Compliance July 20, 2017

Sears Faces ERISA Suit Over Holding Company Stock in Retirement Plan

The complaint offers alternative actions Sears could have taken once it realized its stock was an imprudent retirement plan investment.

Reported by

Rebecca Moore

A participant in the Sears Holdings Savings Plan has filed a proposed Employee Retirement Income Security Act (ERISA) class action lawsuit alleging Sears continued to hold company stock in its retirement plan when it was no longer prudent to do so.

According to the complaint, Sears Holdings Corporation has not had a profitable year since 2011, and has not had a profitable quarter from business operations since 2010. Sears has a net loss attributable to shareholders of $10.196 billion since year-end 2010. The complaint contends Sears faces inevitable bankruptcy.

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“This case is about the Defendants’ abject failure, as Plan fiduciaries, to protect the interests of the Participants in violation of Defendants’ legal obligations under ERISA, including ignoring the excessive risk imposed on Participants by the rise in the debt-equity ratio of Sears, and other objective factors that imposed risks to the Fund by Defendants’ actions and inactions,” the lawsuit says.

It alleges that even if the plan purportedly required that Sears Stock be offered, the plan’s fiduciaries were obligated by law to disregard that directive once it became clear company stock was no longer a prudent investment for the plan.

“The thrust of the plaintiff’s allegations under Counts I (breach of ERISA’s duty of prudence) and II (breach of ERISA’s duty of loyalty) is that defendants allowed the investment of the plan’s assets in Sears Stock throughout the class period (July 14, 2014, to the present) even after they knew or should have known, through publicly available information, that Sears was in extremely poor financial condition and faced equally poor prospects indicating that it had experienced a sea-change in its risk profile and its prospects, making it an imprudent retirement plan investment vehicle.”

The complaint says defendants were empowered and obliged by ERISA to remove Sears Stock from the plan, yet they failed to do so, or to act in any way to protect the interests of the plan or its participants, until it was too late to make any material difference, in violation of ERISA. “Freezing purchases of the Fund at year end 2016 was too little, too late, to protect a great deal of Participants’ retirement savings,” the lawsuit says.

NEXT: What Sears should have done

The lawsuit says the Sears Stock price collapse of more than 80% during the Class Period, which devastated the plan’s assets, could have and would have been avoided in whole or in part by defendants complying with their ERISA fiduciary duties. Defendants could have taken certain actions based on the publicly known information alone such as, and not limited to: investigating whether Sears Stock was a prudent retirement investment; retaining outside advisers to consult them or to act as fiduciaries; seeking guidance from governmental agencies (such as the Department of Labor or Securities and Exchange Commission); resigning as fiduciaries of the plan; stopping or limiting additional purchases of Sears Stock by the plan; utilizing the fund’s unitization such that it was only primarily invested in Sears Stock; and/or by divesting the Sears Stock held by the plan.

To the extent the defendants wanted to take action based on non-publicly disclosed information that they were privy to, according to the complaint, the following alternative options were available to defendants “and (a) could have been done without violating securities laws or any other laws, (b) should have been done to fulfill Defendants’ fiduciary obligations under ERISA, and (c) would not have been more likely to harm the Plan than to help it.”

First, according to the lawsuit, defendants could have and should have directed that all company and participant contributions to the Company Stock fund be held in cash rather than be used to purchase Sears Stock. The refusal to purchase Company Stock for the Company Stock fund is not a “transaction” within the meaning of insider trading prohibitions, the complaint notes. This action would not have required any independent disclosures that could have had a materially adverse effect on Sears Stock’s price.

Alternatively, the complaint suggests defendants should have closed the fund itself to further contributions and directed that contributions be diverted from the fund into other (prudent) investment options based upon participants’ instructions or, if there were no such instructions, the plan’s default investment option. A further alternative available to defendants was to utilize the fund’s unitization so that participants were less exposed to Sears Stock.

“Because Defendants could and should have concluded that Sears Stock was an imprudent retirement savings vehicle based solely upon public information, no disclosure was required before conducting an orderly liquidation of the Plan’s holdings,” the lawsuit contends.

The suit asks Sears to make good to such plan any losses to the plan and for the court to impose “such other equitable or remedial relief as the court may deem appropriate.”