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Eaton Corp. executives dodged a proposed class action accusing them of breaching their ERISA fiduciary duties by allegedly allowing artificially inflated stock to be invested in the company’s retirement plan ( Graham v. Fearon , 2017 BL 94517, N.D. Ohio, No. 1:16-cv-02366, 3/24/17 ).
Judge Patricia A. Gaughan March 24 dismissed the lawsuit against the executives, holding that the plan’s participants failed to meet the strict pleading standard adopted by the U.S. Supreme Court in 2014. The participants failed to allege that a prudent fiduciary in the executives’ circumstances wouldn’t have viewed the available options—freezing new investments and issuing corrective disclosures—as more likely to harm the plan than to help it, Gaughan said.The lawsuit, which accused four company executives of breaching their fiduciary duties under the Employee Retirement Income Security Act, didn’t name Eaton as a defendant.
Gaughan’s decision is the latest defeat for employees who are using ERISA to challenge losses in their retirement plans as a result of company stock drops. In the past year RadioShack Corp., Whole Foods Corp., Lehman Brothers, JPMorgan Chase & Co., International Business Machines Corp. and BP Plc. defeated lawsuits by employees who claimed the companies failed to remove poorly performing company stock from their retirement plans. However, these results haven’t stopped employees from filing new lawsuits against other companies, including Chesapeake Energy Corp., Seventy Seven Energy Inc. and General Cable Corp.
The participants alleged that Eaton stock became artificially inflated between 2013 and 2014 as a result of Eaton executives’ false and misleading statements assuring investors of the feasibility of divesting certain company businesses on a tax-free basis. The participants claimed in their lawsuit that the executives knew or should have known that the stock was artificially inflated by fraud.
The participants alleged that the executives could have halted new investments in the company stock or issued corrective disclosures to cure the fraud.
Halting investment in a company fund can cause the market to infer that insider fiduciaries view the employer’s stock as a bad investment, resulting in a drop in stock price, Gaughan said. The participants failed to allege that a prudent fiduciary in the executives’ position wouldn’t have considered the possible detrimental effect of halting investments in the company fund and concluded that this approach could do more harm than good, the judge said.
Gaughan’s decision puts an end to the participants’ case, at least in the district court, since she also denied their request to amend the complaint.
Zamansky LLC and Plevin & Gallucci represented the participants. Latham & Watkins LLP and Benesch Friedlander Coplan & Aronoff LLP represented the executives.
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