L-3 Communications Workers Sue Over Company Stock Losses

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Jacklyn Wille

June 27 — L-3 Communications Corp. workers filed a class action against the company, arguing that an accounting fraud scheme cost them millions of dollars in retirement savings held in company stock ( Dodd v. L-3 Comm. Corp. , S.D.N.Y., No. 1:16-cv-04930, complaint filed 6/24/16 ).

According to the workers, the people running the company's retirement plan continued to invest more than $900 million in L-3 stock, despite having knowledge that the stock was artificially inflated because of an ongoing accounting fraud. Once revealed, this fraud caused a one-day drop in stock price of 12 percent and had a “long-term damaging impact on the Company's reputation,” the workers alleged.

L-3 creates military and civilian electronics equipment, including the “black boxes” used on aircraft. It bills itself as one of the top 10 defense contractors in the world.

The lawsuit was filed by Zamansky LLC, a New York-based plaintiffs' firm currently litigating similar cases against IBM Corp., Whole Foods Market Inc. and American Express Co. Earlier this year, the firm reached a $4.5 million settlement in a lawsuit against J.C. Penney Corp. and a $6.25 million settlement with Avon Products Inc.

According to the complaint, nearly 63,000 L-3 workers stand to benefit from the lawsuit, if it's successful.

Challenge to Stock Losses

The lawsuit—which alleges L-3 committed fiduciary breaches in violation of the Employee Retirement Income Security Act—comes at a time when courts are struggling to interpret the U.S. Supreme Court's recent decision creating new pleading standards for ERISA lawsuits based on declining employer stock.

In lawsuits like this, which accuse plan fiduciaries of having inside knowledge of an ongoing fraud that affected stock prices, the Supreme Court has instructed that plan participants must identify an alternative action that plan fiduciaries could have taken instead of continuing to invest in employer stock. That action must be consistent with securities laws and not, in the view of a prudent fiduciary, likely to do more harm than good to the value of company stock.

The task of interpreting these instructions may fall to the U.S. Court of Appeals for the Fifth Circuit, which is currently hearing a lawsuit involving BP Plc's Deepwater Horizon oil spill. In that case, the Fifth Circuit has received briefs from the Department of Labor and the Securities and Exchange Commission attempting to flesh out the standard created by the Supreme Court.

For their part, the L-3 workers argue that the company could have closed the retirement plan to new L-3 stock purchases or issued “truthful or corrective disclosures to cure the fraud.”

L-3 didn't immediately respond to Bloomberg BNA's request for comments.

The lawsuit was filed June 24 in the U.S. District Court for the Southern District of New York.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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