Past Court Settlements
Note these past court settlements:
2003
Lucent Technologies, Inc. - $69,000,000
Providian Financial Corporation – $8,600,000
2004
Dynegy Inc. - $30,750,000
Global Crossing Ltd. - $79,000,000
Household International – $46,500,000
2005
Enron Corporation – $85,000,000
Royal Dutch Shell - $90,000,000
Williams Cos., Inc. - $55,000,000
WorldCom, Inc. - $48,000,000
2006
AOL Time Warner – $100,000,000
CMS Energy Corporation – $28,000,000
HealthSouth Corporation – $28,850,000
Mirant Corporation – $9,700,000
2007
Polaroid Corporation – $15,000,000
Southern Company – $15,000,000
2008
American International Group, Inc. – $24,200,000
General Motors – $37,500,000
Goodyear Tire & Rubber Company – $8,375,000
Syncor Int’l. Corporation – $4,000,000
2009
Countrywide Financial Corporation – $55 million
General Electric – $40 million
Marsh & McLennan Companies – $35 million
Merrill Lynch & Company, Inc. – $75,000,000
State Street Bank & Trust Company – $89,750,000
Tyco International Ltd. – $70,500,000.00
Xerox Corporation – $51,000,000
2010
Employee Retirement Income Security Act litigation continues to be a growth area in the employment arena, with the continued fallout from the economic recession, the emergence of a new generation of retirees and the eagerness of the plaintiffs bar combining to generate an increase in federal ERISA filings. A survey analysis of federal court cases revealed that 2,327 cases were filed in U.S. district courts during the first quarter of 2010.
GM Settles Class-Action 401(k) Suit
January 17, 2008
General Motors Corp. avoided further litigation when it agreed Tuesday, January 15, to settle for $37.5 million a class-action lawsuit filed by 401(k) plan participants who suffered huge losses after GM shares fell sharply. The suit was filed in 2005 after Detroit-based GM’s shares plunged 75 percent, causing GM employees and retirees to suffer substantial financial losses in their 401(k) plans. The agreement enforces changes that GM has already made to its 401(k) plans, which includes GM no longer matching employees’ salary deferrals with GM stock or requiring employees to invest some of their own 401(k) plan contributions in GM common stock.
Also as part of the agreement, retirees will be offered discounted financial counseling from Ayco, a subsidiary of Goldman Sachs, for which employees will pay $30 for a year of advising services. This type of service usually costs employees around $200. GM has agreed to pick up the balance for those employees who elect to participate in this program.
U.S. District Judge Nancy G. Edmunds will hold a hearing to grant preliminary approval of the settlement. That hearing date has not yet been scheduled. Several charges were filed against GM in the suit, including that it “breached fiduciary duties in violation of the Employee Retirement Income Security Act of 1974” and “failed to provide participants with complete and accurate information regarding stocks and the true risks of investing,” according to court documents.
GM’s poor financial state was disclosed in a 2003 filing with the Securities and Exchange Commission, which promptly launched an investigation into the automaker’s accounting practices. According to court documents, 260,000 employees and retirees were participants in plans that held assets of $21 billion as of 2003. The settlement covers anyone enrolled in GM’s 401(k) plans between March 1999 and May 2006.
Supreme Court Rules Employees Can Sue Over 401(k) Misconduct
By Carrie Johnson
Washington Post Staff Writer
Thursday, February 21, 2008
The Supreme Court handed workers a major victory yesterday by allowing them to sue over mismanagement of their 401(k) retirement accounts, in which more than 50 million employees have invested nearly $3 trillion. The unanimous holding reverses a lower court decision that had barred individuals from suing over losses related to mistakes and misconduct, and thus had insulated employers from lawsuits even as more U.S. workers came to rely on the savings accounts to help fund their retirements.
In the opinion, Justice John Paul Stevens recognized that the landscape of retirement investing had been reshaped since the high court’s prior ruling on related issues more than two decades ago. Since then, individual plans known as 401(k) accounts have mushroomed as employers moved away from defined-benefit plans, or pensions. As a result, Stevens wrote, courts should interpret employee benefits law as giving individuals the green light to sue over administrative problems with their accounts, rather than limiting cases to those that affected an employer’s “entire” retirement savings plan.
Yesterday’s decision will allow James LaRue to proceed with a case against his former employer, DeWolff, Boberg & Associates, over $150,000 in losses he claims he suffered after the Texas management consultancy failed to act on instructions to shift his retirement savings when the stock market hit turbulence more than six years ago.
In a telephone interview, LaRue, 47, criticized his former company for being “nonresponsive” when he asked to transfer his money from stocks into cash as the Internet bubble burst and the market plunged after the Sept. 11, 2001, terror attacks. LaRue, now a self-employed consultant to manufacturing and telecommunications companies, said his former colleagues at DeWolff Boberg were “hiding under the law.”
“There is a principle involved,” LaRue said. “Somebody stepped on my toe, and it’s wrong.” The Labor Department and the solicitor general, who argues the Bush administration’s position before the Supreme Court, threw their weight behind LaRue. Assistant Solicitor General Matthew D. Roberts argued in November that any recovery by the plaintiff would benefit the company’s retirement plan as a whole in keeping with the law, known as the Employee Retirement Income Security Act.
“Today’s decision supporting our position is a huge victory for workers and retirees,” said Labor Secretary Elaine L. Chao. Peter K. Stris, a professor at Whittier Law School in Los Angeles who represents LaRue, said the decision protected the savings of everyone with a 401(k). “If the lower court opinion had stood, it would have prevented the Department of Labor from pursuing claims when retirement funds had been stolen or mismanaged,” he said.
Business advocates predicted the ruling would unleash a raft of lawsuits by employees, particularly as stock market volatility once again is causing havoc with investment accounts. “Ultimately, employers aren’t going to sponsor plans if they’re going to be sued every time they make an innocent mistake,” said Thomas Gies, a Washington lawyer who defended the consulting firm, which denies any wrongdoing.
Gies added that DeWolff Boberg expected to be “vindicated on the merits” of the case when it returned to the lower courts. Employment law experts said the decision leaves unanswered important questions about other steps that workers must take before they enter the courthouse over retirement savings disputes. Chief Justice John G. Roberts Jr. agreed that reasoning by the U.S. Court of Appeals for the 4th Circuit was “flawed.” But in a concurring opinion, he and Justice Anthony M. Kennedy questioned whether LaRue and other employees could recoup their losses if they do not first follow set procedures, such as an appeal to the plan administrator.
In past cases, the Supreme Court gave administrators wide latitude to develop standards for eligibility and other terms, judgments that courts can review only for an abuse of discretion, Roberts wrote. Such a hurdle could be difficult for employees to surmount, said Karla Grossenbacher, an employment lawyer at Seyfarth Shaw in the District who has no connection to this case. Alden Bianchi, an employment lawyer at Mintz Levin in Boston, said business executives greeted the ruling with disappointment rather than surprise.
“What it will do is punish dumb mistakes,” Bianchi said, while more lawsuits could clarify the scope of the court’s decision. “When the Supreme Court takes on an ERISA question, inevitably the law of unintended consequences starts to work over time.”
The case is LaRue v. DeWolff, Boberg & Associates Inc.
Can An Employee Sue for Losses To His 401k Account?
March 2008
By Dodd S. Griffith
In LaRue v. DeWolff, Boberg & Associates, Inc., the U.S. Supreme Court held that an employee could sue his employer for investment losses which the employee claimed were caused by the employer’s failure to make requested changes to the investments in his 401(k) account. This decision serves as a wake-up call to many employers who sponsor 401(k) plans and comparable defined contribution plans (i.e. 403(b) and 457 plans, and as other retirement plans that give participants individual investment accounts), since employees can now recover losses from the employer that sponsors their 401(k) plan if they can prove that the losses were caused by the employer’s failure to promptly implement investment changes requested by the employee.
The 401(k) plan sponsored by DeWolff, Boberg & Associates, Inc. allowed plan participants to direct the investment of their 401(k) plan accounts. Mr. LaRue claimed that his employer breached its fiduciary duty to him by not making changes to the investments in his individual account after being directed by him to do so. He claimed that this omission caused his 401(k) account to lose approximately $150,000.
Until the LaRue case was decided, it had been thought that employers who sponsored 401(k) and other pension plans were immune from lawsuits brought by plan participants seeking individual damages for breach of fiduciary duty. This was because a prior U.S. Supreme Court case, Massachusetts Mutual Life Insurance Company v. Russell, 473 U.S. 134 (1985), held that individual plan participants were not permitted to recover damages if the plan sponsor breached its fiduciary duty. Damages for breach of fiduciary duty were recoverable only for the benefit of the plan as a whole, and could not be recovered by any individual plan participant.
The U.S. Supreme Court said that the decision in the earlier case was inapplicable because Russell dealt with a defined benefit plan, and not a defined contribution plan. In a traditional defined benefit pension plan, participants do not have individual investment accounts and the benefit paid under the plan is fixed in advance. Thus, the employee is not responsible for investment decisions, and need worry only about whether the plan as a whole is sufficiently solvent at retirement to pay the agreed benefit. In contrast, in a defined contribution plan such as a 401(k) plan, participants have individual investment accounts that can go up or down based on the employer’s and employee’s contributions to the account, and the performance of the investments held in the account. There is no fixed benefit. Thus, the employee must be concerned with how his individual investment account performs over time. Not surprisingly, the performance of an employee’s defined benefit plan account (i.e. 401(k) or similar account), can be significantly affected by whether the employer promptly implements changes requested by the employee. Thus, the Court concluded that a breach of fiduciary duty that affected only one participant’s account was significant in the context of a defined benefit plan such as a 401(k) plan.
The Court also noted the prevalence of 401(k) plans and similar defined contribution plans, and that such plans had largely replaced traditional defined benefit pension plans. The Court’s comments in this regard suggests that it now has a heightened concern that workers whose retirement savings are tied up in 401(k) and similar defined contribution plans be adequately protected. Thus, while the DeWolff case leaves many issues unclear, one thing that is clear is that the Supreme Court has evidenced an intent to protect employees who must depend on their 401(k) and similar defined contribution plans for their retirement income.
What Should Employers Do Now to Protect Themselves from Claims?
The threat of increased litigation by individual plan participants provides a wake-up call to employers to pay attention to the day-to-day operation and administration of their defined contribution plans. While the DeWolff case involved a 401(k) plan, there are a variety of other types of defined contribution plans that could be impacted by this decision, including 403(b) and 457 plans sponsored by non-profit employers, and other plans where employees are permitted to direct plan investments.
It is important to note that the Supreme Court did not determine whether the employer violated its fiduciary duty to Mr. LaRue by failing to make the investment changes requested by Mr. LaRue. The Court merely stated that the claimed failure on the part of the employer was sufficient grounds for a damage claim by Mr. LaRue. The case was sent back to the lower court to determine whether or not the employer had breached its duty to Mr. LaRue. The lower court will have to determine whether the 401(K) plan had adequate procedures for processing requests for investment changes submitted by plan participants; and whether the employer as plan administrator failed to comply with those procedures.
There are a few simple measures that an employer can take today in order to try to avoid a claim of the type brought in the LaRue case, and to best ensure the likelihood of success if sued. These include:
1. Conducting a self-audit of all defined-contribution retirement plans sponsored by the employer.
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Review the terms of your plans to make sure you understand what your plans require you to do.
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If the plan procedures are not being followed, or they don’t work, then you should take prompt corrective action, before there is a claim.
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Determine whether you are actually following the procedures required by your plans.
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Ensure that the people in your organization that are in charge of administering the plans are following the procedures; and that the procedures actually work in a reasonable fashion.
2. Thinking critically about the procedures currently in place.
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Keep an eye out for areas where you may need to amend procedures in order to minimize risk.
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Be vigilant about minimizing potential errors or misunderstandings. For example, procedures should clearly prohibit verbal requests to implement investment changes (i.e. requests made at the coffee machine, copier, water cooler, etc.).
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Protect the plan sponsor using appropriate documentation; and make sure your procedures include a mechanism to show they were followed. For example, you may require an employee’s written submission include his/her signature. Make clear that the submission has not been accepted until the authorized recipient has acknowledged receipt. In addition, documentation should appropriately and sufficiently tracks any changes made to a participant’s account.
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Review notice procedures to employees. Make sure uniform procedures are in place to notify participants of required disclosures, and other communications regarding their accounts.
3. Review contractual relationships with the vendors who administer your plans.
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Although many employers have only a limited role in the administration of their 401(k) plans, they are almost always plan fiduciaries. This means that they are likely to be responsible for claims by plan participants, even if they rely on third parties to administer the plans.
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Consequently, employers who use third party providers should review the agreements they have with those providers, paying specific attention to the extent of the employer’s own responsibility (and the responsibility of the third party provider) if the provider were negligent.
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Employers should also be familiar with any right they may have to indemnification from the third party provider, and any indemnification they are required to give to the third party provider.
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Likewise, employers should determine whether third party provider agreements cap or otherwise limit damages that can be recovered by the employer in the case of negligence or other breach on the part of the third party provider.
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By conducting a self-audit before a claim arises, and by promptly correcting any deficiencies, you should be able to avoid, or significantly diminish the impact of, any claims by plan participants. Moreover, you can provide a better benefit to your employees.
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