SNSFE Investigates Claims That Brokerage Firm Employees In 401(k) Plans And Other Qualified Plans Were Not Advised Of The Risk Of Owning Company Stock In Light Of Subprime And CDO Exposure

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, Merrill Lynch and Morgan Stanley.

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 ERISA.

The suits cover the firms' 401(k) plans, other savings plans and employee stock option programs.  The claims don't involve deferred-compensation plans for brokers.  Deferred-pay plans for producers also hold substantial amounts of stock. 

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. 

Plan fiduciaries have a number of avenues to reduce risk to participants, such as encouraging diversification and withdrawing or limiting company stock as an investment option.  Officials and board members of 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.

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.  However, the plaintiff's attorney states, "Our argument would be [that 404(c)] only applies when participants are given full disclosure."

SNSFE continues to investigate claims regarding 401(k) and other savings plans.

Source:  InvestmentNews