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Fiduciaries of the Seventy Seven Energy Inc. 401(k) plan face accusations that they violated ERISA by allowing plan assets to be invested in the “extremely volatile” stock of Chesapeake Energy Corp. ( Myers v. Fiduciary Comm. for Seventy Seven Energy, Inc. , W.D. Okla., No. 5:17-cv-00200, complaint filed 2/24/17 ).
The plan fiduciaries invested $87 million—more than 44 percent of the plan’s assets—in Chesapeake stock after Seventy Seven Energy was spun off from Chesapeake in 2014, a lawsuit filed Feb. 24 in federal court in Oklahoma alleged. When Chesapeake stock declined more than 70 percent, from $29 per share to $7 per share, the plan lost tens of millions of dollars in assets, the lawsuit said. The fiduciaries failed to diversify, exposing participants to a higher risk of loss, and even allowed the plan to buy millions of dollars of additional Chesapeake stock after its value started to decline, in violation of the Employee Retirement Income Security Act, the complaint said.
Seventy Seven Energy is the latest energy company involved in a lawsuit challenging company stock drops under ERISA. Last year, Exxon Mobil Corp. was sued for allegedly causing millions of dollars in losses to its retirement plan when it failed to disclose certain information that allowed its stock to be artificially inflated.
The lawsuit against Seventy Seven Energy’s fiduciaries faces some challenges of its own. In 2016, similar lawsuits against other energy companies, including BP Plc and Edison International Inc., were dismissed. Since the 2014 U.S. Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer that changed the pleading standard for these lawsuits, courts have rejected lawsuits against Lehman Bros., JPMorgan Chase & Co. and International Business Machines Corp.
Kathleen J. Myers, who filed the lawsuit on behalf of the plan and other similarly situated participants, seeks class treatment for 5,000 individuals whose plan accounts include investments in Chesapeake.
The lawsuit is quite different from other stock drop challenges insofar as it aims not at Seventy Seven Energy stock, but at the stock of its previous parent company—Chesapeake. After the 2014 spinoff, Seventy Seven became an independent, publicly traded company and established a separate retirement plan for its employees.
The plan included an employee stock ownership plan component, which only allowed “employer securities.” The fiduciaries allowed Chesapeake stock in the ESOP component, an action that was prohibited under ERISA, according to the lawsuit. They also failed to tell participants that ESOP was primarily, and heavily, invested in Chesapeake stock, the complaint said.
Between July 2014 and December 2014, the plan’s interest in Chesapeake stock dropped in value by $23.7 million, and yet it remained by far the plan’s largest investment, the complaint said.
Seventy Seven Energy didn’t immediately respond to Bloomberg BNA’s request for comment.
Latham Wagner Steele & Lehman, Izard Kindall & Raabe LLP and Bailey & Glasser LLP represent the proposed class.
To contact the reporter on this story: Carmen Castro-Pagan in Washington at firstname.lastname@example.org
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Text of the complaint is at http://www.bloomberglaw.com/public/document/Myers_v_The_401K_Fiduciary_Committee_for_Seventy_Seven_Energy_INC.
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