Lead plaintiff Mary Reidt is seeking class certification for similarly situated Frontier Communications 401(k) Savings Plan participants in a new Employee Retirement Income Security Act (ERISA) stock drop lawsuit filed in the U.S. District Court for the District of Connecticut.

This action “concerns the plan’s excessive concentration in Verizon common stock.”

By way of background, starting in July 2010, Frontier began acquiring significant capital assets of Verizon—starting with wireline operations providing services to residential, commercial and wholesale communications customers. Subsequently, Frontier has purchased broadband and fiber optic assets in certain Western states.

According to the complaint, between July 2010 and December 30, 2011, the Frontier Communications 401(k) plan received and retained approximately $150 million in Verizon stock, at that time representing over 15% of the plan’s total assets. In April 2016, Frontier acquired additional Verizon assets, and the plan fiduciary defendants allegedly invested over $200 million of additional plan assets in Verizon stock.

The lead plaintiff suggests the failure of the plan’s fiduciaries to timely liquidate the significant holdings in Verizon common stock, and the decision to concentrate plan investments in Verizon common stock, breached their “fiduciary duty under ERISA to diversify the investments of the plan so as to minimize the risk of large losses.” The plaintiff further alleges the decisions of plan fiduciaries “violated ERISA’s prudence and loyalty requirements under 29 U.S.C. § 1104(a)(1)(A) and (B).”

As a result of these breaches, plaintiff alleges, defendants caused the plan and the proposed class to suffer more than $100 million in losses.

In presenting these arguments, the lawsuit seems keenly aware of the poor record other such stock drop complaints have had in federal court since the crucial Supreme Court ruling in Fifth-Third vs. Dudenhoeffer. This is to say the lawsuit focuses its arguments for standing and remuneration more on the imprudent concentration of employer stock as opposed to alleging that fiduciaries knowingly allowed participants to buy (and continue to buy) stock at inflated valuations.

“Defendants’ failure to liquidate the plan’s Verizon common stock holdings subjected participants to additional risks because, for much of the class period, the plan was also heavily invested in AT&T common stock,” the complaint states. “Verizon and AT&T are telecommunications stocks—exposing the plan to an enormous concentration within a single sector and industry. At the end of 2014, the plan’s Verizon and AT&T common stock holdings collectively comprised more than 15% of the plan’s total assets (7.8% was Verizon; 7.3% was AT&T).”

The complaint suggests the “imprudence of defendants in holding such massive amounts of Verizon common stock is further evidenced by the fact that Verizon is a volatile stock.” According to the plaintiff, in the year prior to the plan’s new $200 million investment in Verizon stock in 2016, Verizon common stock “was approximately 31% more volatile than the stock market as a whole.”

Other allegations of wrongdoing in the complaint more closely resemble the typical stock drop arguments that have so far broadly failed to even surmount defendants’ motions to dismiss—let alone to convince a judge or jury. One such example is the following: “Defendants knew long in advance of the December 2011 and April 2016 acquisitions that Verizon stock should be sold. In light of the Verizon Stock Fund’s undiversified nature, its volatility, and the facts that it represented the largest investment in the plan, was positively correlated with another major, undiversified plan investment (AT&T company stock), and was no longer was an ‘employer security’ exempt from ERISA’s diversification requirements, defendants should have immediately commenced a process to liquidate the plan’s investment in the Verizon Stock Fund. Had they done so, all or at least most plan participants would have divested their Verizon Stock Fund holdings by the beginning of the class period or, in the case of participants acquired in 2016, at or shortly after their accounts were acquired by the plan.”

Inside details of the Verizon-Frontier M&A activity show pension carried far less telecom stock

As with other stock drop litigation, the text of this lawsuit includes substantial background information, taken from SEC forms and other regulatory filings, regarding the corporate maneuvering that went into the various deals reached by Verizon and Frontier Communications

In one section it is noted that, as a result of the spin-off and merger, Verizon was given the authority to select three directors to Frontier’s board of directors. Verizon designated Edward Fraioli, Pamela Reeve, and Mark Shapiro to Frontier’s board, and they were formally elected to the board on July 6, 2010.

“Fraioli became a member of the board’s retirement plan committee, as did Virginia Ruesterholz, an executive vice president of Verizion who was elected to the Frontier Board of Directors in August, 2013,” the complaint states. “As of January 31, 2012, Ruesterholz owned over $15 million in Verizon common stock, stock options, and stock-based units of deferred compensation and incentives.”

As is common practice, the Frontier board’s retirement plan committee oversees Frontier’s retirement plans, which includes review of the investment strategies and asset performance of the plans and the overall quality of the asset managers.

“As a result of the spin-off and merger, a portion of the Verizon Savings Plan for Management Employees was spun off to form the FCCSI Management Plan,” the complaint explains. “The spun-off portion related to employees with accounts under the Verizon Management Plan who became employees of Frontier through the acquisition. Those accounts remained under the FCCSI Management Plan until December 30, 2011, at which time the FCCSI Management Plan was merged in its entirety into the 401(k) plan.”

Between July 1, 2010, and December 30, 2011, the assets of the FCCSI Management Plan were technically not assets of the 401(k) plan, but both the 401(k) plan and the FCCSI Management Plan, along with other defined contribution plans, were held within the Frontier Communications Corporation Master Trust.

“Frontier also had a separate trust, the Frontier Communications Pension Plan Master Trust, for its defined benefit plan,” the complaint alleges. “Because defined benefit plans promise participants a set level of future benefits, the risk of investment losses is borne by Frontier in the pension plan, whereas the risk of investment losses is borne by participants in defined contribution plans like the plan.”

According to the complaint, on December 31, 2011, Verizon stock represented 15.32% of the assets of the DC Master Trust compared with 0.07% of the assets of the pension.

“As a result, the DC Master Trust was 219-times more concentrated in Verizon stock than defendants felt was appropriate for the pension plan—for which they bore the investment risk,” the complaint states. “Throughout the class period, Verizon stock was included in the S&P 500 Index, a diversified stock index tracked by numerous large-cap domestic equity mutual funds. During the class period, the S&P 500 and its diversified tracking index funds invested less than 1.5% of their assets in Verizon stock. Verizon is a telecommunications stock. The largest telecommunications mutual fund in the United States is the T. Rowe Price Comm & Tech Fund (ticker PRMTX), which invests 2.53% of its assets in Verizon stock. Thus, the plan is approximately 10-times more concentrated in Verizon than a diversified investment and 6-times more concentrated than a concentrated telecommunications investor.”

The full complaint is available for download here.