An employee whose pension fund plummeted when his employer went bankrupt sued for violations of the Employee Retirement Security Income Act (ERISA).

What happened. “Roy” worked for Dallas, Texas-based Idearc, a directory publisher spun off from Verizon Communications in November 2006, where he invested in an Eligible Individual Account Plan (EIAP) governed by ERISA. The plan offered several investment options, including a company stock fund invested principally in Idearc stock. The plan document stated that “the selection and timing of … investment choices are solely [the employee’s] responsibility and investment returns are not guaranteed by the company.”

Under the terms of Verizon’s spin-off arrangement, Idearc was barred from restructuring debt or entering into a merger for 2 years. In October 2008, the company announced growth in bad debt, causing stock prices to fall 36 percent. The following month, the company withdrew Idearc stock from the EIAP, and in March 2009, Idearc filed for bankruptcy, rendering company stock worthless.

Roy filed a class action lawsuit claiming Idearc breached its fiduciary duty under ERISA by allowing employees “to buy and hold Idearc stock when it was no longer prudent to do so,” and by withholding or misrepresenting material information about the fund.

Roy claimed that plan administrators knew as early as August 2007 that they faced a liquidity crisis, but overstated the company’s revenues and assets by generating false invoices, altering the books, and instructing employees to move $3 million of doubtful accounts to accounts receivable. Roy’s case was dismissed, and he appealed.

What the court said. The 5th Circuit Court of Appeals, which covers Louisiana, Mississippi, and Texas, affirmed the district court’s dismissal, finding that the evidence did not imply disloyalty or imprudence by plan administrators. The court found that “the facts, if proven, would not show that the Idearc defendants were aware Idearc’s stock was in danger of becoming essentially worthless or Idearc’s viability as a company was threatened” before the stock was withdrawn from the plan.

“Merely because fiduciaries were aware an employer was engaged in unscrupulous conduct or facing financial difficulties does not … prove the fiduciaries were aware the employer was in a dire situation,” the court found. The court also ruled that Roy’s claim relied on “non-public information provided by confidential witnesses,” and “[n]o general duty to disclose non-public information exists under ERISA.” Kopp v. Klein, et al., 5th Cir., No. 12-10416 (7/9/2013).

Point to remember. The court noted that requiring administrators to act on inside information might run afoul of corporate disclosure and securities laws.