[UPDATED 5.4.08: -- The first ERISA suit has been filed, employing my newly-revamped theory, a theory to avoid Judge Easterbrook's cogent musings, below -- cool! It was just filed against Merck, in relation to many of the subjects covered by this blog.]
A little while ago, I said I'd summarize the ERISA suits filed against Schering-Plough's Plan Fiduciaries, toward the end of this post. In the mean time, a very well-thought-of federal judge, on the Seventh Circuit -- Judge Frank Easterbrook -- has authored, and now published, an opinion that tends to cast doubt on of the viability of most ERISA suits of the kind now being brought against Schering.
Now, to be fair, what Judge Frank Easterbrook recently wrote (in PDF format) was, strictly speaking, obiter dicta (that is, not essential to his disposing of the case before him -- think of it more of an editorial comment, if you will), and yet, because he is so-well-regarded, it may be the way "the path of the law" will 
ultimately evolve. I'll get to that in a minute; first a summary of the Schering ERISA suits:
Some of Schering's Puerto Rico employees and some of its U.S. employees (as well as current Schering retirees living in each place) have sued (in addition to Schering itself) the so-called "Plan Fiduciaries" that oversee Schering's retirement plans, alleging in essence that the plans should not have permitted employees and retirees to invest in Schering stock during the period of time from April 1, 2006, through March 31, 2008. The central notion here is that Schering executives -- including, presumably, the Plan Fiduciaries (as it is not uncommon to have current financial officers of Schering -- the public company -- serve also as ERISA "plan fiduciaries", and that would seem to have been true in Schering's case, based on the ERISA suits I've reviewed, thus far) should have prevented the employees and retirees from investing in Schering stock during the period that the ENHANCE study results remained undisclosed to the investing public. It is doubtless true that these pension-plan investors have suffered much the same losses as the general In Re Schering-Plough/ENHANCE Securities Litigation class action plaintiffs have alleged.
". . . .Plaintiffs are participants in the retirement plan for [Schering-Plough's] employees. Each participant exercises some control over the investments in an individual account in this defined-contribution plan, though the plan and its trustees may limit what assets an account may contain and when trading may occur. In this suit under the Employee Retirement Income Security Act, plaintiffs contend that [Schering-Plough] and some of the plan’s trustees have violated §409(a), 29 U.S.C. §1109(a), in their capacity as fiduciaries. The defendants’ failing, according to the complaint, is that they allowed participants to invest in [Schering’s] stock, despite knowing that it was overpriced in the market and hence a bad deal. . . .
In order to pursue a claim under §409(a) of ERISA, the participants first need a private right of action. They invoke §502(a)(2) of ERISA, 29 U.S.C. §1132(a)(2), which says that suit may be brought “by the Secretary [of Labor], or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title”. . . .
LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct. 1020 (2008), holds that §502(a)(2), and thus §409(a), may be used by the beneficiary of a defined-contribution account that suffers a loss, even though other participants are uninjured by the acts said to constitute a breach of fiduciary duty. . . ."
"What was Judge Easterbrook's boggle?", then, you might ask. . . . Well, he has quite-cogently pointed out, I think, that expecting an ERISA Plan Fiduciary who is also a corporate "insider" at the Plan's public-parent company (Schering-Plough), in the meaning of the federal securities laws and regulations, to use his or her "inside information" (the ENHANCE study difficulties, pre-disclosure, before January 14, 2008) to benefit only the ERISA Plan participants, over all other investors (by warning them to "get out" of Schering stock, or keeping them from buying it, in the first place) would -- itself, plainly be a violation of the SEC's insider trading rules:
. . . .Corporate insiders cannot trade on their own behalf using material private information, good or bad. See generally United States v. O’Hagan, 521 U.S. 642 (1997); Dirks v. SEC, 463 U.S. 646 (1983). In Harzewski we raised the question whether they may act on such information in their role as fiduciaries for pension plans. 489 F.3d at 808. That question remains unanswered but must be resolved in plaintiffs’ favor if they are to prevail.. . . .
So, Judge Easterbrook reasons, it would be a "steep hill" for ERISA plaintiffs to climb, to be able to prove that the federal ERISA scheme expects that corporate executives will knowingly violate federal SEC regulations, in order to fully-discharge their federal fiduciary duties to ERISA plan participants. That, he reasons, cannot be a result the law expects. And, he is right, I think.
What remains unwritten in this recent obiter dicta -- from Easterbrook's opinion -- is that, perhaps, for exactly this reason, corporate "insiders" should not serve as ERISA Plan fiduciaries, in the first place -- where -- as here -- the Plan allows an investment in the securities of the public-parent company.
So, it seems (to me, at least!), that the Schering ERISA suits should be recast, then, to allege that (to the extent a future court finds Judge Easterbrook's obiter dicta persuasive, and so holds, in a case that presents this issue, squarely) the design of the Plan was "fatally-flawed by inherent conflicts of interest" -- and that the public-parent ought to answer in damages for not having fully-disclosed and explained this inherent conflict of interest -- a conflict created by the structure, itself -- when the parent named insiders as ERISA Plan Fiduciaries.
That may well turn out to be the ERISA plaintiffs' class-action bar's counter-punch to Judge Easterbrook's otherwise very well-reasoned editorial comment.
As ever, we shall see. And so, if you came here looking for a Schering Plough ERISA class action suit summary, you left with an added bonus -- a "path of the law" musing, gratis -- to boot!
4 comments:
I've worked for Merck and Fred at Pharmacia many moons ago. Just read about Merck's ghostwriting scandal recently, which is not what that company was about with such tactics. corruption, like AIDs, has affected many, from saints to the progressive sinners of this industry.
I hear you, anon. If you're interested, I'll have an essentially "live-blogged" analysis of Merck & Co.'s First Quarter Earnings Conference Call, in a new thread here, on Monday morning, before market open.
As to corruption -- I think we'll soon see whether it is a chosen behavior at Schering, and Merck, or whether, like a dread disease, it has been randomly (and wrongfully) "attributed to" these companies, and the senior managements, of each.
Cheers!
While I generally concur with your analysis, the judge may be oversimplifying the issue. Other ERISA litigation involving investment in employer stock has reached similar conclusions about the conflict inherent between securities law that applies to corporate insiders, and the duties of ERISA fiduciaries. Generally, courts seem to believe that corporate insiders can't use inside information to direct the sale of employer stock owned by a plan. Similarly, courts have held that disclosing inside information to plan participants (who could then direct the sale of employer stock) may not be much of a remedy either, because as soon as the inside information becomes public, the stock price will drop anyway (see McKesson). But both DOL and plaintiffs' firms have argued that there are prudent actions that fiduciaries could have taken (such as directing the plan trustee to stop buying more employer stock) that would not have violated securities laws (it's not a crime to avoid transactions), and that would have been a reasonably prudent response under the circumstances. DOL and plaintiffs' firms argue that by failing to take ANY action, insiders who were also fiduciaries breached their fiduciary duty to the plan.
Thanks for the well-reasoned response here, Anon. No. 2 -- but, with all due respect, I think Judge Easterbrook is well-aware of the law, as it now stands.
And I think he makes a good point.
Imposing a "black-out" on investments in the issuer's-securities (at the level below true "insiders") is, itself, the "use" of inside information.
Whether it is used to avoid losses, or prevent windfall profits, is of no moment under the applicable securities case law (I am no maven of the ERISA world, though, I will readily and humbly, confess).
I do appreciate your thoughts -- and any additional ones, on the ERISA side of this problem, would be likewise appreciated -- I would love to read a continuing dialogue on this, here. . . .
Anyone (else) have thoughts?
Anyone? -- C'mon, over 700 of you stopped by, just in the last seven hours. You may post anonymously here. I promise.
Thanks, and c'mon back!
-- the rainnn
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