Reliance Escapes Lawsuit Over SandRidge’s 401(k) Stock Losses

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By Carmen Castro-Pagan

Reliance Trust Co. isn’t liable for the losses suffered by SandRidge Energy Inc. employees who invested their retirement savings in the natural gas company’s stock as it declined into bankruptcy, a federal court ruled ( Gernandt v. SandRidge Energy, Inc. , 2017 BL 263965, W.D. Okla., No. 5:15-cv-00834, 7/28/17 ).

SandRidge’s plan participants didn’t plead sufficient facts to meet the special circumstances required by a 2014 U.S. Supreme Court decision that altered the standard of pleadings for stock challenges under the Employee Retirement Income Security Act, Judge Timothy D. DeGiusti of the U.S. District Court for the Western District of Oklahoma held July 28.

Granting Reliance’s motion to dismiss, DeGiusti said that the U.S. Court of Appeals for the Tenth Circuit—which reviews decisions from Oklahoma district courts—hasn’t addressed what special circumstances a participant could allege that would render a fiduciary’s reliance on the market imprudent. Under ERISA, fiduciaries who exercise discretionary control of plan assets are responsible for ensuring that all available investment options are prudent. In reaching his conclusion, DeGiusti looked at rulings in similar cases in favor of Lehman Brothers Holdings Inc., State Street Bank & Trust Co., RadioShack, and Citigroup.

DeGiusti said that he was “mindful” his ruling “may appear harsh” at this early stage of litigation and without the benefit of discovery. However, in light of the absence of further guidance from the Supreme Court or the Tenth Circuit, he was “compelled” to follow the majority of cases, which have held that the type of circumstances discussed in this case, including publicly available information of the company’s gradual decline into bankruptcy, wouldn’t be deemed special circumstances, DeGiusti said.

Major companies, including Eaton Corp., Whole Foods Corp., JPMorgan Chase & Co., International Business Machines Corp., and BP Plc have defeated lawsuits by employees who claimed their 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.

In 2015, SandRidge employees sued the company, its directors, and Reliance, as the plan trustee, for allowing the plan to continue to offer SandRidge stock as an investment option despite allegedly knowing that the stock was artificially inflated and SandRidge was in extremely poor financial condition. In 2016, SandRidge filed for bankruptcy, and the employees’ lawsuit over their retirement savings was stayed. DeGiusti reopened the case so the participants could proceed against the non-debtor defendants, including Reliance.

Although DeGiusti dismissed the lawsuit against Reliance, he granted the participants leave to amend their allegations. This is interesting because DeGiusti rejected Reliance’s argument that as a directed trustee, it didn’t have discretion regarding the extent to which the plan invested in the company stock.

The fact that Reliance, as a directed trustee, may not have exercised discretionary authority or control over the administration and management of the plan doesn’t relieve it of a fiduciary obligation to the participants, DeGiusti held.

Mattingly & Roselius PLLC, Kessler Topaz Meltzer & Check LLP, Norman & Edem PLLC, Harwood Feffer LLP, Delluomo & Crow, and Stull Stull & Brody represent the participants. Bryan Cave and Ryan Whaley Coldiron Shandy PC represent Reliance.

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

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

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