Cir.) (appeal of Rule 12(b)(6) dismissal; briefed on May 20 and June 20, 2008, oral argument Mar. 31, 2009) Grabek v. Northrop Grumman, No , (9th Cir.) (appeal of denial of class certification; briefed on Jan. 25 and Feb. 26, 2008) Braden v. Wal-Mart Stores Inc., No (8th Cir) (appeal of Rule 12(b)(6) dismissal; appellant s brief filed on Feb. 11, 2009) Department of Labor amicus brief in support of appellants, filed March 16, 2009, contains caveat: This brief should not be construed as suggesting that it is per se illegal for ERISA employee benefit plans to include retail mutual fund options 12

14 What s Next? Litigation Involving Current Market Conditions Continued stock drop and fee litigation Suits over plan funds that have suffered losses or liquidity restrictions due to mortgage-backed, assetbacked, or related investments Implicates ERISA provisions excluding management of registered mutual fund assets per the Investment Company Act of 1940, such as ERISA 3(21)(B), 401(b), 29 U.S.C. 1002(21)(B), 1101(b) Implicates defense under ERISA 404(c)(1)(A)(ii), 29 U.S.C. 1104(c)(1)(A)(ii): no person who is otherwise a fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from such participant s or beneficiary s exercise of control 13

15 James Fleckner (617)

16 April 7, 2009 LEGAL PUBLISHING GROUP OF STRAFFORD PUBLICATIONS ERISA CLASS ACTION LAWSUITS ON THE RISE Litigation Trends and Effective Trial and Settlement Strategies BEST PRACTICES FOR PLAN FIDUCIARIES AND SPONSORS TO AVOID AND REDUCE ERISA LITIGATION RISKS By: HOWARD PIANKO, ESQ. SEYFARTH SHAW LLP

17 April 7, 2009 Best Practices For Plan Fiduciaries and Sponsors To Avoid and Reduce ERISA Litigation Risks Howard Pianko Seyfarth Shaw I. ERISA S PLAN GOVERNANCE PLAYING FIELD A. Best practices for employer/fiduciaries to reduce ERISA liability exposure begin with the establishment of one or more plan governance structures. 1. ERISA does not mandate a specific plan governance structure. 2. Instead,it contains a framework of concepts a plan sponsor (the settlor ) can work with to establish and maintain its own plan governance structure. This structure may differ between ERISA s two basic plan categories (e.g., retirement vs. welfare benefits) and also may differ between plans within the same category (e.g., defined benefit vs. defined contribution plans). B. To start with, inherent in ERISA is the concept that the ERISA playing field essentially consists of three categories of players and each category is subject, or not, to different standards and levels of liability: 1. Settlor The settlor is the entity or person who designs and establishes the plan. Founded in trust law principles, sponsor design, adoption and termination decisions generally are not fiduciary in nature. Therefore, as long as laws regulating the operation of plans (e.g., coverage and nondiscrimination rules) are met, the employer can decide to adopt, amend or terminate a plan without being subject to ERISA fiduciary or prohibited transaction rules. Of course, different exceptions may apply (e.g. (i) the termination of a plan is not a fiduciary act but the purchase of annuities to effect the termination would be; or (ii) communication to employees about their benefits in connection with a spin-off may be considered a fiduciary act while the spin-off would not). 2. Fiduciary ERISA imposes prudence and other standards upon persons performing fiduciary functions. Broadly stated, a person who exercises discretionary authority with respect to plan administration, or who has or exercises discretionary authority with respect to the investment of plan assets, is an ERISA fiduciary. In addition to being subject to ERISA s fiduciary standards, certain prohibited transaction rules apply to a fiduciary, who also is subject to personal liability for breach of ERISA. 1

18 3. Party in interest This broad definition covers a range of persons or entities who have a degree of connection with an ERISA plan (e.g., either directly, such as the employer, or indirectly, such as a person with a specified ownership interest in the employer) that warrants the prohibition of certain transactions involving that person or entity and the ERISA plan. Unlike the standards regulating the conduct of plan fiduciaries, ERISA contains no standards of conduct applicable to parties in interest, except if the party in interest also is a plan fiduciary subject to fiduciary standards. The prohibited transaction rules are transaction-based as opposed to setting a standard by which other parties in interest are bound. C. Plans subject to ERISA are required by that statute to be in writing. The ERISA plan consists of the actual plan document as well as related documents (e.g., trust agreement). Within the plan documents, the settlor can specify the plan s governance structure and the allocation of different plan responsibilities. This allocation involves the application of other ERISA concepts such as the designation of a: 1. Named Fiduciary The named fiduciary specified in the plan document is allocated certain fiduciary functions and also may delegate its functions and perform other actions such as the appointment of an investment manager. For example, a single committee can be designated as the named fiduciary responsible for the investment of plan assets as well as the fiduciary aspects related to discretionary administrative functions (e.g., interpretation of the plan document). Alternatively, a two committee structure can be implemented; or a different approach adopted. 2. Trustee Typically, the employer (acting through its board of directors if a corporation) will appoint a trustee to hold plan assets, or an insurance contract designated as the investment vehicle. While a trustee often will act as a directed trustee, the source of the direction to a trustee can affect the level of its responsibility. If the direction is received from a named fiduciary, the trustee is obligated to follow proper direction. However, if the direction is received from an investment manager, the trustee can follow such direction without regard to whether or not the direction is proper. 3. Investment Manager A fiduciary named in the plan document can exercise its discretion and appoint one or more investment managers. Stated simply, such a manager must be either a bank, insurance company or a 40 Act advisor. The fiduciary appointing the investment manager has a duty to be prudent in the selection NY

19 and the monitoring of the performance of the investment manager. However, as stated above, a trustee can follow the direction of an investment manager without being subject to the otherwise applicable constraint that the direction be proper. D. The allocation of responsibilities in a plan document affects plan governance as well as issues of risk and liability. For example, a fundamental ERISA concept is that a fiduciary who has the authority to perform an action is held to the standard of prudence both in terms of the initial decision and, as applicable, the ongoing monitoring of that action. Thus, a committee authorized to select the investment alternatives constituting the menu for participant direction in a 401(k) plan must continue to monitor the performance of the investment alternatives selected. Similarly, a board committee who appoints the individual members of an investment committee for a plan, is responsible for the ongoing monitoring of the performance of the members of that committee. On the other hand, if members of an investment committee are designated in the plan document by title - i.e., the individuals from time to time serving as designated corporate officers - there arguably is no ongoing responsibility at the corporate board level with respect to the selection or monitoring of these committee members. Similarly, a 401(k) document that specifically mandates the existence of a company stock fund imposes a different level of potential responsibility upon the committee responsible for selecting other investment alternatives than if the choice of a company stock fund was within the discretionary authority of this committee. II. THINK OF A PAPPA (PROCESS AND PRUDENT PRACTICE APPROACH) WHEN THINKING OF BEST PRACTICES IN PLAN GOVERNANCE A. ERISA does not prescribe specific best practices in terms of plan governance just as it does not prescribe specified lists of permitted investments or allocation models. Instead: 1. ERISA fiduciary compliance is judged based on adherence to the prudence standard set forth in that statute, as well as satisfaction of the other fiduciary requirements as to diversification, exclusive benefit and acting in accordance with the terms of the plan document. 2. Determination of adherence to these requirements often looks to the decision-making process undertaken by the fiduciary. In that regard ERISA is often referred to as process driven. 3. However, a paper trail in and of itself cannot be relied on. Process requires the setting up of prudent policies and procedures NY

20 and their adherence. Underlying this PAPPA is the fundamental premise that when an appropriate person or group of people conduct an analysis in a manner appropriate to the issue at hand, and with proper professional assistance, they are more likely to meet ERISA s prudence and other fiduciary standards. 4. The test of prudence: is one of conduct, not a test of the result of performance of the investment. The focus of the inquiry is how the fiduciary acted in his selection of the investment, and not whether the investment succeeded or failed. Donovan v. Cunningham, 716 F.2d 1455 (5 th Cir. 1983). 5. Systemically instituting and maintaining a PAPPA is the most consistent strategy to limit class action fiduciary liability risk. III. SOME BEST PRACTICE CONCEPTS THE BOARD LEVEL A. Degree of Board Involvement 1. Again, no specific provision of ERISA sets a best practice standard for the level of involvement by a company s Board of Directors ( Board ). 2. It is common for plan documents to specify that the Board is responsible for the designation of committee members or for the appointment of a trustee. 3. An initial review item is to examine plan documents to determine what authority is delegated to, or may be exercised at the discretion of, the Board. Ambiguous language should be avoided; for example, a delegation of authority to the company. Who is the company? Does this language implicate the Board? Who has the authority to take action on behalf of the company? Another example would be language to the effect that the company is the Plan Administrator unless the Board has designated a committee (and the Plan Administrator is the named fiduciary under the plan). What obligation does such a phrase impose upon a Board? 4. While sometimes treated as a detail that is not brought to the attention of Board members, there are important governance considerations that should be considered. In particular, if the Board, or one of its committees, has the authority to appoint members of a plan committee, what reporting mechanism is or should be put into place for the Board to fulfill its duty to monitor performance by that plan level committee? Other considerations, some of them settlor in nature, also could be considered by the Board e.g., delegation of authority to amend the plan for legally NY

21 required changes or for administrative or design changes with no [significant] cost impact. B. Some Corporate Governance Considerations 1. Recognizing the level of financial commitment, and exposure, stemming from different benefit plans - qualified and nonqualified retirement plans as well as those providing health and welfare for active and possible retired employees is there a duty for the Board to review benefit-related commitments and risk exposure as an element of corporate, and not just plan, governance? 2. From an organizational point of view, major corporations often have benefit-related responsibilities, both administrative and legal compliance, spread among different corporate offices. For example, there may be benefit lawyers in Human Resources and others in Finance and Legal. There may be reporting by a plan investment committee for defined benefit plans to a Board finance committee, but no reporting as to 401(k) plans. If there are rabbi trusts, should there be a review of the assets being held with respect to corporate liabilities in these plans? 3. The threshold question at the Board level is whether there should be a Board charter working through the different plans, to whom the Board wants to delegate plan level responsibilities for different plan functions and how reporting should be effected to the appropriate Board committee. Another approach would be to hardwire plan documents to minimize ongoing Board action and, as a corollary matter, seek to eliminate possible liability. 4. Finally, while not ERISA-related but as a matter of risk management, should Boards consider the different compliance functions and risk exposure related to the company s benefit plans and create a centralized benefit risk management function to address this area of potential corporate exposure? IV. SOME BEST PRACTICE CONCEPTS THE PLAN LEVEL A. At the plan level, a number of structural best practice considerations are applicable, including: 1. Documentary and Operational Consistency - Who actually is performing different plan-related functions, both fiduciary and administrative, and is the existing practice consistent with the applicable plan documentation? If not, amend the documents to reflect the practice or change the practice to be consistent with the documentation. A range of plan-related documents from trust agreements, to investment management agreements and service NY

22 agreements should be reviewed for consistency in designating fiduciaries and referring to their responsibilities. 2. In the course of identifying plan fiduciary functions, another question is whether different functions are properly staffed. Are there insiders on an investment committee for a 401(k) plan with a company stock fund? Is there a single committee composed principally or totally of employees from Finance who are charged with administrative functions? 3. In addition to plan documentation, what documentation is in place with respect to: a. Charter or ByLaws Does each committee have a written charter setting forth how it will operate and govern itself? b. Investment Guidelines Are there written investment guidelines for each plan both defined benefit and defined contribution? c. Other Policies and Procedure Are there written policies with respect to topics such as the payment of expenses from plan assets or compliance with the requirements of Section 404(c) of ERISA. 4. Fiduciary Training Is there an ongoing formal or informal fiduciary training program? What type of evaluation process, if any, is in place? Are there any limits on the term of service? 5. Overlap between ERISA fiduciary and management/settlor functions - In some instances there is not a clear distinction between the different roles the same members of a committee are fulfilling. A common example is a single committee which, in addition to its clear fiduciary functions, also performs settlor and management functions. For example, a meeting may cover a range of topics from an amendment to comply with a new law, or administrative questions arising under such a law, to the change in an investment fund. While the same individuals may be at a meeting, it would appear that they should separate their roles as to when they are acting in a plan fiduciary role and when they are acting in a settlor/management capacity. 6. Another consideration is whether existing policies and procedures are being followed and kept current. a. For example, how carefully are minutes being kept and what is the style of recording minutes? Are the minutes of the prior meeting reviewed at the next meeting? Is there an NY

23 interim process to confirm that actions directed by the committee are timely effected? 7. Independent Investment and Other Professionals To what extent is independent advice being obtained (as appropriate for the plan)? For example, in a 401(k) plan is the evaluation of fund performance being performed by the same organization that is providing the recordkeeping and other platform services? B. Other Plan Document Provisions Other considerations in reviewing plan documents to limit risk exposure include: 1. Do documents, including SPD s, contain appropriate Firestone language providing for binding effect of internal claims decisions? As applicable, is there consistent reservation of rights language and has the SPD been checked for consistency with the plan document? 2. Claims procedures should comply with applicable DOL requirements and should be followed. 3. For individual account plans, documentation should include statement as to intent to comply with Section 404(c) of ERISA. 4. Is there an indemnification provision within the plan? How broadly is it worded, e.g.: (i) does indemnification extend to employees or is it limited to committee members; and (ii) is there a specific provision for advancement of defense costs? Should there be a specific reference to benefit plans within corporate-related indemnification documentation? In a similar context, while not a plan provision, check the scope of fiduciary liability insurance coverage. C. Segregation of Administrative/Non-Fiduciary Functions and Supervision. Another area often overlooked is the delineation of administrative roles between fiduciary (e.g., claims review and plan interpretation) and nonfiduciary functions. To the extent that there is a service provider, what is the interface with the employer and who is responsible for monitoring the performance of the service provider? Is that a corporate (i.e., HR) function or is it an assigned responsibility of a committee? V. RISK MANAGEMENT - SPECIFIC FACT PATTERNS A. Plans holding employer securities 1. Stock drop actions often are instituted against fiduciaries of 401(k) plans that have company stock funds as an investment choice; 2. Considerations for risk management: NY

24 a. Eliminate insiders from committee membership; b. Hardwire plan language to explicitly require that one of the investment alternatives be a company stock fund; c. Appoint an independent fiduciary or investment manager for the company stock fund; d. Set up tripwire criteria requiring appointment or independent fiduciary or investment manager upon occurrence of one or more specified events; e. Provide participants with the unfettered ability to diversify the investment of their accounts out of the company stock fund. f. Establish aggregate limits (e.g., no more than 25% of total account balance at time of contribution) or contribution limits on the amount that may be invested in the company stock fund; g. Review plan-related communications to be sure that there is an appropriate discussion of the risks of company stock ownership and no direct or indirect effort to encourage investment in company stock; h. Establish a culture that respects independence of committee members. B. Revenue Sharing Litigation 1. While some important decisions have rejected class action claims related to revenue sharing, e.g., Hecker v. Deere & Co., 45 EBC 2761 (7 th Cir. 2009), a number of these cases are proceeding and one can expect refinement in the arguments presented by counsel for plaintiffs. 2. Considerations for risk management: a. Obtain precise reporting as to the amount of revenue sharing within the plan and expenses being paid by plan assets; b. Review employee communications in terms of disclosing the nature and application of revenue sharing; c. Examine 404(c) compliance and consider expanded disclosure; NY

25 d. Monitor exact amount of revenue sharing and analyze whether amount received by the platform provider is reasonable in light of services being rendered. In that regard, ascertain the cost of providing the same service from an unbundled provider. Determine minimum fee income required by vendor to provide services and negotiate lower fees (or go through a RFP process to ascertain what is true market cost for comparable services); e. If revenue sharing is considered to exceed reasonable compensation, consider alternative arrangements; e.g., revenue sharing to be deposited in an account in the name of the trust and applied to pay other proper plan expenses; f. For plans with a company stock fund, examine any additional fees for trustee or other service. Review policy and fees associated with the liquidity portion of the stock fund and be sure that participant disclosures clearly state that a portion of this fund, as needed for liquidity and administrative purposes, is held in short term instruments; g. For plans with master trusts, review expenses imposed at the master trust level, confirm that expenses are reasonable and disclose to participants; h. Exercise ongoing prudence in the monitoring of the performance of the funds made available for participant directed investment and be sure that administrative convenience or cost elimination is not restricting the focus on fund performance or competitive expense ratios. Is unbundling a viable option? What is the degree of utilization of index funds? C. Consideration for financial firm/platform provider 1. With respect to 401(k) plans maintained for its own employees, a process for evaluating including proprietary funds in the investment menu is important for existing proprietary funds as well as for newly formed funds that may be subject to a charge of conflict because of seeding of the new fund through assets of a plan maintained by the financial firm. 2. In situations where the platform provider is filtering and monitoring the overall fund selection from which the plan fiduciary selects the menu made available for participant-directed investment, consideration is needed as to whether the platform provider might be subject to claims that it is acting as an ERISA NY

26 fiduciary. See, e.g., Haddock v. Nationwide Financial Services, 36 EBC 2953 (D. Conn. 2006) 3. Another possible area of exposure exists to the extent that a plan participant can claim that the financial firm became a plan fiduciary by reason of the actions of its broker or agent. See, e.g., Young v. Principal Financial Group, 547 F.Supp.2d 965 (S.D. Iowa, 2008) VI. CONCLUSION Overall, the issue of reduction of exposure to class action claims needs to be considered as a risk management matter; in this case the risk stemming from benefit plans sponsored by the employer. Viewed from this perspective, the fundamental approach to limiting liability is to institute and culturally support the ongoing maintenance of a process designed to maximize adherence to ERISA s fiduciary standards. This requires an initial commitment of time and resources to examine the existing fiduciary structure and to develop an ongoing structure along the lines outlined above. For such a structure to achieve its objectives, other organizational changes may be needed, such as the extension of the charter concept to the board level so that the directive flows from the top down. Further, the development of a centralized corporate benefit risk management function would serve an ongoing role; i.e., responsibility for the monitoring of statutory, case law and best practices developments and the application of these concepts to the company s benefit plans and plan governance structure. NY

27 SETTLEMENT STRATEGIES IN ERISA CLASS ACTION STOCK DROP LITIGATION Strafford Legal Teleconference April 7, 2009 EVAN MILLER JONES DAY 51 Louisiana Avenue, N.W. Washington, D.C all rights reserved WAI v2 1

28 I. Timeline SETTLEMENT STRATEGIES IN STOCK DROP LITIGATION A. Litigation Tactics to Enhance Settlement Position B. Motion to Certify Class C. Preparation for Settlement Negotiations / Consulting Damages Experts D. Mediation E. Settlement Agreement II. Litigation Posture to Enhance Settlement Position A. Circumscribe Answer to the Relevant ERISA Fact Questions 1. Who, if anyone, was the responsible fiduciary? 2. What did that fiduciary know? 3. When did he or she know it? 4. How did the fiduciary s knowledge affect his or her responsibility?. B. Prudence Claim 1. Prudence claim is the heart of most stock drop litigation 2. Historically uncommon for defense to win at MTD stage 3. Perhaps will become easier in wake of Reliant Energy, especially within 5th Circuit. See In re Dell Inc. ERISA Litigation, 563 F. Supp. 2d 681 (W.D. Tex. 2008); see also In re Avon Products, Inc. ERISA Litigation, 05-Civ (S.D. N.Y. Mar. 30, 2008) C. Disclosure Claim 1. Typical disclosure claim has two parts a) Disclosures were inaccurate and misleading b) Disclosures were insufficient and misleading; i.e., disclosures regarding company stock were incomplete and failed to provide accurate picture. (i) Often tees off of related securities case 2. Disclosure claim typically less valuable to plaintiffs than prudence claim; more difficult to proceed on class-wide basis. D. Duty to Monitor and Co-Fiduciary Liability Claims 1. Derivative of the prudence and disclosure claims WAI v2 2

29 III. Motion to Certify Class A. Class Certification Motions 1. Standard requirements of numerosity, commonality, typicality, and adequacy 2. Brought under Rule 23(b)(1) (no-opt-out class) 3. Plaintiffs emphasis that relief is on behalf of the plan so inherently typical B. Opposition Arguments 1. LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct (2008), and Langbecker v. EDS, 476 F.3d 299, (5th Cir. 2007), provide roadmap for some defenses. See its successful use in In re Diebold ERISA Litigation, 5:06 cv 0170 (Mar. 11, 2009)(denying class certification). 2. Battleground usually over typicality/adequacy a) Following Supreme Court s decision in LaRue, new arguments arise that strengthen consideration of individual inquiries / conflicts. b) Individualized issues as to why and when each person sold stock. (i) Some in class may have benefited from, or were not harmed by, alleged breaches c) ERISA 404(c) requires individual evaluations as to participants decision making. (i) 404(c) has more viability after Hecker v. John Deere 3. Releases may provide another way to oppose class certification. 4. Many cases cited by Plaintiffs as examples of courts that have certified a class are in the settlement context, and not relevant to outside that context, or are pre-larue. C. Suiting up Testifying Experts 1. Will require data from record-keeper concerning participant-level trading activities 2. Report included with class cert opposition D. Opposition Expert Arguments 1. Analyze and compare individual trading patterns of a) Named Plaintiffs / Class Representatives b) Plan as a whole c) If more than one plan (e.g., Salaried / Union), between plans 2. Identify optimal recovery dates for subgroups of plan participants to show conflicting interests IV. Preparation for Settlement Negotiations /Damages Experts A. Suit Up Damages Experts & Consider Appropriate Time Frame WAI v2 3

30 B. Consider Appropriate Time Frame 1. What are the potential breach points? a) Evaluating risk and damages at different points during putative class period is crucial. 2. When would a hypothetical prudent fiduciary have acted? 3. Did the stock rebound? 4. Did participants benefit from low stock price with increased company stock investment at low prices? 5. How did company stock fund fare relative to other plan investment options? To industry peers? C. Participant level vs. Plan level (aka Trust level) damages 1. Plan level means analyzing the trades of company stock made by the trustee/investment manager on the open market (or Treasury shares) and calculating damages based on these trades 2. Participant level means analyzing each company stock trade made by each individual participant in the plan and calculating damages by summing across all individual damages 3. Plan level usually yields lower damages numbers than participant level, because participant trades are netted and plan only trades when imbalance is great enough to necessitate a trade (typically a cash cushion of a few percentage points is able to absorb small imbalances) D. Appropriate Alternative Investment 1. Leading but largely unhelpful -- case is Donovan v. Bierwirth, 754 F.2d 1049, 1056 (2d Cir. 1985): a) Language from Donovan: [W]e hold that the measure of loss applicable under ERISA section 409 requires a comparison of what the Plan actually earned on the [company stock] investment with what the Plan would have earned had the funds been available for other Plan purposes.... In determining what the Plan would have earned had the funds been available for other Plan purposes, the district court should presume that the funds would have been treated like other funds being invested during the same period in proper transactions. Where several alternative investment strategies were equally plausible, the court should presume that the funds would have been used in the most profitable of these. The burden of proving that the funds would have earned less than that amount is on the fiduciaries found to be in breach of their duty. 2. Alternative Investments Requested a) Plaintiffs: Best Performing Alternative Investment WAI v2 4

31 b) Defendants: No presumption properly applies in participant-directed 401(k) plans (i) Rationale: Bierwirth addressed defined benefit plan, where fiduciaries of the plan made the investment decisions. The logic of Bierwirth fails in the context of participant-directed account plans, such as 401(k) plans. In participant-directed account plans, the breaching defendant has no control over how investments are made; that decision is left completely in the hands of the participants. (ii) Defense typically performs damages analysis comparing actual company stock fund performance against: (A) plan-level composite (weighted composite based on actual participant investment choices) (B) equity fund participants have turned to in the past when there s been an elimination of an equity investment option. (C) default investment option; QDIAs (D) broad-based equity index option (e.g., S&P 500 fund) (E) other plan-specific options that make sense under the circumstances, such as index funds correlating to company stock. E. Analyze Purchaser vs. Holder Damages 1. Purchaser damages are the damages related to the shares purchased during the class period acquired as a consequence of defendant s alleged imprudent failure to freeze purchases.. 2. Holder damages are the damages related to the shares purchase prior to and during the class period and held during the class period, rather than sold outright, as a consequence of defendants alleged imprudence in failing to liquidate all company stock. 3. Always know the spread between purchaser and holder damages, but do not negotiate based on holder damages. a) Holder damages typically far greater than, sometime several multiples beyond, purchaser damages, and holder damages have an in terrorim effect in the mediation/settlement room if they become a benchmark upon which negotiations occur. F. Practical Considerations 1. Allow sufficient time to collect and analyze data (while it is sometimes a simple data dump, be prepared for company-specific quirks) a) Trustee / Stock Fund Investment Manager will have plan-level data b) Record-keeper will have participant-level data c) Additional helpful information may be in the hands of the plan administrator WAI v2 5

32 (i) cash flow reports (sometimes useful in verifying data or determining plan-level composite) (ii) mapping information if fund choices have changed over time G. Equitable Relief 1. Sometimes part of settlement a) Often a good deal closer ; be prepared to discuss at mediation 2. Could include: a) Removal of company stock fund option; removal of match in company stock b) Appointment of independent fiduciary to manage company stock fund c) Change in description of company stock fund option d) Other disclosure-type mandates V. Mediation A. Selecting Mediator 1. Substantive legal background of mediator important 2. Experience in ERISA stock drop cases. B. Mediation Brief 1. Legal Highlights 2. Damages a) Generally, later in the period one can establish a breach, the lower the damages b) Highlight damages expert report, provide report or portions of report c) Don t forget offsets (from securities class action settlements, etc.) C. Mediation Session 1. Usually standard shuttle diplomacy 2. No upside to disclosing litigation reserves VI. Settlement Agreement A. Certification of Settlement Class B. Independent Fiduciary Review 1. Independent fiduciary provides opinion pursuant to PTCE Independent fiduciary report should be due after fee application is due to be filed, with sufficient time to allow the independent fiduciary to review the fee application WAI v2 6

33 C. Released Claims 1. Need to carve out companion case 2. Independent Fiduciary usually requests 502(a)(1)(B) claims not connected to stock drop be carved out. D. Costs 1. Negotiable, but usually all costs other than for independent fiduciary come out of the settlement fund. WAI v2 7