Trends in ERISA stock drop litigation

Court decisions and economic factors have caused the number of stock drop lawsuits filed to fall sharply since the financial crisis

The number of class action lawsuits alleging breaches of fiduciary duty under the Employee Retirement Income Security Act (ERISA) has increased dramatically during the past decade. Initially fueled by large corporate scandals, such as Enron and WorldCom, most of these lawsuits accompany securities lawsuits and are filed following declines in the value of employer stock offered in corporate-defined contribution plans. These ERISA “stock drop” lawsuits typically allege that plan fiduciaries breached their duties by allowing participants to invest in company stock when the stock was an imprudent investment option for the plan. Plaintiffs usually assert that company stock was an imprudent investment because the company’s ongoing viability was in question and/or fiduciaries misrepresented or failed to disclose material information adversely affecting the value of the company’s stock.

According to Cornerstone Research’s ERISA Stock Drop Litigation Database, on average, 21 ERISA class actions have been filed annually between 2002 and 2011, although the number of cases in each year has fluctuated. These fluctuations seem to be related to the ups and downs of the stock market as well as industry-specific issues.

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Kivanç Kirgiz

Kivanç Kirgiz is a principal at Cornerstone Research. He has more than ten years of experience applying economic and financial analysis to issues arising in...

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