RadioShack Defeats Challenge to Stock Losses in 401(k) Plan(1)

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By Carmen Castro-Pagan

RadioShack Corp. executives defeated a lawsuit accusing them of violating federal benefits law by allowing workers to invest in company stock despite knowing of the company’s financial decline and impending bankruptcy.

The workers’ allegations—that the executives were imprudent by failing to respond to public information on RadioShack’s financial decline and insider information suggesting the stock was overvalued—aren’t sufficient to state a claim under the Employee Retirement Income Security Act, the U.S. Court of Appeals for the Fifth Circuit held Feb. 6.

The ruling is the latest defeat for workers who seek to hold their employers liable for offering allegedly inflated stock as an investment option in their 401(k) plans.

Lawsuits challenging lost retirement savings following drops in company stock price have seen almost no success since 2014, when a U.S. Supreme Court decision made it harder to bring fiduciary breach claims under ERISA. Since then, a growing list of companies and their executives have defeated stock-drop lawsuits, including Wells Fargo, Target Corp., Cliffs Natural Resources Inc., Reliance Trust Co., Lehman Brothers Holdings Inc., State Street Bank & Trust Co., Citigroup, Whole Foods Corp., JPMorgan Chase & Co., L-3 Communications, and BP Plc.

The RadioShack ruling comes one month after the Ninth and Sixth circuits issued similar rulings in cases against Hewlett-Packard Co. and Eaton Corp.'s executives, respectively.

In their lawsuit, the workers alleged that company executives, who served as plan fiduciaries, should have taken certain actions to protect their retirement assets after the RadioShack stock fund dropped from $39.6 million in 2012 to $7.63 million in 2014. They based their allegations on publicly available information, including news articles and analyst reports.

RadioShack plan fiduciaries didn’t breach their duty of prudence by relying on market price as a fair indicator of the value of the company stock, a three-judge panel held. The lawsuit failed to include any reason that the negative commentary from news articles and reports wasn’t incorporated into the company stock price, the judges said.

The workers also failed to show that special circumstances made the fiduciaries’ reliance on the market price imprudent, the judges said.

The judges also rejected the workers claim of fiduciary breach based on insider information. The workers were unable to show that a prudent fiduciary would have taken some alternative action to protect plan assets that wouldn’t do more harm than good. Each of the workers’ proposed alternative actions—including freezing plan contributions to the fund, disclosing inside information to the market to deflate stock price, or liquidated the company stock fund—would have done more harm than good, the judges said.

Chief Judge Carl E. Stewart and Judges E. Grady Jolly and Priscilla Richman Owen joined the per curiam opinion.

Kessler Topaz Meltzer & Check LLP and Lackey Hershman LLP represent the workers. Morgan Lewis & Bockius LLP represents RadioShack and the executives.

The case is Singh v. RadioShack Corp. , 2018 BL 40265, 5th Cir., No. 16-11587, affirming district court decision 2/6/18 .

To contact the reporter on this story: Carmen Castro-Pagan in Washington at ccastro-pagan@bloomberglaw.com

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

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