Misstatements not Made in ERISA Fiduciary Capacity

U.S. District Judge Paul Barbadoro rejected plaintiffs’ arguments that the defendants breached their fiduciary duties when they made misstatements in various Securities and Exchange Commission (SEC) filings and other public statements that were incorporated into a plan prospectus because defendants were not acting as ERISA fiduciaries when they made the alleged misstatements.  

In dismissing that claim, Barbadoro cited another court opinion which found the obligation to file those forms, and to distribute the prospectus to plan participants, arose not under ERISA, but under corporate securities laws. Therefore, the court held that when the defendant made the allegedly misleading statements, it was “discharging its corporate duties under the securities laws, and was not acting as an ERISA fiduciary.” The fact the filings were made available to plan participants does not transform them into fiduciary communications, Barbadoro wrote.  

However, Barbadoro refused to dismiss plaintiffs’ claims that the defendants failed to disclose material adverse information about the company and allowed class members to make what the defendants knew or should have known were imprudent investments in the fund. 

The court said the information that the defendants allegedly failed to disclose concerned a publicly traded stock owned by the plan rather than information concerning the terms of the plan itself. This distinction is potentially significant because disclosure obligations with respect to such investments ordinarily are established by the federal securities laws rather than by ERISA.  

As the 1^st U.S. Circuit Court of Appeals previously did in Lalonde v. Textron (see "Textron ESOP Claims Thrown Out"), Barbadoro declined to adopt the presumption of prudence many courts have adopted in company stock cases, saying even if the plan required the defendants to offer beneficiaries the opportunity to invest in Textron stock, the defendants would have been obligated to override those requirements if allowing such investment constituted a violation of ERISA's prudence requirements.   

According to the opinion, following troubles in all three of its divisions, Textron's debt and preferred stock were repeatedly downgraded by all three of the major credit rating agencies that judge the financial risk of potential investments. In addition, Textron's Altman ZScore, a commonly-accepted bankruptcy prediction model, gave the company a score using data from July 2009 that placed it in a "distress zone," indicating a high probability that the company would go bankrupt within two years. As a result of these disclosures, Textron's stock value dropped heavily, from a class-period high of $74.40 per share on December 10, 2007 to a class-period low of $3.57 per share on March 6, 2009.