L-3 Executives Cleared in ERISA Suit Over 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

Two L-3 Communications Corp. executives defeated a lawsuit seeking to hold them personally liable for drops in L-3’s stock price that caused losses to its retirement plan ( Price v. Strianese , S.D.N.Y., No. 1:17-cv-00652-VEC, order granting motion to dismiss 10/4/17 ).

A federal judge Oct. 4 dismissed the proposed class action against L-3 Chief Executive Officer Michael Strianese and Chief Financial Officer Ralph D’Ambrosio. The lawsuit said Strianese and D’Ambrosio were wrong to continue allowing L-3 workers to invest retirement savings in the company’s stock when an ongoing accounting fraud caused the stock to be artificially inflated. The judge rejected these allegations, saying the plan participant who sued failed to show that the executives should have known that an ongoing fraud was making L-3 stock an imprudent investment.

Lawsuits challenging lost retirement savings following drops in company stock price have seen almost no success since a 2014 U.S. Supreme Court decision making it harder to bring fiduciary breach claims under the Employee Retirement Income Security Act. Since then, a growing list of companies 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, Eaton Corp., Whole Foods Corp., JPMorgan Chase & Co., and BP Plc.

The lawsuit against the L-3 executives was based partly on a recent $1.6 million settlement between L-3 and the Securities and Exchange Commission over charges that the company failed to maintain accurate books and records and used insufficient accounting practices. This failed to persuade the judge, who said the SEC settlement suggested only that the executives knew L-3 was losing money on one of its contracts, and not that they were aware of any associated fraud.

In February, L-3 agreed to a $34.5 million settlement in a securities fraud lawsuit based on the same alleged conduct. Another ERISA lawsuit targeting L-3, Strianese, and D’Ambrosio—which was filed by Zamansky LLC, the same firm bringing the instant lawsuit—was voluntarily dismissed in December.

In this case, the judge said that even if the plan participant had shown that Strianese and D’Ambrosio knew about the accounting fraud, he still would have failed to state a valid claim for fiduciary imprudence under ERISA. That’s because the plan participant failed to identify a plausible alternative action the executives could have taken other than continue to allow investment in company stock.

In particular, the judge disagreed that the executives could’ve offset the risk of L-3 stock by investing in a “low-cost hedging product,” calling this alternative “too vague” to be viable.

In so ruling, the judge called the ERISA pleading standards adopted by the Supreme Court in 2014 “highly exacting” and “incredibly difficult to satisfy.”

Judge Valerie Caproni of the U.S. District Court for the Southern District of New York wrote the decision.

Simpson Thacher & Bartlett LLP represent the executives.

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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