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Four Eaton Corp. executives scored an appeals court victory in a case accusing them of wrongly allowing workers to continue investing retirement savings in company stock.
The executives didn’t have an option that was clearly better than letting workers continue to invest in Eaton stock during a period when its price fell more than 15 percent, the U.S. Court of Appeals for the Sixth Circuit ruled Jan. 8. The workers said the executives could have told the public about alleged fraud at the company or moved the 401(k) assets held in Eaton stock to a different investment, but the Sixth Circuit said these options could have driven stock price even lower and thus done more harm to the plan than good.
Lawsuits challenging lost retirement savings following drops in company stock price have seen almost no success since a 2014 U.S. Supreme Court decision made it harder to bring fiduciary breach claims under the Employee Retirement Income Security Act. Since then, a growing list of companies and their executives have defeated so-called stock-drop lawsuits, including Wells Fargo, Target Corp., Cliffs Natural Resources Inc., Reliance Trust Co., Lehman Brothers Holdings Inc., State Street Bank & Trust Co., RadioShack, Citigroup, Whole Foods Corp., JPMorgan Chase & Co., L-3 Communications, and BP Plc.
Many cases, including the one involving Eaton’s retirement plan, hinged on the Supreme Court’s new pleading standards for stock-drop cases under ERISA. To show that a plan fiduciary can be liable for keeping company stock in the plan when stock value has been artificially inflated because of undiscovered fraud, workers must identify an alternative action the fiduciary could have taken instead of holding onto the investment. That action must be legal under federal securities laws and can’t be something that a prudent fiduciary would consider more likely to harm the plan than help it.
The alternative actions identified by the Eaton workers—publicly disclosing alleged fraud, freezing new investments in Eaton stock, and moving some stock investments to a different low-cost investment—didn’t satisfy the Supreme Court’s “more harm than good” standard, the Sixth Circuit said. Disclosing alleged fraud can cause an “overcorrection” in stock price that could harm the 401(k) plan, the court said. Freezing new investments in company stock could do the same, the court said, because it could signal that something may be “deeply wrong” at the company.
Eaton is a publicly traded maker of vehicle and electrical components that has gradually shifted its operations from Cleveland, Ohio, to Ireland over the past decade. Workers said Eaton’s stock became artificially inflated in 2013, when executives made false and misleading statements assuring investors of the feasibility of divesting certain company businesses on a tax-free basis.
A separate lawsuit challenges this alleged conduct under federal securities law. A federal judge dismissed that case in September 2017 but gave Eaton workers another chance to state their claims.
The Sixth Circuit’s decision was written by Judge Helene N. White and joined by Senior Judge Eugene E. Siler Jr. and Judge Amul R. Thapar. Thapar is one of three judges appointed to the Sixth Circuit in 2017 by President Donald Trump.
Zamansky LLC represented the Eaton workers. Benesch Friedlander and Latham & Watkins represented Eaton.
The case is Graham v. Fearon , 6th Cir., No. 17-3407, unpublished 1/8/18 .
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