Employee plaintiffs are lining up to sue the major brokerage firms over losses in company stock.
A number of proposed class actions have been filed against Citigroup Inc., Merrill Lynch & Co. Inc. and Morgan Stanley, all of New York.
According to the lawsuits, the companies made inadequate disclosures about their subprime and collateralized-debt-obligation exposure. The suits allege that by including company stock in 401(k) and other savings plans, and encouraging employees to buy shares, the firms violated their fiduciary duties to participants under the Employee Retirement Income Security Act.
The suits cover the firms' 401(k) plans, other savings plans and employee stock option programs.
The first of a rash of claims hit the courts in November, and more were filed last month. Citigroup and Merrill Lynch each face at least eight separate suits, and Morgan Stanley is now defending three claims.
The cases were filed in the U.S. District Court for the Southern District of New York.
The claims don't involve deferred-compensation plans for brokers, said Robert Harwood, a partner at Harwood Feffer LLP, a New York law firm, who has cases pending against Citigroup and Merrill Lynch.
Deferred-pay plans for producers also hold substantial amounts of stock.
The ERISA suits claim that plan participants have paid a heavy price.
Citigroup's plans held $4.1 billion in company stock at the end of 2006 and have lost more than $1.3 billion in value since January 2007, according to one suit. Morgan Stanley's employee stock ownership plan had nearly $3 billion in company stock as of December 2006, and Merrill's retirement plans held a total of $4.7 billion, several of the suits say.
Motions to consolidate the cases are pending in the suits against Citigroup and Merrill Lynch.
Citigroup spokeswoman Shannon Bell, Merrill Lynch spokesman Mark Herr and Morgan Stanley spokesman Jim Wiggins all said that the cases have no merit and that the firms will defend themselves "vigorously."
'WRITING ON THE WALL'
The suits — all fairly similar — run down a long list of alleged violations by the firms and plan administrators.
They claim that executives and board members who oversaw the retirement plans knew that the companies were in trouble from CDO and subprime losses but failed to make adequate disclosures to plan participants.
CDOs and subprime mortgages have caused multibillion-dollar write-offs at the companies, and a collapse in their stock prices.
"We think [company management] saw the writing on the wall much earlier than they have claimed," said Michael Jaffe, a partner at Wolf Haldenstein Adler Freeman & Herz LLP in New York. He is a plaintiff's attorney who is suing Morgan Stanley.
In theory, non-management plan fiduciaries should provide some degree of independence, but they are in fact appointed and controlled by company management, Mr. Harwood said. That makes the plan administrators reluctant to raise alarms to employees about investing in the company.
Nevertheless, plan fiduciaries have a "number of avenues" to reduce risk to participants, Mr. Harwood added, such as encouraging diversification and withdrawing or limiting company stock as an investment option.
Officials and board members at the companies didn't want to suspend employee purchases of stock, according to the lawsuits, because their compensation relied on maintaining a high stock price.
POSSIBLE DEFENSE
One of the cases against Citigroup acknowledges that Section 404(c) of ERISA, which eliminates liability for poor performance if participants have adequate investment choices, could be a defense.
But "our argument would be [that 404(c)] only applies when participants are given full disclosure," Mr. Jaffe said.
The claim against Citigroup cites ERISA and makes a similar argument in saying that 404(c) applies only when participants have "sufficient information to make informed choices."
In other instances, money in ESOPs and other plans can't be diversified out of company stock, the suits claim.
In several past ERISA cases involving the airline industry, courts have held that plan fiduciaries don't have to dump employer stock based simply on a falling price or weakness in the industry and that fiduciaries can't be held liable if employees have the tools to build a proper portfolio.
SIGNIFICANT SUMS
Nevertheless, plaintiff's attorneys said, some ERISA claims filed against firms in other industries have been settled for significant sums.
Money recovered in settlements is returned to the plans, Mr. Jaffe said. In addition, as part of a settlement, a savings plan can be restructured to eliminate or reduce concentration in company stock, can be ordered to provide more information to participants and can be overseen by independent fiduciaries.
Plaintiff's attorneys also said that in some settlements, plan participants have been given access to independent advisers who can provide diversification advice.
Dan Jamieson can be reached at [email protected].
