In many class action securities litigations, the company's own pension plans are significant shareholders, by virtue of the plans' investment in company stock. Most frequently the plan at issue is a 401(k) plan that offers company stock as an investment option, but defined benefit and other plans could be shareholders as well. It is important to consider whether and, if so, how the plans participate in settlements of securities lawsuits.

As the legal record-holder of the stock, the plan, as opposed to the plan participants, is the most likely candidate to be the class member in the lawsuit. Plaintiffs' counsel, however, may seek to exclude the plan from participation in the lawsuit's settlement as part of a general exclusion of any persons or entities associated with the corporate defendant. Furthermore, when a plan does participate in the settlement, there are sometimes disputes about how to calculate its recovery because plans often offset purchases and sales requests of their participants before engaging in transactions on the open market. A claim that is submitted based on a plan's net purchases may not yield the same recovery as a claim that is submitted based on individual participant elections.

In the AIG securities class action, In re Am. Int'l Grp., Inc. Sec. Litig., 14-4067, 2016 WL 5075939 (2d Cir. Sept. 20, 2016), the Second Circuit addressed the first of these issues, but not the second. The Court was asked to determine whether AIG's ERISA plans – three 401(k) plans and one defined benefit plan (the "Plans") – were properly excluded from the class of shareholders participating in the settlement because they were deemed "affiliates" of AIG. The Second Circuit concluded that the Plans were not affiliates and thus could participate in the settlement. But it left for another day the issue of whether the Plans could submit their claims on a plan-wide level or on a participant-by-participant basis.


AIG was sued for violations of the federal securities laws. The lawsuit ultimately settled pursuant to an agreement which by its terms excluded from the settlement class "any parent, subsidiary, affiliate, officer, or director of AIG." The settlement agreement did not define "affiliate."

After the district court granted final approval to the settlement, the Plans moved the district court to direct the claims administrator to approve their settlement claims. The claims administrator determined that that the Plans were ineligible to participate in the settlement for two reasons. First, the claims administrator concluded that the Plans were "affiliates" of AIG, and thus excluded from the class. Second, the claims administrator concluded that the Plans failed to identify any purchases of publicly traded AIG securities because their claims were based on participant-level purchase requests, and the participants were not the legal title holders of the stock.

The district court declined the Plans' request to approve their claims. After consulting Black's Law Dictionary and securities law regulations, the district court concluded that the Plans were affiliates of AIG because of the control AIG exhibited over them – specifically, through the power to direct the management and policies of the Plans. Among other things, the court observed that the Plans are sponsored by AIG or a subsidiary, the individuals comprising the Plans' administrator (consisting of AIG employees) were appointed by AIG, and AIG could disband the Plans without reason. In so ruling, the court relied on In re Motorola Sec. Litig. 644 F. 3d 511 (7th Cir. 2011), where the Seventh Circuit held, under substantially similar circumstances, that an ERISA plan was an affiliate of Motorola.

The Plans thereafter moved to intervene in the underlying class action for the purpose of appealing the district court's order. The court denied the motion and the Plans appealed.

The Second Circuit's Decision

The Second Circuit reversed and remanded, concluding that the Plans were eligible to collect a "slice of the settlement pie" because they were not affiliates of AIG.

Like the district court, the Second Circuit looked first to Black's Law Dictionary and to the securities law regulations and found that they each conditioned affiliate status on the level of control exercised by the parent entity on the purported affiliate. Unlike the district court, however, the Second Circuit found that sponsorship of the Plans by AIG or an affiliate was "too slender a reed upon which to predicate a finding of control." First, the Court observed that ERISA presumes that the interests of the employer and the employer-sponsored plans are adverse and requires that ERISA plans be managed solely in the interest of the plan's participants and beneficiaries. Second, the Court concluded that AIG's ability to select the plan administrator was not equal to the power to shape the Plans' management and policies because the plan administrator must wear different "hats" when it acts for AIG and when it act for the Plans, and may only wear one hat at a time. Third, the Court rejected the district court's finding that AIG's authority to disband the Plans without reason gave it sufficient "control" to be deemed an affiliate because ERISA's fiduciary duties prohibit the Plans from being influenced by AIG threatening to disband them for lack of cooperation.

The Second Circuit declined to follow the Seventh Circuit's ruling that Motorola had control over the plans (and thus that the plans were affiliates) because, in its view, the Seventh Circuit did not consider the role of ERISA in shaping the limits of an employer's control over a sponsored plan. In particular, the Second Circuit observed that the U.S. Department of Labor has stated that many of ERISA's provisions are premised on the concept of an employee benefit plan being independent of the employer plan sponsor. Furthermore, ERISA § 403 provides that ERISA plan assets "shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries."

Finally, the Second Circuit concluded that AIG was not an affiliate because it was not within the category of entities that the parties would have intended to exclude from the class. The Court explained that exclusions like this are generally drafted to ensure that those who perpetrated, or otherwise profited from, the alleged wrong would not benefit from the settlement. Here, that purpose would not be fostered because there was no dispute that the Plans' participants and beneficiaries were not those that perpetrated the alleged securities violations that gave rise to the class actions.

The Second Circuit declined to rule on the issue of whether the claims administrator erred when denying the claims by the three defined contribution plans on the grounds that the claims were submitted on a participant-level, rather than on a plan-level. The issue was significant because the participant-level "recognized loss," was $200.6 million collectively across the Plans, whereas the plan-based "recognized loss," which took into account the Plan's net purchases and sales on the open market, was only $80.5 million collectively across the Plans. Because the district court did not reach this issue, the Second Circuit remanded the question to the district court to consider it in the first instance.

Proskauer's Perspective

The Second Circuit's decision exposes a potential conflict among circuits as to whether plans will be permitted to participate as class members in a securities settlement. The potential conflict can be averted, however, through careful drafting of the class definition, whether in the initial class certification motion or the class settlement agreement. As the Second Circuit noted, "if drafters do want to exclude employer-sponsored plans, they can simply say so." The case law does not resolve the related issue of whether, if the plan is excluded, participants can file their own individual claims, notwithstanding the fact that they do not own legal title to the shares held on their behalf by the plan.

Assuming participation in the settlement by the ERISA plan, it remains to be seen how the plans will be able submit its claim to the settlement administrator, i.e., on a participant-level or a plan-level. As the AIG litigation illustrates, the outcome of this issue can have a material impact on the amount of a plan's recovery.

Originally published by Bloomberg, BNA.