News & Information



5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

CCH® PENSION — 06/10/11

Plan not entitled to share of securities litigation settlement as affiliate of employer

A company's control over the committee administering its 401(k) plan was sufficient to render the plan an affiliate of the company and, thus, excluded from the class entitled to share in the settlement of securities fraud litigation, the U.S. Court of Appeals at Chicago (CA-7) has ruled in In re Motorola Securities Litigation.

Securities case involving artificial inflation of stock

Purchasers of a company's common stock brought a class action suit against the company and its principal officers, alleging that it violated federal securities laws by artificially inflating the value of its securities through the use of false and misleading statements. The class members, as defined by the federal trial court, included investors who purchased publicly traded stock during the class period. However, purchasers who were affiliates of the company were expressly excluded from the class.

The securities fraud action was subsequently settled for $190 million. The Stipulated Settlement specifically incorporated by reference the class definition specified by the trial court.

Prior to the distribution of the settlement proceeds, however, the company's 401(k) plan submitted a claim to share in the settlement. The plan, which was structured as an ERISA 404(c) participant-directed plan, offered a company stock fund as one of the few investment options available to participants. The plan claimed that, during the class period, many plan participants acquired beneficial ownership of the company's common stock by purchasing units of the company stock fund. The participants, as beneficial owners of company stock, the plan maintained, were injured by the company's allegedly unlawful conduct.

The trial court denied the plan's claim to a share in the settlement. The plan was an affiliate of the company and, thus, the court ruled, specifically excluded from the class.

Plan excluded from class as affiliate of company

The Appeals Court, in affirming the trial court's ruling, initially explained that the term "affiliate," for purposes of securities fraud litigation, is based on federal securities law, pursuant to which an entity is an affiliate of the issuer of the stock if the entity is controlled by or controls the issuer. The court then noted that the company approved and removed members of the plan committee (which was the designated plan administrator). Accordingly, the company had structural organizational control over the management and policies of the committee. Because the committee, as plan administrator, had managerial control over the policies and operations of the plan, the court further reasoned that the company through its control of the committee effectively controlled the plan.

The plan maintained that the administrative authority of the committee over plan assets was not sufficient to render the plan an affiliate of the company. According to the plan, the participants, and not the committee, controlled the plan because the participants controlled the decisions to buy or sell units in the company stock fund and retained voting control over the company common stock allocated to their accounts.

The Appeals Court acknowledged the participant-directed structure of the plan, but in rejecting the plan's argument, stressed that the participants' investment choices were severely circumscribed by the committee, which limited investment options to a small number of funds. In addition, the court noted that the committee was empowered to: (1) limit, by percentage, the amount of money a participant could invest in a fund and (2) restrict the frequency with which participants could reallocate assets among different funds. Thus, the court concluded that the committee and not the plan participants had managerial and operational control over the plan.

For more information, visit

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.