In Veera v. Ambac Plan Administrative Committee, et al., No. 10 CV 4191, 2011 U.S. Dist. LEXIS 1194 (S.D.N.Y. Jan. 6, 2011), the Southern District of New York allowed a “stock drop” case to move forward where the plaintiff alleged that the company failed to make adequate financial disclosures and allowed employees to invest in its stock while the company’s financial health deteriorated.
Ambac Financial Group, Inc. and its subsidiary (“Ambac”) were in the financial services business. Ambac sold insurance against default by issuers of public and structured finance obligations. Employees had the option to invest in Ambac stock through the company’s employee retirement plan (“Plan”). The Plan’s Administrative Committee had the power and duty to take all actions and decisions necessary or proper to administer the plan, and to interpret the terms and provisions of the Plan and all related documents.
Veera was a former Ambac employee who alleged that the Administrative Committee failed to protect Plan assets as Ambac’s financial condition sharply deteriorated and Ambac stock dropped precipitously during the 2007-2008 time period. Ambac had changed its business model in the preceding years, lowered its underwriting standards and increased its exposure to risk. Veera alleged that “Ambac improperly bolstered its reported financial results by overstating the value of its business and failing to properly mark-to-market Ambac’s portfolio of high-risk securities, even as the market collapsed for the collateral underlying those securities.”
The Veera decision was a ruling on Ambac’s motion to dismiss the complaint for failure to assert a claim for which the court could grant relief. In denying the motion, the court did not issue a final judgment on Veera’s claims but allowed them to proceed. The court held that the complaint adequately stated a claim for breach of the fiduciary duties that the Employee Retirement Income Security Act (“ERISA”) imposes on the plan administrators. In doing so, the court provided a useful reference point to other ERISA plan fiduciaries and plan participants on “stock drop” claims.
The court ruled that the plan fiduciary had an affirmative duty to monitor the investment of Plan assets, and could not blindly allow investment in Ambac stock if such an investment did not satisfy the fiduciary’s duty of prudence and care under ERISA. Veera alleged that Ambac overstated the value of its business and failed to mark-to-market its portfolio of high-risk assets, causing Plan participants to purchase Ambac stock at an inflated price. Veera also alleged that the Plan had no “system . . . in place to review and evaluate the performance of appointees” and plan assets. The Veera court held that a monitoring system should be sufficient to provide plan participants with meaningful guidance when there is a relatively rapid collapse in asset values.
The court held that Veera’s allegations supported a claim for fiduciary breach based on the theory that the fiduciaries did not attend “to the risks of the continued purchase and retention of Ambac stock.” The court therefore denied the defendants’ motion to dismiss and allowed the case to proceed.