Trustees of employee stock ownership plans might violate federal pension law if they continue investing in employer stock when the company's financial condition is deteriorating and the stock price is falling, according to a ruling handed down by the U.S. 3rd Circuit Court of Appeals in Philadelphia.
In Charles Moench et al. vs. Joseph W. Robertson et al, the federal appeals court said ESOP fiduciaries are not immune from the Employee Retirement Income Security Act by investing solely in employer stock, even though ESOPs by their very nature are required to do so.
Charles Moench, a former employee of Statewide Bancorp, Toms River, N.J., filed a class-action suit against Statewide's ESOP trustees for continuing to invest in the company's stock even when it went from $18.25 in mid-1989 to $9.50 at year end, to $2.25 at the end of 1990 and less than 25 cents by May 1991.
A federal district court in New Jersey ruled in favor of trustees, saying they had no discretion to invest in anything but company stock.
The decision of the appellate court could put company officials who serve as plan trustees in a tough spot because they could end up violating securities insider trading if they follow the court's dictates, says A. Richard "Brick" Susko, partner at Cleary, Gottleib, Steen & Hamilton, New York.
The best thing for insiders who serve as ESOP trustees to do in such a situation is to appoint independent outside trustees instead, according to Mr. Susko.
