ERISA Breach Case Hinges on SunEdison Company Stock

Alexander Y. Usenko, a former SunEdison employee and participant in the company’s defined contribution (DC) plan, has brought suit against SunEdison for losses incurred by investing his retirement plan assets in SunEdison stock.

Usenko has named as defendants SunEdison Inc., its board of directors, the company’s investment committee, State Street Bank & Trust Co., and SunEdison’s chief executive (Ahmad R. Chatila) and senior executives and members of the operating committee: Emmanuel T. Hernandez, Antonio R. Alvarez, Peter Blackmore, Clayton C. Daley, Jr., Georganne C. Proctor, Steven V. Tesoriere, James B. Williams, Randy H. Zwirn, Matthew Herzberg). One defendant is identified only as John Doe.

The notion of company stock as a potential liability in a retirement plan is cropping up more frequently, with plan sponsors backing off company-issued stock as a plan investment. Some say it can still be offered, as long as there is a prudent, documentable process in place.  

According to the complaint, the defendants permitted the plan to continue offering SunEdison stock as an investment option to retirement plan participants, even after they knew or should have known that during the time frame (August 6, 2015 to the present) the stock had a number of troubling issues. It was artificially inflated; SunEdison—which bills itself as the world’s largest global renewable energy development company—was in extremely poor financial condition; and SunEdison faced equally poor long-term prospects.

These factors made SunEdison stock an imprudent retirement investment for the plan, the complaint says. As fiduciaries of the plan, the defendants were empowered to remove SunEdison stock from the plan’s investment options but didn’t. Neither did they act in any way to protect the interests of the plan or its participants, in violation of their legal obligations under the Employee Retirement Income Security Act (ERISA).

The complaint says that the value of SunEdison shares in Usenko’s account diminished as a result of the defendants’ breaches of duty. According to the complaint, Usenko is no different than the thousands of other SunEdison employees who entrusted their retirement savings to the defendants/fiduciaries of the plan.

According to the complaint, the inclusion of the stock amounts to a breach of the “prudent man” standard under ERISA. The defendants breached the duties they owed to the plan, to Usenko, and to the proposed class members who are also participants by, among other things, retaining SunEdison common stock as an investment option in the plan. A reasonable fiduciary using the “care, skill, prudence, and diligence that a prudent man acting in a like capacity and familiar with such matters would use,” as required by ERISA, would have done otherwise.

Usenko is seeking a jury trial; the complaint states that once discovery begins, it’s likely that additional people or entities engaged in wrongdoing will be revealed, and that more instances of wrongdoing will be uncovered. In that case, Usenko will seek to amend the complaint, adding new parties or new claims (or both).

The complaint cites the Supreme Court’s decision regarding Fifth Third Bancorp v. Dudenhoeffer as a precedent, in which plan participants challenged the plan fiduciaries for failing to remove company stock as a plan investment option. The plan’s fiduciaries were found to have violated ERISA when they continued offering an imprudent plan investment option—and the U.S. District Court considers this case similar to Fifth Third.

The gist of the allegations of breach of the duty of prudence and breach of the duty of loyalty is that the defendants allowed the company stock to continue as a plan investment during the period specified in the complaint—despite knowing that the investment was imprudent as a retirement vehicle. The complaint says defendants certainly should have known it was unsuitable by the beginning of that specified period.

According to the complaint, SunEdison stock was artificially inflated during the period specified in the suit, while the plan was making purchases. Second, the company materially misrepresented the strength of its financial condition and prospects, thereby inflating the stock’s value. As a result, SunEdison stock, and subsequently the plan’s assets invested in it, lost substantial value once the truth emerged.

This claim—that a company’s stock is imprudent based on the stock price being artificially inflated, and that the fiduciaries should have understood the overvaluation because of nonpublic information of which they were aware—is squarely endorsed by Fifth Third.

Second, the lawsuit claims the company was also an imprudent choice during the specified period in light of circumstances demonstrating SunEdison’s perilous financial condition, which included a sea-change in the basic risk profile and business prospects of SunEdison.

The suit suggests several factors—SunEdison’s overwhelming and unserviceable debt and high debt management risk, and the defendants’ failure to properly investigate the continued prudence of SunEdison Stock and/or employ a reasoned decision-making process in evaluating company stock—all represent the kind of “special circumstances” that the Supreme Court recognized in Fifth Third.

The case was filed in U.S. District Court for the Eastern District of Missouri. The text of the complaint is here.