Compliance December 9, 2009

Yellow Pages Publisher Faces Stock-Drop Suit

R.H. Donnelley Corp., publisher of the Yellow Pages, is facing a lawsuit brought by 401(k) plan participants who claim the company should have discontinued offering company stock as a plan investment choice.

Reported by

The suit alleges plan fiduciaries violated their duties under the Employee Retirement Income Security Act (ERISA) by continuing to offer the stock and maintaining the plan’s heavy investment in stock when it was no longer prudent to do so. Defendants are also accused of failing to avoid certain conflicts of interest that inhibited their ability to act in the best interest of participants, and of failing to monitor persons to whom management and administration of the plan was delegated.

The complaint filed in the U.S. District Court for the Northern District of Illinois proposed to represent a class of plaintiffs who were participants in or beneficiaries of the plan from July 26, 2007, to the present. During this time, Donnelley’s main source of revenue, print advertising, dropped off, and this, combined with the company’s long-term debt, caused R.H. Donnelley to be a “seriously troubled company,” the complaint said.

The company’s stock fell from a value of nearly $70 per share to less than a penny per share.

The suit said defendants allowed the plan to stay heavily invested in company stock even though they knew or should have known that:

  • the company was not adequately reserving for its bad debts in violation of generally accepted accounting principles, causing its financial results to be materially misstated;
  • the downward pressure the company was experiencing with its advertising revenue was not a cyclical change, but was due to a permanent shift in customers moving away from print yellow pages advertising;
  • the company had far greater liquidity concerns and ratings downgrades than it had previously disclosed;
  • given the turmoil in the economy and the shift away from print advertising, the company had no reasonable basis for its projections about its 2008 results;
  • the company’s stock price was artificially inflated as a result of its undisclosed problems; and
  • the plan’s heavy investment in company stock would result in investment losses to the plans and to participants.

The suit seeks restoration of losses to the plan.

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