Compliance January 22, 2016

SunEdison Faces Lawsuit Over Company Stock in Retirement Plan

The accusations are similar to those in many stock drop lawsuits.

Reported by

Alexander Y. Usenko, a former SunEdison employee and participant in the company’s defined contribution (DC) plan, has brought suit against SunEdison for losses incurred by investing his retirement plan assets in SunEdison stock.

Usenko has named as defendants SunEdison Inc., its board of directors, the company’s investment committee, State Street Bank & Trust Co., and SunEdison’s chief executive (Ahmad R. Chatila) and senior executives and members of the operating committee: Emmanuel T. Hernandez, Antonio R. Alvarez, Peter Blackmore, Clayton C. Daley, Jr., Georganne C. Proctor, Steven V. Tesoriere, James B. Williams, Randy H. Zwirn, Matthew Herzberg). One defendant is identified only as John Doe.

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The notion of company stock as a potential liability in a retirement plan is cropping up more frequently, with plan sponsors backing off company-issued stock as a plan investment. Some say it can still be offered, as long as there is a prudent, documentable process in place.  

According to the complaint, the defendants permitted the plan to continue offering SunEdison stock as an investment option to retirement plan participants, even after they knew or should have known that during the time frame (August 6, 2015 to the present) the stock had a number of troubling issues. It was artificially inflated; SunEdison—which bills itself as the world’s largest global renewable energy development company—was in extremely poor financial condition; and SunEdison faced equally poor long-term prospects.

These factors made SunEdison stock an imprudent retirement investment for the plan, the complaint says. As fiduciaries of the plan, the defendants were empowered to remove SunEdison stock from the plan’s investment options but didn’t. Neither did they act in any way to protect the interests of the plan or its participants, in violation of their legal obligations under the Employee Retirement Income Security Act (ERISA).

NEXT: A breach of the “prudent man” standard

The complaint says that the value of SunEdison shares in Usenko’s account diminished as a result of the defendants’ breaches of duty. According to the complaint, Usenko is no different than the thousands of other SunEdison employees who entrusted their retirement savings to the defendants/fiduciaries of the plan.

According to the complaint, the inclusion of the stock amounts to a breach of the “prudent man” standard under ERISA. The defendants breached the duties they owed to the plan, to Usenko, and to the proposed class members who are also participants by, among other things, retaining SunEdison common stock as an investment option in the plan. A reasonable fiduciary using the “care, skill, prudence, and diligence that a prudent man acting in a like capacity and familiar with such matters would use,” as required by ERISA, would have done otherwise.

Usenko is seeking a jury trial; the complaint states that once discovery begins, it’s likely that additional people or entities engaged in wrongdoing will be revealed, and that more instances of wrongdoing will be uncovered. In that case, Usenko will seek to amend the complaint, adding new parties or new claims (or both).

The complaint cites the Supreme Court’s decision regarding Fifth Third Bancorp v. Dudenhoeffer as a precedent, in which plan participants challenged the plan fiduciaries for failing to remove company stock as a plan investment option. The plan’s fiduciaries were found to have violated ERISA when they continued offering an imprudent plan investment option—and the U.S. District Court considers this case similar to Fifth Third.

NEXT: No presumption of prudence 

The gist of the allegations of breach of the duty of prudence and breach of the duty of loyalty is that the defendants allowed the company stock to continue as a plan investment during the period specified in the complaint—despite knowing that the investment was imprudent as a retirement vehicle. The complaint says defendants certainly should have known it was unsuitable by the beginning of that specified period.

According to the complaint, SunEdison stock was artificially inflated during the period specified in the suit, while the plan was making purchases. Second, the company materially misrepresented the strength of its financial condition and prospects, thereby inflating the stock’s value. As a result, SunEdison stock, and subsequently the plan’s assets invested in it, lost substantial value once the truth emerged.

This claim—that a company’s stock is imprudent based on the stock price being artificially inflated, and that the fiduciaries should have understood the overvaluation because of nonpublic information of which they were aware—is squarely endorsed by Fifth Third.

Second, the lawsuit claims the company was also an imprudent choice during the specified period in light of circumstances demonstrating SunEdison’s perilous financial condition, which included a sea-change in the basic risk profile and business prospects of SunEdison.

The suit suggests several factors—SunEdison’s overwhelming and unserviceable debt and high debt management risk, and the defendants’ failure to properly investigate the continued prudence of SunEdison Stock and/or employ a reasoned decision-making process in evaluating company stock—all represent the kind of “special circumstances” that the Supreme Court recognized in Fifth Third.

The case was filed in U.S. District Court for the Eastern District of Missouri. The text of the complaint is here.

Investing January 22, 2016

Asset Managers Keeping Their Cool Amid Volatility

Even with deepening concerns about corporate earnings and U.S. economic growth, asset managers are not rushing for the door on equities.

Reported by

Among the good news in Northern Trust Asset Management’s quarterly market outlook survey, the vast majority (84%) of asset managers believe that weakness in emerging markets has “less than a 25% probability of turning into a global recession over the next year.”

Retirement plan investors could be forgiven for thinking otherwise after yet another week of whipsawing markets that at one point saw the bluest of blue chip indices, the DJIA and S&P 500, both approach 20% losses measured year on year. And indeed, “a potential slowdown in emerging-market economies” remains the top concern identified by investment managers, while expectations around U.S. economic growth and corporate earnings also continue to be low for the short term.

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For the second consecutive quarter, investment managers ranked a slowdown in emerging markets as the biggest risk to global equity markets over the next six months. U.S. corporate earnings ranked as the second-highest risk to equity markets, and a slowdown in the U.S. economy ranked third, up from sixth place in the prior quarter, Northern Trust explains.

According to Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust, a lower percentage of managers expect U.S. corporate earnings, job growth or GDP to accelerate than has been the case for a number of years. “Most managers still expect U.S. economic activity to remain stable,” he observes, “but this change in expectations is worth monitoring going forward.”

The survey of approximately 100 money managers, taken throughout December 2015, also sought views about the expected market reaction to extended low oil prices—and the U.S. Federal Reserve’s likely course on interest rate hikes. “Although most managers surveyed (53%) expect corporate earnings to remain the same, more managers expect earnings to decrease than increase (24% to 23%) over the next 6 months,” the survey report notes. “On the U.S. economy, those who expect an increase in U.S. GDP over the next six months fell to 23%, down from 54% in the second quarter of 2015. Sixty-four percent of respondents expect U.S. GDP growth to remain the same over the next six months.”

With all this in mind, more than two-thirds (68%) of managers still expect the Fed will continue to raise rates with a series of small increases. About 20% expect the Fed will hold off on any further increases after its December rate hike, given the current volatility and other global economic factors.

NEXT: More on the slippery price of oil

“In December, with oil prices falling below $50 per barrel, managers were asked how sustained prices at that level would affect U.S., developed non-U.S. and emerging markets equities,” Northern Trust explains. “Nearly half (49%) expect low oil prices to have a negative impact on emerging market equities, and 45% said there would be a positive impact on developed non-U.S. equities. For U.S. equities, 25% expect a negative impact, with the rest divided between positive and neutral.”

Looking at portfolio positioning, there has been a somewhat modest increase in the percentage of managers identifying as “more risk-averse,” at 22%, up from 17% in the third quarter of 2015. Just over two-thirds of managers expect volatility to increase in the U.S equity market over the next six months.

“Even with lower energy prices, more than half of the managers maintained the same level of commodities exposure as the prior quarter,” notes Mark Meisel, senior investment product manager for multi-manager solutions at Northern Trust. “About an equal percentage of managers added to their commodities position as lowered their exposure. More generally, increased market volatility for some managers has led to increased risk-aversion but most managers have not altered their portfolios.”

This is a key lesson for retirement plan investors to absorb: Managers are not reacting emotionally to the currently swings in equity prices, opting instead to focus on the underlying fundamentals. In fact, according to asset managers in the survey, “non-U.S. equity markets are viewed as having the most attractive valuations.”

For example, 54% say European equities are undervalued, and 52% see emerging market equities as undervalued. U.S. equities are seen as undervalued by just 21% of managers, “the lowest percentage since the survey began in the third quarter of 2008,” Northern Trust explains. “Forty-one percent of investment managers view U.S. equities as overvalued, up from 37% in the third quarter.”

When it comes to picking winners and losers in the equity markets, information technology has a bullish rating from 68% of managers, followed by financials, at 38%.

The full Investment Manager Survey Report and a video on survey highlights can be found on Northern Trust’s web site at www.northerntrust.com/managersurvey.

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