Throughout the 2000s, mortgage lender National City Corp. maintained an ERISA-governed 401(k) retirement plan for its employees, in which participants could opt to invest in company stock. Half of the available investment funds were managed by National City subsidiaries, including one—Allegiant Asset Management Co.—that served as investment adviser for most of the funds. National City also controlled the administrative committee that had full discretionary control over the plan.
During this time, National City became heavily involved in the subprime real estate market, despite indications that it was eventually going to collapse. The bank sold one subsidiary that focused on subprime loans but retained unpaid loans worth $10 billion. It also repurchased millions of shares of outstanding stock and bought a bank that focused on subprime loans in the Florida real estate market.
National City asserted to the public that its involvement in the subprime market wouldn’t damage the company. It didn’t tell retirement plan participants of the dangers and continued to invest plan money in company stocks.
The company’s 2006 report to the Securities and Exchange Commission and its statements to stockholders artificially inflated its profits with what should have been reserved for potential losses.
As the company’s losses became known, its stock declined from more than $30 per share in 2006 to $5 per share in 2008. Retirement plan participants suffered significant losses.
Several participants filed class actions, which were consolidated, against National City, its board of directors, the administrative committee members, and the company’s CEO and human resources vice president. The plaintiffs claimed that the defendants breached their fiduciary duties in violation of ERISA by failing to disclose the company’s losses to plan participants; adequately monitor the plan’s management; and avoid conflicts of interest by appointing an independent administrator rather than allowing the board of directors—which profited from investment in company stocks—to choose how the participants’ money would be invested.
The class also alleged that the company shouldn’t have become involved with the subprime market.
The parties settled for $43 million, to be allocated based on participation in the plan. The participants will be divided into two groups: those who held National City stock between September 2006 and December 2008, and those who held Allegiant funds between March 2002 and December 2009.
The court has preliminarily approved the settlement. A fairness hearing is set for the end of this month.
Citation: In re Natl. City Corp. Secs., Derivative & ERISA Litig., No. 1:08-nc-70000 (N.D. Ohio Aug. 27, 2010).
Lead plaintiff counsel: AAJ member Joseph H. Meltzer, and Edward W. Ciolko and Joseph A. Weeden, all of Radnor, Pennsylvania; and Edwin J. Mills and Michael J. Klein, both of New York City.