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A federal judge in Philadelphia has approved a creative settlement of a class action ERISA suit brought by employees of IKON Office Solutions Inc. that calls for a rewriting of the company’s 401(k) plan to allow the workers to diversify their investment of the company’s matching funds instead of forcing them to buy only IKON stock. The settlement also lifts a restriction in the plan that called for workers to hold all of their IKON stock until at least the age of 55. Senior U.S. District Judge Marvin Katz said he reviewed the settlement “with an especially critical eye” because it does not include any cash payment to the plaintiffs, but allows their lawyers to seek up to $6.5 million in fees. But in the end, Katz found there was real value in the freedom to diversify, and that, over the years, it is likely to be worth “tens of millions” to the class. He also found there were good reasons for the workers to pursue such a rewriting of the 401(k) plan in lieu of a huge cash payment. “This settlement is indeed fair, adequate and reasonable, despite the fact that it does not include any monetary payment,” Katz wrote in his 32-page opinion in In Re: IKON Office Solutions Inc. Securities Litigation. Katz was assigned under the multidistrict litigation program to handle all of the lawsuits that stemmed from IKON’s 1998 restatement of its earnings and the subsequent plunge of its stock price from $30 to a low of $2. Along the way, the case has generated more than its share of headlines. In November 1999, Katz approved a $111 million settlement of a shareholders’ suit and a $5 million settlement of a derivative suit. At the time, it was the largest settlement of a shareholders’ suit in the Eastern District of Pennsylvania. Katz later awarded the plaintiffs’ lawyers on those cases more than $32 million in fees, saying he rejected the recent trend among judges to slash fees in big cases and that it made perfect sense to pay the lawyers a full 30 percent. But the winning streak for the plaintiffs ended when the accountants got off the hook. In February 2001, Katz dismissed all claims by IKON shareholders against Ernst & Young that accused the accountants of failing to detect the company’s inflation of its stock price. The 3rd U.S. Circuit Court of Appeals later upheld Katz’s ruling that the plaintiffs could never prove that E&Y’s conduct was the cause of their losses or that E&Y acted with the requisite “scienter” necessary to establish securities fraud. The last remaining piece of the MDL case was a class action ERISA suit brought by former and current IKON employees who claimed the company breached its fiduciary duty to them in several ways. The suit complained that IKON acted imprudently by requiring employer contributions to be invested in company stock until the employee reached age 55, and by failing to disclose the risks of not diversifying. Katz had conditionally certified the case as a class action and was sitting on a defense motion for summary judgment when the lawyers told him they were actively negotiating a settlement. Now Katz has approved a settlement that calls for “structural changes” to IKON’s pension plan. The keystone of the settlement is the lifting of two restrictions that called for all employer-match funds to be invested exclusively in IKON stock and to be held until the worker was at least 55 years old. Under the new plan, IKON will lift the age restriction, and will permit workers with at least two years of service to direct their employer match contributions to any of the plan’s investment options. To protect against any stock price decline that a sudden, massive disinvestment by plan participants might cause, the redirection of employer contributions already made is subject to a vesting schedule and to temporary limitations on diversification that the retirement plans committee concludes are “reasonably necessary.” Another component of the settlement is designed to cure alleged conflicts of interests. It calls for two independent advisors to be appointed to the retirement plans committee. The workers complained in the suit that communications from the company encouraged them to imprudently invest in IKON stock rather than diversify. Now an adviser will review all educational materials related to diversification and make recommendations if the materials insufficiently communicate the merits of diversification. The second adviser will report periodically on the performance of the investment options offered. Katz said he was skeptical about whether a settlement with no cash for the plaintiffs could truly be considered fair. But in a hearing, Katz heard from expert witnesses who said the structural changes to IKON’s pension plans will have real value for the participants. Finance professor Krishna Ramaswamy of the Wharton School at first estimated that “unlocking” the plan would result in more than $100 million in direct benefits to the class. Ramaswamy later lowered his estimate after IKON’s own stock rebounded considerably, from its low of $2 per share to nearly $9 in recent weeks. But Ramaswamy’s overall conclusion was the same — that the return to risk ratio was higher when the constraint was lifted than when the constraint was in effect. Katz found that Ramaswamy’s opinion was backed up. “Recent scholarly articles filed as exhibits strongly support the theory that employee retirement savings are quantifiably more valuable when diversified than when they are concentrated in an employer’s stock,” Katz wrote. The articles discussed the current trend of investing retirement savings heavily in company stock through plans established by the company, as well as the common practice of locking up employer match funds in company stock. Katz said the commentators also noted the inclination of passive and unsophisticated employee investors to invest their own contributions in company stock as well; and the risks for employees of such poorly diversified investments. One article, Katz said, “suggests that due to the increased risk associated with overinvestment in a single stock, employees effectively sacrifice an average of 42 percent of the market value of the firm’s stock by failing to diversify.” Katz found that Ramaswamy’s valuation of the settlement was “reliable and supported by the scholarly literature.” Nonetheless, Katz said, “it is certainly a striking feature of this settlement that it lacks a cash award.” The absence of any cash component, Katz said, has been “recognized as a prime indicator of suspect settlements.” But after applying the so-called Girsh factors to assess the settlement’s fairness — named after the 3rd Circuit’s 1975 decision in Girsh v. Jepson — Katz found that the settlement is not only fair, but that the decision to forego cash was a wise one for the class. Katz found there were numerous reasons that “a non-cash settlement is more appropriate in this case than it may be in others.” The settlement was reached, he noted, at a time when the plaintiffs had not yet survived a defense motion that challenged their right to any monetary relief, either under ERISA or on a classwide basis. “The threat of a legal bar to any recovery of monetary relief is obviously a legitimate consideration of counsel when assessing the appropriateness of a non-cash settlement,” Katz wrote. And since nearly all of the ERISA class plaintiffs were also members of the class that obtained the $111 million settlement, Katz found there was a potential problem relating to whether the ERISA plaintiffs had released their claims in the prior settlement. Finally, Katz found the workers had no interest in seeing the company take a hard hit. “It is not in the interest of class members to obtain a truly large cash settlement in the range of hundreds of millions of dollars that could affect the value of IKON stock or its financial health, as class members may have interests in continued employment with IKON and in protecting the value of their existing retirement savings, approximately 50 percent of which is currently invested in IKON stock,” Katz wrote. The plaintiffs were represented by attorneys E. Graham Robb of Weber Gallagher Simpson Stapleton Fires & Newby in Philadelphia; Gary A. Gotto and Ronald Kilgard of Dalton Gotto Samson & Kilgard in Phoenix; Robert Palmer of Hennigan, Bennett & Dorman in Los Angeles; and David K. Isom of Salt Lake City. IKON was represented by attorneys Eleanor Morris Illoway, John G. Harkins Jr. And Elizabeth M. Chachis of Harkins Cunningham in Philadelphia, along with Brian D. Roche of Sachnoff & Weaver in Chicago.

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