In actions some observers are comparing to past problems at now-defunct energy giant Enron, two former Sovereign Bank employees have filed lawsuits against the bank, claiming it knew its pension investments were risky and misled employee participants and the public about the level of risk.
“Thousands” of present and former employees of $82 billion, Wyomissing, Pa.-based Sovereign Bancorp could be affected by the claims, according to Ellen Doyle, of Pittsburgh law firm Stember Feinstein Doyle & Payne.
The number cited in one of the complaints is at least 15,000.
Doyle’s firm filed suit in U.S. District Court for the Eastern District of Pennsylvania on behalf of plaintiff Gail Wentworth of Massachusetts in April.
Wentworth and Emanual Schmalz, of New York City, who filed a separate lawsuit in the same court in February, claim that starting in January 2007, bank management invested their retirement funds unwisely and didn’t give them enough information to know otherwise.
The bank says the claims are without merit and said it “intends to vigorously defend” against them.
Stember Feinstein and Harwood Feffer, the New York law firm representing Schmalz, hope to combine the claims and seek class-action status in the fall.
Milton bank strategy consultant Suzanne Moot, owner of M & M Assoc., sees a precedent in the complaint: Enron.
It’s common for publicly owned companies to encourage employees to invest in company stock, as energy giant Enron did, she noted.
“The question is, was there pressure applied [on Sovereign employees] to make one choice over another?”
Now-defunct Enron collapsed in 2001 following exposure of fraudulent accounting practices. Employees who had invested in company stock through the company’s 401(k) plan lost millions of dollars.
Robert Harwood, Schmalz’s attorney, said that while Sovereign clearly has not collapsed, it “did suffer a major setback and big losses” in recent months. Schmalz’s complaint lists the amount of money lost in the “millions.”
Slumping Stock Price
Sovereign Bancorp stock closed Friday at $8.69 per share. Its highest sale price in the last year was $23.35.
It was trading at about $13.50 in January, Harwood said, when Sovereign announced it had lost approximately $1.6 billion due to credit market problems. Employees invested at that time have lost about one-third of their investment, he said.
Knowledge of the bank’s financial problems was “not something that would surface overnight,” he added.
Harwood said “a breach of fiduciary duty” by Sovereign’s retirement plan managers, some of whom are also bank officers, is behind the losses. The two lawsuits allege that as man-agers of the 401(k) and Employee Stock Ownership plans, they misled participants about the risk involved in their investments in Sovereign Bancorp stock through their 401(k) plans.
One legal observer said litigation involving retirement plan fiduciaries who are also officers at public companies is not uncommon. Problems can result when fiduciaries, whom the Employee Retirement Income Security Act of 1974 (ERISA) requires to act in the sole interest of plan participants; and senior management, who are bound by federal securities laws not to disclose certain insider financial information, are the same people, he explained.
Employees who didn’t know about the company’s losses may have invested more in company stock then they would have otherwise, Harwood said.
Sovereign employs approximately 12,000 people in nine Northeastern and Eastern Seaboard states.
Harwood declined comment on whether employees were pressured to purchase company stock. ESOP plans, by definition, are designed to allow employees to invest in a com-pany’s stock.
Wentworth’s complaint does not allege pressure, but “it’s certainly true that employees think the company wanted them to invest in [its] stock,” Doyle said.
Schmalz’s complaint alleges that Sovereign issued “misleading” press releases and filings with the Securities and Exchange Commission. Wentworth’s states that “Sovereign’s dis-closures of its financial problems and their causes have trailed its involvement in practices that were likely to cause future financial problems.”
Wentworth’s complaint alleges pension plan managers “knew or should have known” that Sovereign was concealing financial difficulties – in the form of exposure to collateralized debt obligations, subprime mortgages and other investments – which made the bank’s common stock and certain funds it manages and offers through the plan “a risky investment for plan participants.”
Many larger banks are struggling these days, Moot pointed out, because they were similarly involved in collateralized debt obligations – also known as asset-backed securities – or else loaned money in states outside their typical market harder hit by the current credit and loan crisis.
Harwood said Sovereign retirees will be hit harder by current problems in company earnings affecting the pension plan.
Doyle said employees closer to or in retirement would be hurt more, but added that losses in an employee pension fund during an investor’s early years “can affect returns forever.”
Harwood said the exact amount of money and number of employees potentially involved is information held by Sovereign that he will seek during a process of discovery over the summer.
However, he predicted Sovereign may request to hold up the discovery process.
Company stock represented approximately 40 percent of all assets in the 401(k) plan in December 2006.
Sovereign Bank’s attorney, Daniel Wille of Reed Smith LLP in Pittsburgh, was unable to offer a comment by press deadline. A bank spokeswoman in Boston declined comment.
In a May filing with the SEC, Sovereign Bancorp stated that it “believes the claims [made in Schmalz’s lawsuit] are without merit and intends to vigorously defend the claims.”
