Echoes of Enron in Recent 401k Lawsuit, With A Twist

Lawsuit further claims conflict of interest

401k, lawsuit, retirementIs concentrated employee stock in one company EVER a good idea?

It’s almost as if they’ve never heard of once high-flying Houston energy company.

A lawsuit filed against Kansas City-based DST Systems Inc. claims the company allowed a money manager to put concentrated positions of its employees’ retirement assets in one company’s stock.

Shares of Valeant Pharmaceuticals International Inc. fell from more than $260 a share to less than $15 a share in 15 months, and the concentrated investments of DST right along with it.

The lawsuit said DST employees saw nearly $400 million disappear from their retirement accounts, according to The Kansas City Star.

“They couldn’t get out of it, and they couldn’t control it,” Ted Kapke, an attorney representing the former DST employee who sued, told the paper.

The incident is what the Star calls “a new twist on an old problem that has plagued many employees’ 401(k) and similar retirement plans. They suffer stiff losses from a heavy investment in one stock, though that stock usually has been the employer’s own shares.”

For example, it notes the 401k plan at the former Aquila Inc. in Kansas City was stuffed with Aquila shares when the bottom dropped out of the stock’s price in 2002.

Aquila’s employees were locked into the Aquila investment and powerless to move that money into a safer mix of investments.

Similar situations led to big investment losses in employee retirement accounts at Enron. Such events led some Kansas City area companies to allow their employees to sell company shares that were held inside retirement plans.

According to the lawsuit, DST relied on Ruane, Cunniff & Goldfarb to manage the profit-sharing portion of DST’s combined 401(k) and profit-sharing plan. Each portion was roughly equal in size. DST and Ruane breached their fiduciary duties to the plan’s participants, the lawsuit claimed.]

The lawsuit further claimed that DST and Ruane each had a conflict of interest.

Ruane also managed and distributed the Sequoia Fund, a mutual fund that had a large investment in Valeant shares.

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