Washington Mutual Faces Class Action Citing ERISA Violations
SEATTLE – Washington Mutual (NYSE: WM) employees participating in the company's 401(k) plan filed a class-action lawsuit against the company, its CEO, board members and all other fiduciaries, claiming the organization failed to adequately monitor the plan and advise participants when the company stock investment was no longer prudent. As a result, employee participants suffered total financial losses in excess of $150 million.
Filed on November 29, 2007 in District Court in Seattle, Wash., the suit seeks to represent all WaMu employees whose 401(k) plan accounts include investments in company stock from April 18, 2006 until present.
The suit claims that under ERISA fiduciaries are obligated to eliminate imprudent investment vehicles from 401(k) plans and to warn plan participants of risky investments. The suit alleges that the fiduciaries are legally responsible to restore any losses to the plan resulting from mismanagement. As of December 31, 2006 the plan held $341,404,922 in company stock and has since plummeted 60 percent.
"In recent months WaMu has been hit with investigations and lawsuits that call many of its basic business practices into question," said lead attorney and Hagens Berman Sobol Shapiro managing partner Steve Berman. "Now the effects of the company's mismanagement are trickling down to employees and WaMu is forcing them to take a hit where it hurts most - through retirement and savings plans."
The suit alleges that while CEO Kerry Killinger and the insider-appointed benefits committee members had a fiduciary responsibility to warn employees of the company's precarious financial health they intentionally concealed information from plan participants.
Plaintiff Barbara Alexander, like many WaMu employees, deferred a portion of her salary and invested in the company savings plan. WaMu offers employees company stock funds as an investment option and plan fiduciaries are responsible for monitoring investment options and eliminating those that become imprudent.
According to the complaint, WaMu's involvement in the subprime mortgage industry contributed to the decrease in stock value and employee savings plans. WaMu held billions of dollars in subprime loans that it had originated and in the last year has seen many of those go into foreclosure.
The complaint goes on to explain that WaMu's risk was exacerbated by the fact that the company engaged in a fraudulent appraisal scheme under which it artificially inflated the appraised values of homes. This means the loans in WaMu's portfolio were inherently overvalued but when WaMu securitized those loans and sold them to investors they were perpetuating a massive fraud on investors that created another risk - WaMu would have to re-assume ownership of those loans if the scheme was revealed.
"As the WaMu appraisal scheme has recently been unfolding and the subprime mortgage crisis has been in the limelight for the past year the company had the obligation to warn employees and investors that stock prices would be negatively affected," said Berman. "Not notifying employees of the potential risk is a clear violation of ERISA law and is explicitly stated as one of the roles of a fiduciary."
According to the complaint WaMu's troubles have been pushed into the spotlight, and with increasing severity since September 2007. On September 13, 2007 the company announced it was cutting 1,000 jobs and closing a once-prized loan subsidiary. On October 5, 2007 WaMu announced its third-quarter sales would be severely impacted due to the subprime market, as much as 75 percent from the prior year. Not two weeks later WaMu announced its net income for the third quarter had dropped $210 million from $748 million in the third quarter of 2006. In a final blow on November 1, 2007, the Attorney General for the State of New York sued Washington Mutual's main appraisers for conspiring to provide the company with rigged and inflated appraisals.
Within a day of the announcement company stock collapsed more than 15 percent which created a loss for investors and plan participants of almost $4 billion.
The suit makes several claims of wrongdoing by WaMu's fiduciaries, including: failure to prudently and loyally manage the plan's assets; failure to provide complete and accurate information to participants and beneficiaries; failure to monitor the investment and administration committees and provide them with accurate information; breach of duty to avoid conflicts of interest; and, co-fiduciary liability.
Under ERISA law a plan participant can bring a civil action on behalf of a retirement plan against companies and individuals that breach any of the duties outlined for a fiduciary. According to the complaint Alexander is seeking compensation for any losses the plan suffered, imposition of a constructive trust on any amount by which the defendants were unjustly enriched and for the court to require defendants to appoint one or more independent fiduciaries to participate in the management of the WaMu stock.
WaMu employees who are interested in joining this class-action lawsuit can receive more information by calling 206-623-7292, or going to www.hbsslaw.com.
HBSS is also working on a class-action lawsuit involving WaMu's use of inflated housing values to generate loans. Attorneys intend on seeking redress for inflated loans home owners have received and estimate those inflation prices to be in the hundreds of millions of dollars. Additionally, attorneys are seeking reimbursement for any appraisal fees incurred.
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Hagens Berman Sobol Shapiro is based in Seattle with offices in Chicago, Cambridge, Los Angeles, Phoenix and San Francisco. Since 1993, it has developed a nationally recognized practice in class-action and complex litigation. Among recent successes, HBSS has negotiated a $300 million settlement in the DRAM memory antitrust litigation; a $340 million recovery on behalf of Enron employees; a $150 million settlement involving charges of illegally inflated charges for the drug Lupron, and served as co-counsel on the Visa/Mastercard litigation which resulted in a $3 billion settlement, the largest anti-trust settlement to date. HBSS served as counsel in a $850 million Washington Public Power Supply settlement and represented Washington and 12 other states against the tobacco industry that resulted in the largest settlement in history. For a complete listing of HBSS cases, visit www.hbsslaw.com.
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