Compliance March 3, 2015

Sanofi Potentially Faces Stock Drop Suit

Multinational pharmaceutical company Sanofi is being investigated for possible ERISA violations after continuing to offer company stock as a retirement plan investment option, despite alleged knowledge that it was violating federal anti-kickback laws.
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An investigation of Sanofi’s U.S. Group Savings Plan is underway, in light of possible violations of the Employee Retirement Income Security Act (ERISA), according to employee stock drop case litigator Jake Zamansky, leader of Zamansky LLC.

Zamansky says his firm has commenced an investigation to determine if fiduciary duties to prudently manage and invest plan assets were violated by Sanofi, which continued offering its company stock while it allegedly knew it was violating federal anti-kickback laws.

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The investigation stems from a whistleblower lawsuit filed against Sanofi by a former paralegal, Diane Ponte, as reported by Bloomberg on December 4, 2014. At the time, Ponte alleged that in an attempt to get the company’s diabetes drugs prescribed and sold, Sanofi’s senior officers and executives, including former CEO Christophe Viehbacher, conducted an illegal kickback scheme. In addition, she alleged that she was fired in retaliation for raising questions about the legality of the scheme.

Zamansky says these allegations come two years after similar claims that Sanofi gave doctors free samples of arthritis medicine to encourage prescriptions. It paid $109 million to settle illegal kickbacks claims with the U.S. Justice Department in that case.

Zamansky claims the Sanofi’s Board knew of the most recent allegations for some time before disclosing in October 2014 that it had commenced an investigation. On October 29, 2014, the board dismissed CEO Viehbacher, resulting in Sanofi’s stock falling from $56 per share to less than $45. Additionally, the company was the subject of shareholder lawsuits under federal securities laws.

Zamansky says employees who purchased and held company stock through the plan since at least December 19, 2012, have suffered losses to their retirement savings which could have been at least partially avoided had plan fiduciaries prudently dropped the company stock as an investment option. He further alleges Sanofi’s dismissal of its CEO and the whistleblower allegations raise serious issues over the prudent monitoring and oversight of the plan under ERISA for artificial inflation of the stock price.

The path forward for stock drop litigation against Sanofi could be impacted by the U.S. Supreme Court’s 2014 decision in Fifth Third Bancorp v. Dudenhoeffer, which determined fiduciaries offering employer stock as an investment option do not have any special presumption of prudence. The decision also instructed the 6th U.S. Circuit Court of Appeals to review on remand whether plan participants alleging stock drop violations can state a legitimate claim by applying the pleading standard as discussed in Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly, considering that where an employer’s stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus insufficient to state a claim. 

The pleading standard requires that to state a claim for breach of the duty of prudence, a complaint must plausibly allege an alternative action that the defendant could have taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.

Compliance March 3, 2015

Nonqualified Plan Beneficiary Not Determined by Qualified Plan

A federal appellate court found language in a plan membership letter and beneficiary designation form did not show intent for a nonqualified plan to adopt all terms of a qualified retirement plan.
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A decision from The 9th U.S. Circuit Court of Appeals confirms a lower court ruling that a retirement plan membership letter and beneficiary designation form for a nonqualified plan “did not clearly and unequivocally incorporate by reference the entirety” of the terms of a plan sponsor’s qualified retirement plan.

For this reason, the terms of the qualified plan cannot determine a beneficiary under the nonqualified plan, the court ruled.

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In the case E & J Gallo Winery v. Rogers, E & J Gallo Winery filed an interpleader action to determine the designated beneficiary under its Key Executive Profit Sharing Retirement Plan, referred to throughout the suit as the ERP. The benefit at stake in the case belonged to one Robert Rogers, a now-deceased former Gallo employee.

Prior to the appellate court action, the district court denied Michele McKenzie-Rogers’ motion for summary judgment granting her the benefit, concluding that Mark Rogers was instead the proper beneficiary under the terms of the ERP. Michele McKenzie-Rogers, who was married to Robert Rogers at the time of his death, appealed the decision, leading to the current affirmation from the 9th Circuit.

The case turned on a dispute as to whether the terms of the Gallo Profit Sharing Retirement Plan, an Employee Retirement Income Security Act (ERISA) qualified plan, were incorporated into the ERP when certain of its terms were referenced in a 1988 membership letter to Rogers.

The appellate court noted that McKenzie-Rogers relies heavily on the letter’s third paragraph, which states that vesting, methods of payment and “all other matters” under the ERP will be determined under the Gallo Qualified Plan. Both the appellate and district court determined Michele McKenzie-Rogers reads “all other matters” too broadly, as the fourth paragraph of the 1988 letter specifically addresses the issue of designating a beneficiary, and informed Robert that if he did not do so in the accompanying form, payments would be automatically made to his estate upon his death.

The terms relating to beneficiary designation in the 1988 letter are in direct contradiction to the analogous provisions in the Gallo Qualified Plan. As explained in the appellate court decision, the Gallo Qualified Plan provides that benefits would be paid a) to the surviving spouse, or b) to the designated beneficiary, but only if there was no surviving spouse or if the surviving spouse had consented to the designated beneficiary, and would pass to the estate only if there were no surviving spouse or the surviving spouse had consented to the designated beneficiary.

Robert Rogers used the form to unambiguously designate his former wife, Audrey Rogers, as his primary beneficiary under the ERP, and his brother, Mark, as his secondary beneficiary. But, Audrey Rogers waived her rights as the primary beneficiary of the ERP in a “Waiver and General Release” that she signed on February 6, 2008.

“Nothing in the ERP governing documents provided that Robert’s marriage to Michele would void his prior beneficiary designation,” the court decision reads. The court also pointed out that the ERP is a nonqualified, top hat plan, exempted under ERISA from spousal consent requirements.

The text of the 9th Circuit decision is here.

 

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