Expanded Liability in Pension Investment Cases

Company pension plan managers have the same duty of care to its plan participants as they would to public stock investors under securities law, a federal appeals court ruled Tuesday.

The 9th U.S. Circuit Court of Appeals reinstated a class action by former Amgen, Inc. employees for alleged imprudent investment in the company’s overpriced stock for the retirement plan.

The appeals court, for the second time in a week, has revived a dead class action.  In this case, the court found that the pension plan did not require plan managers to invest primarily in the company’s stock, thus opening up a claim when the plan allegedly paid artificially inflated prices for the Amgen stock.

The 9th Circuit joins the 2nd Circuit in a similar holding.  It also rolls back on a 9th Circuit holding in 2010 that there is a “presumption of prudence” on the part of the pension fiduciaries, in Quan v. Computer Sciences Corp.

The duty of loyalty and care to the pension plan participants, with regard to company stock, are not less than duties they owe to the general public under securities law.  This allows the pension plan members to rely on a presumption that they relied on the plan administrators and it is up to the administrators to rebut that presumption.

“We conclude that the presumption of prudence does not apply, and that, in the absence of the presumption, plaintiffs have sufficiently alleged violation of the defendants’ fiduciary duties,” wrote Judge William Fletcher.

Amgen is a global biotechnology company.  Pension benefits come solely from employee contributions, adjusted by any gains or losses in assets held in the plan.  Employees may select from a number of investment funds offered.  One of those is Amgen Common Stock Fund.  It constituted the largest single asset in both plans at issue in the class action in 2004 and 2005, according to the court.

Amgen was accused of improper off-label marketing of anemia drugs Aranesp and Epogen, for use by HIV patients.  The company allegedly not only paid speakers to tell doctors about the benefits of off-label use but gave doctors attending the events $1,000 from Amgen’s marketing budget, according to the court.

When the allegedly improper off-label marketing came to light through news accounts and a Food and Drug Administration order of a “black label” warning of the dangers of off label use, the stock price dropped.

Sales of Aranesp dropped by 50 percent, an unexpected $1 billion hit to company income, according to the court.

Shares in the pension stock fund lost value from a high of $86.17 to $66.73 between 2005 to 2007, according to the court.

U.S. District Judge Philip Gutierrez in Los Angeles dismissed the pension class action for failure to state a legal claim, while at the same time, Gutierrez allowed a separate securities class action against Amgen for the same alleged misconduct to proceed.

Fiduciaries of the Amgen plans were under no compulsion to buy the common stock fund. “They knew or should have known that the Amgen Common Stock Fund was purchasing stock at an artificially inflated price due to material misrepresentations and omissions by company officers, as well as by illegal off-label marketing, but they nevertheless continued to allow plan participants to invest in the fund,” Fletcher wrote.

“If defendants had revealed material information in a timely fashion to the general public (including plan participants), thereby allowing informed plan participants to decide whether to invest in the Amgen Common Stock Fund, they would have simultaneously satisfied their duties under both the securities law and ERISA,[federal pension law]” Fletcher said.

Case:  Harris v. Amgen, Inc., No. 10-56014