Compliance

Lawsuit Claims Chesapeake Energy Stock Was Imprudent 401(k) Investment

Among other things, the plaintiff alleges the plan committee ignored the numerous warning signs that Chesapeake was an imprudent investment for retirement assets, and allowed the plan to invest more than 44% of its assets in this one stock.

By Rebecca Moore editors@assetinternational.com | March 15, 2017

A participant in the Seventy Seven Energy Inc. Retirement & Savings Plan has filed a lawsuit on behalf of the plan and a class of similarly situated participants in the plan against the 401(k) Fiduciary Committee, other plan fiduciaries, as well as Delaware Charter Guarantee & Trust Company d/b/a Principal Trust Company.

The lawsuit alleges that Committee Defendants and Principal Trust wrongfully and imprudently invested the plan’s assets in Chesapeake Energy Corporation stock in the plan’s employee stock ownership plan (ESOP) component. The complaint says, under the Employee Retirement Income Security Act (ERISA), ESOPs must invest in employer securities, and Chesapeake stock was not an employer security. The complaint says defendants should not have allowed the plan to make the investment.

The lawsuit also alleges the plan’s investment in Chesapeake stock violated ERISA’s prudence requirement “and was reckless under any common-sense investment strategy.” It noted that Chesapeake is in the oil and gas industry, a very volatile, high-risk sector of the economy subject to frequent boom-and-bust cycles. The plaintiff alleges the Committee Defendants ignored the numerous warning signs that existed before the class period showing that Chesapeake was an imprudent investment for retirement assets, and instead allowed the plan to invest more than 44% of its assets in this one stock. The complaint also says Committee Defendants did not take any action as the price of Chesapeake stock declined more than 70%, from $29 per share to $7 per share during the class period, causing the plan to lose tens of millions of dollars in assets that should have been used for participants’ retirement.

According to the complaint, the Committee Defendants violated their duty under ERISA to diversify the plan’s investments. Despite recognizing that investing in a single company’s securities was “not diversified and exposes investors to a higher risk of loss,” the Committee Defendants allowed the plan to have a high percentage of its assets concentrated in Chesapeake stock and let the plan buy millions of dollars of additional shares of Chesapeake during the class period.

In addition, the complaint says, the Committee Defendants violated their duty under ERISA to accurately convey the plan’s terms to participants. The Committee Defendants told participants the ESOP’s purpose was to invest in the stock of Seventy Seven Energy, Inc., rather than truthfully telling them that the ESOP was primarily, and heavily, invested in Chesapeake stock throughout the class period.

Among other things, the lawsuit seeks an order compelling the Committee Defendants and Principal Trust to make good to the plan all losses resulting from their breaches of their fiduciary duties, including loss of vested benefits to the plan resulting from imprudent investment of the plan’s assets; to restore to the plan all profits defendants made through use of the plan’s assets; and to restore to the plan all profits which the plan and participants would have made if defendants had fulfilled their fiduciary obligations.

The complaint in Myers v. The 401(k) Fiduciary Committee for Seventy Seven Energy, Inc. is here.