Unregistered Employer Securities

[Guest JDL]

Hi -

A plan sponsor has a 401(k) plan that permits participants to invest employee contributions in a Company stock fund. The company now realizes that for a limited time unregistered Company stock was offered for purchase by employees under the Company stock fund in violation of the Securities Act of 1933. The company stock should have been registered on a Form S-8.

12(a)(1) of the 1933 Act provides a right of action for rescission against a seller who has offered unregistered securities in violation of the registration provisions of the 1933 Act. Therefore, participants who purchased the unregistered Company stock have a right to rescind the purchase and recover the amount they paid for the stock under the 1933 Act.

My question is, do the plan fiduciaries have a fiduciary duty under ERISA to notify plan participant of their rescission rights? I would imagine it would be prudent to do so, but I have not found anything discussing such a situation. I realize this is a bit obscure, but if there is anyone out there that has encountered a similar situation or has run across anything discussing this, I would greatly appreciate your advice! Thanks.

[Guest planman]

I don't know of any discussion of this. But at one point there was a proposed Enron suit where plan participants claimed they had not received a prospectus for Enron stock and therefore the sale (participants purchase) of securities was not valid. This was an attempt by participants to get all their money back that purchased Enron stock in the plan. I don't know where the suit went or if those facts (missing prospectus) were true.

I would think notifying the participants about recission would be prudent. But I'm sure you can figure out their answer in advance by looking at the investment performance of the stock.

[Guest Harry O]

There was a recent article in the WSJ or BNA Pension Reporter about EDS having this problem. I am no securities lawyer so I don't know the implications of this but the article did mention the possibility of recission -- a very expensive proposition for EDS since they had a sharp decline in their stock price.

[Guest FAQ]

JDL-

We are faced with the same situation and dilemma. How did the sponsor end up handling the situation you described?

I, too have found nothing on point regarding this issue. Disclosure of rescission rights seems appropriate under the rules of prudence and acting in the best interest of participants. However, we would like to have something concrete to show the sponsor.