4/7/2014 2:27:00 PM,
Philip A. Janquart
(CN) - A federal judge has thrown out claims that Hewlett-Packard Co. should have suspended employee investments after mismanagement destroyed stock prices.
The December 2012 class action claimed that fiduciaries had the power to stop spending employee retirement funds on a tanking company, but continued to do so to the detriment of tens of thousands of retirement plans.
With some 300,000 employees, HP has been mired with legal troubles, including a 2011 class action that said former CEO Leo Apotheker misled shareholders about corporate operations before he was fired. The company agreed last week to pay $57 million to settle the lawsuit.
HP is also facing securities fraud and derivative lawsuits filed on behalf of shareholders for the disastrous $10.3 billion acquisition of the British software company Autonomy Corp., which led to a nearly $9 billion write-down of HP's assets in 2012. HP claims it is the victim of fraud by former Autonomy management members, Bloomberg reoprted.
Mike Laffen is the lead plaintiff of the lawsuit U.S. District Judge Charles Breyer dismissed last week.
He had claimed that those entrusted with investing funds from the Employee Stock Ownership Plan (ESOP) should have suspended investment in HP in light of the company's troubles and the freefall of stock prices that ensued.
"The plan's fiduciaries were aware or should have been aware of internal and external warnings indicating HP had engaged in a series of strategic management blunders, wasting nearly $20 billion, which has destroyed HP's market position and credibility, and brought it to the verge of collapse, causing its stock price to fall approximately 76 percent," the complaint stated.
Breyer nevertheless concluded that HP had an obligation to continue to invest the funds, citing the Moench presumption of prudence. In Moench v. Robertson,
the 3rd Circuit addressed "to what extent" fiduciaries are liable for ESOPs under the Employee Retirement Income Security Act (ERISA).
"The court concluded that only 'in limited circumstances, ESOP fiduciaries can be liable under ERISA for continuing to invest in employer stock according to the plan's direction," Breyer wrote. "Thus, when an employee benefit plan requires or encourages investment in employer's stock, plan fiduciaries are entitle to a strong presumption that they satisfied ERISA's prudence mandate by permitting plan participants to invest in their employer's stock."
Laffen failed to duck the Moench presumption by saying because HP's ESOP does not "require or strongly encourage investment in the stock fund."
"The plan requires that the HP Stock Fund be an ESOP offered as an investment option for plan participants," he wrote. "The argument hinges on plaintiffs' reading of the plan as providing the IRC 'the power to terminate, hold purchases of, or transfer assets out of the stock fund."
Though HP's Investment Review Committee (IRC), which consist of top executives, does have that power, it does not apply to ESOPs, according to the ruling.
"The funds other than
the HP Stock fund are addressed in [the plan], which gives the IRC broad discretion to add, remove, or modify the investment funds available," he wrote. "Section 9(b), which applies to just the HP Stock Fund, provides no such discretion to the IRC and instead mandates that the 'stock fund shall be invested and reinvested primarily in [HP] stock.' Read together, these two sections unequivocally provide the IRC with broad discretion as to all investment funds offered under the plan, except for the HP Stock Fund."
Breyer dismissed the action without prejudice.