Company Stock Exclusion not Warranted by Tribune Fraud Revelation

According to the appellate opinion, the plaintiffs did not contend that the defendants actually knew about the underlying circulation fraud being perpetrated by employees, but that the defendants had a duty to investigate and uncover the wrongdoing at an earlier time than they did. However, the court pointed out that the Employee Retirement Income Security Act (ERISA) imposes no duty on plan fiduciaries to continuously audit operational affairs but that a duty to investigate only arises when there is some reason to suspect that investing in company stock may be imprudent.

The court rejected the plaintiffs argument that lawsuits filed by advertisers and alleged inadequate internal controls in place indicated the defendants knew or should have known that continuing to offer company stock as a plan investment was imprudent. The opinion pointed out that Tribune immediately took action and launched an investigation into advertisers’ allegations as soon as it was made aware of them.

Additionally, the appellate court noted the affects of the Tribune’s public announcement of the fraud and subsequent earnings restatement on the company’s stock price was not as great as plaintiffs alleged and did not warrant going against the plan provision for including company stock as an investment option.

According to the opinion, certain employees at the subsidiary falsely boosted the circulation figures of two newspapers, Newsday and the Spanish-language Hoy, increasing the amount that they were able to charge advertisers and, in turn, inflating revenues. Tribune, along with an independent auditor, discovered and publicly disclosed the fraud, which resulted in a $90 million charge against earnings.

The ruling in Pugh v. Tribune Co., 7th Cir., No. 06-3898, 4/2/08 is here .