Risk Management

DoL Sues Agway Directors on 401(k)

The bankrupt company is accused of overvaluing and overpaying its stock price in its defined-contribution plan.
Sarah JohnsonOctober 16, 2006

The U.S. Department of Labor is suing the fiduciaries of a liquidated company, accusing 47 directors of “imprudently” investing $50 million of its 401(k) plan in the company’s securities. That investment allegedly overvalued the stock and gave employees misleading information.

In a suit filed with the U.S. District Court for the Northern District of New York, DoL charged that various board members of Agway, a former agricultural cooperative, violated the Employee Retirement Income Security Act. Two former CEOs of the company, Donald Carderelli and Michael Hopsicker, are named as defendants. Agway, once based in Dewitt, N.Y., filed for bankruptcy in October 2002.

DoL is calling for the defendants to either restore all the losses incurred by the 401(k) or give up their own benefits received from the plan.

As of June 2002, 4,080 people took part in Agway’s 401(k) plan. The plan held about $48 million in Agway securities and $2 million in cash reserves.

“The workers in this case were betrayed by those entrusted to administer and oversee their 401(k) plan,” said Secretary of Labor Elaine Chao. “With this lawsuit, the Department of Labor seeks full restoration of the 401(k) plan so that the workers’ retirement dreams are not destroyed by the gross mismanagement of their retirement funds.”

DoL is accusing the 401(k) investment and administration committee members and Agway’s board of directors of causing “substantial financial losses” to the plan by allegedly not monitoring and divesting its holdings in Agway securities and not accurately figuring out the fair-market value of the securities, which included preferred stock and money-market certificates. Agway set the value of the stock purchased and held by the plan, according to DoL.

Ed Cerasia, a partner at Proskauer Rose LLP, which is representing the board members in this suit and a similar one filed by State Street Bank & Trust in 2003, told CFO.com that this case is akin to other suits filed by employees of troubled companies who are trying to recoup money from investments involving those organizations. “No one is saying there was any self-dealing here,” Cerasia says. “There was no manipulation of stock price for stock gain.”

Like most other 401(k) plans, Agway’s was voluntary and included employer contributions. Those contributions were made to a company security fund, where they were designated to stay. The securities were held at prices exceeding fair-market value, DoL says in its claim.

Agway distributed fact sheets about the 401(k) to employees that implied the company fund was one of the safest in the plan and had low risk, according to DoL.

But Agway’s worth was faltering. Its revenues were declining, its debts rising, and promises made to lenders were getting broken, according to the suit. In March 2002, the company announced it was selling off parts of its business in a deal that later fell through. That July, it froze the 401(k) plan’s company security fund.

“By their actions and failures to act, the investment committee defendants did not act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use,” the suit claims.

The goings-on behind 401(k) plans received lots of attention earlier this month when lawsuits were filed against several large companies, including Lockheed Martin, United Technologies, Bechtel Group, and Caterpillar. The suits, filed by law firm Schlichter Bogard & Denton on behalf of plan participants, allege that the companies allowed 401(k)participants to be overcharged.

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