With No Presumption of Prudence, RadioShack Faces New Lawsuit

An Employee Retirement Income Security Act (ERISA) lawsuit has been filed on behalf of participants of the RadioShack 401(k) Plan and the RadioShack Puerto Rico 1165(e) Plan of RadioShack Corporation. 

The suit alleges fiduciaries of RadioShack’s 401(k) plans violated ERISA by failing to disclose the company’s true financial and operating condition to participants and beneficiaries of the plans and/or by offering RadioShack stock as an investment option under the plans when it was not prudent to do so. 

Also, according to the complaint, at least some of the defendants failed to provide plan participants information necessary to make informed decisions regarding RadioShack stock. The complaint notes that the company made direct and indirect communications with the plans’ participants regarding investments in company stock, which included Securities and Exchange Commission (SEC) filings, annual reports, press releases, and summary plan descriptions (SPDs) and/or prospectuses regarding plan/participant holdings of company stock. The complaint points out that the Solicitor General and the Solicitor of Labor asserted in their brief to the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer that the incorporation of material misrepresentations contained in SEC filings into an SPD is actionable under ERISA. 

While the U.S. Supreme Court decided in Dudenhoeffer that fiduciaries of employee stock ownership plans (ESOPs) are not entitled to any special presumption of prudence under ERISA, it also found 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. In its decision, the high court said 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. 

In a previous attempt to sue RadioShack over its handling of company stock in the plans, the U.S. District Court for the Northern District of Texas used the presumption of prudence that the Supreme Court struck down to dismiss claims, saying participants had not put forth a strong enough case to overcome the legal presumption that it was prudent to include RadioShack stock as a 401(k) investment. 

According to Bloomberg, RadioShack has lost money in each of its 10 latest quarters and is trying to stem losses that it has said could force it to seek bankruptcy. Just this week, the electronics retailer announced plans to cut its 401(k) match. Bloomberg reports an internal memo from CEO Joe Magnacca obtained by the news provider says RadioShack will discontinue matching contributions in its 401(k) and 1165(e) plans on February 1, 2015. 

The memo also states RadioShack is also reviewing health benefits, Bloomberg says.