RadioShack Slapped with Co. Stock Fiduciary Breach Lawsuit

The 48-page lawsuit was filed this week by Houston lawyer Thomas R. Ajamie against the Fort Worth-based company and a number of its executives in the U.S. District Court for the Northern District of Texas.

The named plaintiff is Jeffrey V. Cormier, identified in the suit as a Hartford, Connecticut-area RadioShack employee, but the suit requests that a judge grant the case class-action status on behalf of other RadioShack retirement plan participants.

According to the lawsuit, the company’s 401(k) was “heavily invested” in company stock because the company matching contribution was in the form of stock and because the company encouraged participants to also allocate some of their own contributions to buy shares.

By 2000, over 80% of the 401(k) assets were in RadioShack stock, Ajamie asserted, which “emphasizes not only the substantial degree to which the long-term retirement benefits of the 401(k) plan’s participants were dependent on the performance of RadioShack stock, but also the need for prudent fiduciary decisions by Defendants concerning such a large, ongoing investment of the 401(k) plan’s assets.”

The suit said the company’s Supplemental Plan, an Employee Stock Ownership Plan (ESOP), also invested all or substantially all of its assets in company stock.

Among other things, the company did not give participants the information the suit claimed was necessary for the workers to make an informed decision about the prudence of continuing with their company stock investments.

Cormier’s lawsuit also accuses the company of not properly monitoring the performance of the 401(k) plan’s investment options – provided by Putnam Investments – and “failing to replace the Putnam funds with better performing and more cost-effective investment alternatives.”

Fund Stats

Quoting the 401(k) plan’s Form 5500 annual report, the suit said the plan had 32,111 participants as of December 31, 2005 and held $327 million in assets in 23 investment options. As of that date, the largest was the RadioShack Common Stock Fund, which the suit said held 6.6 million shares valued at $139 million – about 43% of the plan’s total assets.

The suit said Putnam Fiduciary Trust Company was the plan’s trustee and recordkeeper between 1996 and 2003 and that Mercer Trust Company replaced Putnam as trustee and Mercer HR Services became the recordkeeper.

As of December 31, 2005, the ESOP had 780 participants and had $13.2 million in assets, the suit said.

The company and the executives should have known that it was imprudent for the retirement plans to be so heavily concentrated in company stock when, the suit charged, RadioShack continued investing in its wireless communication products despite a 2002 law change allowing customers to take their phone numbers from one provider to another.

The law change produced what the suit labeled a "temporary phenomenon," - a demand surge for cell phones because customers knew they could move their phone numbers to different providers as well as purchases by customers just using cell phones without a traditional land line, the lawsuit claimed.

Because the company failed to understand the temporary nature of the sales surge, the suit claimed, it was stuck with millions of dollars in excess unsold inventory just as the cell phone demand began to weaken.

Starting in January 2003, the company issued news releases and regulatory reports containing overstated earnings and statements that the company did not expect to have to include a special balance sheet charge to pay for the excess wireless product inventory, the suit alleged.

RadioShack then revised downward its 2005 its performance expectations. Wrote Ajamie: "RadioShack's second quarter performance confirmed what management knew: the Company's poor performance in the first quarter of 2005 was due to the Company's poor strategic positioning and the Company was in turn-around mode for which the ultimate success was unknown."

Excess Inventory

A key development, according to the lawsuit, came in February 2006 when the company announced a writedown of $62 million for the excess inventory, a move that the suit said sparked an 8.04% drop in company share price. "The price of the Company's stock has never recovered," Ajamie declared.

Because of the company's financial woes, the suit said five significant institutional investors slashed their RadioShack holdings including T. Rowe Price, AMVESCAP and Morgan Stanley.

In terms of the fiduciary breach allegations for sticking with Putnam funds as investment options, the suit claimed the company and RadioShack executives kept the funds despite their underperformance and did not try to hammer out agreements with a fund provider more advantageous to the plan because of the plan's large size.

The Putnam funds became "inappropriate and unsuitable" after the company got caught up in the national late trading and market timing scandal that ultimately tagged a number of prominent plan providers, the suit said.

Not only did RadioShack fail to inform participants of the full picture regarding its finances and other problems, the suit claimed, it:

• failed to investigate investment alternatives.
• failed to monitor appointed fiduciaries.

The case is Cormier versus RadioShack Corporation et. al.; 4-07cv-285-Y, N.D. Tx.