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comprehensive legal services for businesses call 201-957-0874

Kodak employees sue company over 401(k) failure

People who invest in their company's 401(k) or stock option plans are not usually armchair stockbrokers. Most employees think more about the percentage of their salary they're contributing rather than the stocks in which they're investing. A publicly held company may both include its stock in the 401(k) fund and as a separate option for employees. Although this offering is convenient and sometimes lucrative for both employees and the company, it's prone to some of the same issues companies face with non-employee stockholders and can lead to litigation.

A current example is Kodak, which filed for bankruptcy last month. The company's stock share price had already been on a downward slide for years, diving from an average $31 per share 10 years ago to just 35 cents Monday. A Kodak employee has filed suit against the company, claiming it should have done a better job of safeguarding employees by eliminating the company stock as an investment option. The lawsuit, which could reach class-action status, seeks an order forcing the CEO and other defendants to personally make up the losses from investments in Kodak stock. It also asks for any profits the defendants made at the retirement plan's expense to be put in a trust and divided among the plan's participants.

The suit alleges that "a prudent fiduciary facing similar circumstances would not have stood idly by as (the retirement plan) lost tens of millions of dollars." Beyond that amount, the lawsuit doesn't specify the amount of losses. But Kodak stock was a substantial part of the company's Employee Savings and Investment Plan, under which employees can invest in a stock fund, a self-directed brokerage account or mutual funds. They also had the option of investing in company stock.

Kodak's CEO, other executives and other shareholders named as defendants say there were good reasons for keeping the retirement plan loaded with Kodak stock. Taking it out of the investments would have reduced the overall market demand for the stock and sent a strong negative signal to Wall Street analysts, driving the price down at least as quickly.

It should be noted that employees had the power to divest of the stock themselves, at least on a periodic basis. But this is where a company's retirement plan participants differ from other stockholders. Although some may have declined to change their plans out of company trust and loyalty, many others likely weren't paying attention.

Source: Democrat and Chronicle, "Lawsuit takes aim at Kodak," Matthew Daneman, Jan. 31, 2012

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