Along with the flood of securities lawsuits, the current credit crisis has also generated a wave of litigation under ERISA, as I have detailed here. And just as many of the credit crisis-related securities cases have failed to survive preliminary judicial scrutiny (as noted recently here), at least some of the ERISA cases also may encounter judicial skepticism, if the recent decision in the Huntington Bancshares ERISA litigation is any indication.
On February 9, 2009, in an opinion that bespeaks a reluctance to sustain litigation based on the effects of the global financial crisis, Southern District of Ohio Judge Gregory Frost granted the defendants’ motion to dismiss in the Huntington ERISA case. A copy of the opinion can be found here.
The lawsuit had been brought on behalf of participants in Huntington’s 401(k) plan. The plaintiffs alleged that the plan fiduciaries breached their fiduciary duties in connection with Huntington’s July 1, 2007 acquisition of Sky Financial. The plaintiffs alleged that Huntington’s risk of loss greatly increased by subjecting Huntington to $1.5 billion of subprime exposure through Sky’s relationship with Franklin Credit Management Corp.
The plaintiffs alleged that because of the merger with Sky Financial and its subprime exposure, Huntington stock became too risky to be considered a prudent plan investment. The plaintiffs alleged that the defendants failed to take any action to protect the plan assets from the "enormous and entirely foreseeable" risk that he increased subprime exposure would injure the plan and its participants’ retirement savings. The plaintiffs claim that defendants’ alleged breaches caused over $100 million in losses to the plan.
The February 9 Opinion
Judge Frost first agreed with the defendant’s contention that the plaintiffs’ allegation that Huntington violated ERISA when is acquired Sky "is simply an attempt to second guess Huntington’s business decisions and is not governed by ERISA."
Judge Frost also rejected plaintiffs’ claim that the defendants breached their fiduciary duty when they continued to invest in Huntington shares after the merger. Among other things, Judge Frost noted that large public pension funds had continued to invest in Huntington, and indeed had even increased their investment, after the merger.
He also noted that "although Huntington has experienced a significant drop in its stock price," its share price essentially "moved in tandem with the other regional banks in Huntington’s geographic footprint." Judge Frost also noted that the plaintiffs "do not point to any ‘red flags’ that should have placed Defendants on notice of a need to cease offering the Huntington stock."
Judge Frost also rejected plaintiffs’ allegation that defendants had failed to warn investors (including plan participants) of the risk, finding that in its SEC filings, Huntington "specifically disclosed its exposure to subprime, housing and construction markets and frequently disclosed the effect of increasing market turmoil."
Judge Frost’s rejection of the plaintiffs’ ERISA claims was based on the specifics of plaintiffs’ allegations. However, his rejection was also clearly based in part on his perception of what the case represents. Among other things, he observed that:
it is clear that federal courts are currently experiencing a significant rise in "stock drop cases" due to the current status of the Stock Market and the economic climate in general, which of course includes the subprime lending crisis. However, ERISA was not intended to be a shield from the sometimes volatile stock market.
Judge Frost’s reference to "stock drop cases" shows not only how he perceived the Huntington case itself but also reflects a more general perception of the overall subprime litigation wave – that is, that the current influx of cases is the due to stock market volatility caused by the global economic downturn.
His general view the subprime cases represent an effort by investors to avoid the consequences of market volatility could, if widely shared, represent a substantial hurdle to the plaintiffs in many of these cases – both cases filed under ERISA as well as cases filed under the federal securities laws. Indeed, I have already noted (most recently here) numerous other credit crisis-related securities cases where courts clearly have shown skepticism that the plaintiffs’ losses were the result of anything other than the financial crisis itself.
To be sure, there have been subprime-related ERISA cases that have survived dismissal motions, just as there have also been subprime and credit crisis-related securities lawsuits that have survived motions to dismiss. For example, as I discussed here, the judge in the NovaStar ERISA case recently denied the defendants’ motion to dismiss, a decision that is particularly noteworthy because the motion to dismiss was granted in the NovaStar subprime-related securities lawsuit. (My discussion of the NovaStar securities lawsuit dismissal with prejudice can be found here.)
But while some of the ERISA cases may yet survive preliminary motions, many of the cases could also face the same kind of judicial skepticism reflected in Judge Frost’s opinion in the Huntington case. If so, a substantial number of the lawsuits being filed in the current wave of subprime and credit crisis-related litigation could fail to make it past the preliminary stages.
I have in any event added the Huntington decision to my running tally of subprime and credit crisis-related lawsuit settlements, dismissals and dismissal motion denials, which can be accessed here.
Special thanks to a loyal reader for providing me with a copy of the Huntington opinion.
An Unusual Madoff Victim Has Unusual Problems: As reflected in my register of Madoff-related litigation (which can be accessed here), the Madoff scandal has resulted in a wide range of suits and other legal proceedings. But the most unusual of the Madoff-related proceedings may be the motion for temporary restraining order and preliminary injunction filed on March 11, 2009 against Bernard Madoff in the Middle District of Florida by Gino Romano.
In his hand-written motion (a copy of which can be found here), Romano, an inmate in the federal prison system, alleges that Madoff enlisted him to recruit other inmates to invest with Madoff, by guaranteeing Romano "an annual return of 18.5%." Romano alleges that Madoff initiated this contact with Romano by sending him an "investment package" in January 2005.
Romano alleges that he "collected $1 million dollars from gang leaders" including members of "the Mexican Mafia, Chicago’s Gangster Disciples, the Black Panthers, the Aryan Brotherhood, and D.C. Blacks." Romano asserts that "now I’m in danger from these gangs because Madoff Ponzi scammed us."
The dangers Romano claims he now faces include not only irate gang members, but Madoff himself, whom Romano asserts has sent Romano threatening letters. Among other things, Madoff allegedly has communicated to Romano that "he is going to kill me and he has stolen Ponzi money to hire the best hitman money can buy."
As readers might well imagine, Romano finds all of this very distressing. He alleges that because of Madoff’s threats he has "suffered a mental breakdown, bed wetting, [and] panic attacks."
Call my cynical, but I have my doubts about many of Romano’s allegations. However, I am willing to allow the possibility that the part about "bed wetting" might well be true – although it seems unlikely that Madoff is responsible for that.
Special thanks to loyal reader Jon Jacobson for providing me with copies of numerous new Madoff-related pleadings, including Romano’s. I have added all of these new pleadings to my register of Madoff-related suits (here).