Calculating damages in 401(k) litigation over company stock.

In this article, we will identify the important legal and factual damages issues encountered in typical company stock drop cases. We review background legal precedent for determining and measuring loss in Employee Retirement Income Security Act (ERISA) breach of fiduciary duly cases where the basis of liability is alleged, as in company stock drop cases, to be imprudence in investing plan assets. This relatively well-established case law, while applicable to company stock drop cases, provides an incomplete framework for assessing compensable loss in these cases. We will identify and discuss some additional and unique damages questions confronting the parties and the courts in company stock drop cases. Our assessment leads to the conclusion that, in many if not most stock drop cases, the ultimate measure of damages will not be appreciably different than if liability was alleged to be based on a violation of federal securities laws rather than ERISA.

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The prosecution of class action lawsuits seeking recovery under ERISA (1) for retirement savings plan losses on investments in employer stock is now commonplace. An experienced and well-funded plaintiffs' bar has emerged to investigate and commence such litigation promptly when adverse corporate events lead to a decline in the market price of the employer stock. Plaintiffs generally allege that the events were or should have been known to be foreseen by senior management holding positions as plan fiduciaries; that the defendants acted imprudently by allowing the plan and its participants to continue to hold, and to increase, their positions in company stock; and that the defendants acted disloyally in failing to inform plan participants of the adverse information sooner. Often, the same stock drop also generates a securities class action where the plan and its participants may be class members with issues and damage theories that overlap the tandem ERISA case.

Although there are cogent arguments as to why such claims should not be permitted as a matter of law, (2) for the most part efforts by defense counsel to obtain early dismissal of these lawsuits have been unsuccessful. (3) More and more cases are being certified as class actions and are proceeding to in-depth discovery and trial preparation or are settling. Attention in the defense of these cases is therefore turning, quite naturally, to careful evaluation of causation and damages theories.

DAMAGES AND CAUSATION IN ERISA CLAIMS BASED ON IMPRUDENT INVESTMENT

ERISA's basic remedial provision is ERISA Section 409(a), providing as follows:

    [a]ny person who is a  fiduciary with respect to a plan who    breaches any of the  responsibilities, obligations[,] or duties    imposed upon fiduciaries  by this subchapter shall be personally  

      
   liable to make good to such plan any losses to the plan resulting