Merck plan participants feel agony of Vioxx withdrawal

WHITEHOUSE STATION, N.J. — Merck & Co. Inc. is facing at least two class-action ERISA lawsuits after its 401(k) plan lost $240 million when Merck stock dropped almost 27%.

The stock tumbled immediately after the company pulled its multibillion-dollar arthritis drug Vioxx off the shelves Sept. 30. The suits were filed in U.S. District Court for the District of New Jersey, Trenton.

Three other law firms have announced publicly that they are investigating whether to file class-action suits of their own.

The two suits charge that Merck and Raymond V. Gilmartin, chairman, president and chief executive officer, breached their fiduciary duty by allowing Merck's $2.6 billion 401(k) plan to hold a significant number of Merck shares.

The Merck plan had an estimated 20 million Merck shares as of Dec. 31, amounting to 36% of plan assets. The value of those shares was about $900 million on Sept. 29; a day later, the value plunged to $660 million.

"These cases are usually filed against any company that has a 401(k) plan that has employer stock in it and the stock drops or the company hits on troubled times," said Doug Hinson, an attorney with Alston & Bird LLC, Atlanta, who defends companies against such lawsuits. He is not involved in the Merck litigation.

"Merck is no exception. The sharks are circling," Mr. Hinson said.

One of the lawsuits — Robert Mortenson vs. Merck & Co. Inc. and Raymond V. Gilmartin — alleges the defendants "breached their fiduciary duties to the plans and their participants under ERISA, by … selecting and maintaining company stock as an investment alternative for participant contributions and company matching contributions … when it was no longer a suitable or prudent investment option under the plans."

The other suit, filed Oct. 13, is Robert Cimato vs. Merck & Co. Inc., Raymond Gilmartin; Caroline Dorsa, Merck's vice president and treasurer; and John Does 1-30.

Calls to the plaintiffs' attorneys —Joseph J. DePalma of Lite DePalma Greenberg & Rivas LLC, Newark, N.J., and Lisa J. Rodriguez of Trujillo Rodriguez & Richards LLP, Haddonfield, N.J. — were not returned.

The suits claim fiduciary violations under the Employee Retirement Income Security Act for both employer and employee contributions.

But Robert Liberto, a vice president at Segal Advisors Inc., New York, said: "With regard to the company contribution piece, employees have little choice" where those contributions are invested.

According to Merck's 11-K filing with the Securities and Exchange Commission, 50% of company contributions to employees younger than 50 years old are invested in Merck shares; participants older than 50 can invest company contributions in any of the fund options. Employee contributions can be invested in any of the plan's 18 options.

"We don't comment on pending litigation," said Merck spokesman Tony Plohoros.

Alan Sandals, an attorney with Sandals & Associates PC, Philadelphia, represents plaintiffs in other ERISA actions but is not involved in the Merck case. He said of the Merck suits: "It's the old question — what did they know and when did they know it."

Mr. Hinson at Alston & Bird added that one of the first "battles" will be who can be charged in the lawsuit. "Plaintiffs want to put the fiduciary hat on as broad a group as they possibly can so they can find somebody who knew something the market didn't and therefore claimed they breached their fiduciary duty under ERISA," he said.

"What we would say from the defense side is all fiduciaries are supposed to do is be prudent. And prudence doesn't require the ability to foretell the future, just that you do what is right based on the knowledge you have," Mr. Hinson added.

But Mr. Sandals countered: "I think no matter what you as a fiduciary think of your company and its prospects, fiduciaries know (assets) are supposed to be diversified."

The Merck suits are just the latest in a string of similar claims that began in earnest in 2001, when participants in Enron Corp.'s 401(k) plan sued the company after losing millions of dollars in company stock.

"The trend has only sprung up in the wake of Enron," said Mr. Hinson. "They started to be filed before Enron, but they really blew up over the last two years."