Gibson Dunn, Morgan Lewis Win Dismissal of CSC ERISA Stock Drop Case
By Susan Beck
July 15, 2009
With all that's happened in the financial world lately, stock option backdating allegations may seem like a distant memory. But they're still driving litigation. Earlier this week, a ERISA suit against Computer Sciences Corporation was dismissed on summary judgment by Los Angeles federal district court judge James Otero. The decision can be found here. The plaintiffs had alleged that the company and its retirement plan committee had breached their fiduciary duties to participants of its 401(k) plan by continuing to to invest retirement plan assets in the company's stock, in the face of stock option backdating allegations.In 2006 the company announced that the SEC was investigating it for possible backdating, and the company's stock dropped 12 percent. The plan fiduciaries should have then realized the company lacked proper internal controls, and stopped investing in CSC stock, the plaintiffs claim. (The company later modified some stock option grants, but the SEC closed its investigation of CSC without taking any action.)
The court found that the plaintiffs had presented no evidence that the defendants had violated their fiduciary duties by failing to meet the "prudent man" standard. "Not only is a decline in stock price insufficient to make continued investment imprudent," the court wrote. "But holding fiduciaries liable for continuing to invest in declining stock would place them in an 'untenable position,' as they could also be liable if they ceased investment in the declining stock and it later rebounded. " Judge Otero also found no evidence that CSC stock underperformed compared to comparable investments over the class period, which ran from December 1998 to January 2008.
Defendants were represented by Dean Kitchens and Paul Blankenstein at Gibson, Dunn & Crutcher, and Charles Jackson, D. Ward Kallstrom, Nicole Diller, Deborah Davidson, and Thomas Hurka at Morgan, Lewis & Bockius. According to Blankenstein, "This decision imposes on the plaintiffs an obligation to show they sustained a loss from the activities they complain about."
Edwin Mills of Stull, Stully & Brody, who represented the plaintiffs, said they plan to appeal, and believe they have a strong case for reversal. He points out that the Ninth Circuit Court of Appeal in 2008 reversed a similar summary judgment ruling for defendants in the Syncor ERISA litigation, another stock drop case. "We disagree with the decision in many respects and think the court erred by presuming that the fiduciaries acted prudently," said Mills.
