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Defense attorneys are hailing a series of recent court victories in suits filed on behalf of employees who lost money in their 401(k) and other retirement plans because of the declining price of their employers’ stock. The so-called stock-drop suits, filed under the Employee Retirement Income Security Act of 1974, or ERISA, were brought alongside hundreds of shareholder class actions following the demise of Enron Corp. In the past year, several rulings � coupled with an action by the U.S. Department of Labor � have put limits on the liability of directed trustees, who are hired by an employer to manage employee retirement plans. Plaintiffs allege that companies and trustees they hire to manage their retirement plans had a fiduciary duty to shift employee investments out of their stock after learning of an impending decline in the share price. So far, many of the cases have settled or survived defendants’ motions to dismiss their claims. But in the first trial among the ERISA stock-drop cases, a federal judge in June limited that liability by ruling that US Airways, which administered its employees’ 401(k) fund, did not have a fiduciary duty to change the company stock holdings of its employees, who had many investment options to choose from. Christopher Weals, a partner at Morgan, Lewis & Bockius who represents US Airways, says the rulings signal a potential shift in this law. “We see this as a . . . promising development for employers fighting these cases,” he says. “Some of the settlements have been very large, from $10 million to $100 million. It’s a breath of fresh air to look at the theories and say, ‘There’s not a lot there.’ “ Plaintiffs lawyers say that most of their cases have survived dismissal, but they admit that the recent rulings are changing how they litigate. “There is a trend toward limiting the liability of outside trustees,” says Edwin Mills, of counsel at Stull, Stull & Brody, who recently negotiated a $100 million proposed settlement fund with Time Warner Inc. in a stock-drop case. “I wouldn’t name a directed trustee [in a lawsuit] unless it’s an exceptional issue. Six months or a year ago, I would have said differently.” The latest wave of suits were filed in the midst of corporate wrongdoing scandals that followed Enron, whose employees suffered large financial losses in retirement plans that were tied to the company stock. “You have widespread corporate fraud or alleged mismanagement that’s the driving cause of the plan’s problems,” says Jeffrey Lewis, a shareholder at Lewis, Feinberg, Renaker & Jackson in Oakland. “Given the volume of litigation, lawyers are getting creative. People are coming up with new theories on the plaintiffs and defense side.” Many of the original suits were filed against the members of corporate committees who oversee employee retirement plans and the outside trustees hired to manage those investments, such as Merrill Lynch & Co. and State Street Corporation. Rulings have focused in large part on motions to dismiss, most of which have been denied as judges point to certain circumstances in which plaintiffs lawyers might be able to prove that a breach of fiduciary duty occurred. But in the past year, judges have made new rulings as more facts in the cases come to light. The recent rulings come on the heels of a field assistance bulletin issued by the U.S. Department of Labor in December 2004 that limited the fiduciary duty of directed trustees. In the bulletin, the Labor Department said a directed trustee, who typically takes orders from an employer, has an obligation to question the prudence of holding a company’s stock only if the trustee possessed information that had not been made public. “Following that, the case law began to turn,” says Lewis. “There were three decisions after that that endorsed or went further than the Department of Labor.” Many ERISA stock-drop cases now target only the 401(k) committee or the corporation, says Mills: “It’s a tough go, but it’s doable.” A version of this article originally appeared in The National Law Journal, a sibling publication of Corporate Counsel.

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