A federal appeals court in Richmond, Va., overturned a U.S. District Court's dismissal of a complex ERISA case involving Gannett Co. and the stock of its former parent.
Participants in a company 401(k) plan alleged that the company and plan fiduciaries had violated their ERISA duties because they failed to reduce their holdings in the stock of the former parent, TEGNA Inc., following the June 2015 spinoff of Gannett.
Declining to divest the Gannett 401(k) plan's "substantial holdings" in 2015 and 2016 of TEGNA stock caused the plan to be "undiversified," according to the original complaint filed in March 2018. "The plan's holdings of TEGNA common stock should have been liquidated on or shortly after the date of separation," it said.
In September 2018, U.S. District Judge Anthony J. Trenga, Alexandria, Va., dismissed the lawsuit saying the complaint failed to meet the standards for proving an ERISA duty-of-prudence violation set by the U.S. Supreme Court in 2014, a landmark company stock-case opinion.
Mr. Trenga also dismissed the case because "the duty to diversify requires diversity among the full set of funds offered in the menu of plan offerings but does not compel every individual fund in a plan to be diversified," according to court records.
The federal appeals court judges, in a 2-1 vote on Aug. 11, reversed the dismissal and sent it back to the district court.
"Plaintiffs have plausibly alleged defendants breached their duty of prudence and caused a loss to the plan," the judges wrote in the case of Stegemann and Quatrone vs. Gannett Company Inc. et al.
"Because defendants did not monitor the merits of the fund, they did not uncover that it was an imprudent fund," the judges wrote, referring to the TEGNA stock. "As the fund was a single-stock fund with inherent concentration risk, it is plausible that the fund was, in fact, imprudent."
The Gannett Co. Inc. 401(k) Savings Plan, McLean, Va., had $1.23 billion in assets as of Dec. 31, 2018, according to the latest Form 5500.