Law 360: Diebold Loses Bid To Toss ERISA Class Action

Law360, New York (May 30, 2008) -- Automatic teller manufacturer Diebold Inc. has lost a battle to throw out a consolidated class action accusing the company and top executives of issuing misleading statements and mismanaging its employees' retirement benefits.

In a ruling issued Wednesday Judge Peter Economus, of the U.S. District Court for the Northern District of Ohio, said the plaintiffs, workers of the Ohio-based company, had put forth a case of fiduciary duty breaches sufficient to survive dismissal.

The complaint alleges that Diebold and the individual defendants artificially inflated the company's stock price in order to mislead its employees into investing their pensions in the company's stock, in violation of the Employee Retirement Income Security Act.

But Diebold and its directors had argued they were not fiduciaries of the workers' savings plan and could not be held liable for the alleged ERISA breaches, which included dissemination of false financial statements to boost the company's stock performance.

Judge Economus was not persuaded by the argument, however, saying the defendants fell under the “liberal definition” of an ERISA fiduciary operative at the motion-to-dismiss stage of the proceedings.

The judge was equally unmoved by Diebold's argument that the company's reports to the U.S Securities And Exchange Commission, boasting about its performance and prospects, were not actionable under ERISA.

“To the extent that the alleged misrepresentations included in the company's public filings did not relate specifically to plan benefits, they are not actionable under ERISA. However, to the extent that the allegedly inaccurate or misleading communications relate to SEC filings that were incorporated by reference into the plan documents and/or were disseminated to plan participants, such misrepresentations are actionable under ERISA,” he said.

Diebold has been fighting to have the action dismissed for months. In October last year the company urged the court to look for guidance to the U.S. Court of Appeals for the Third Circuit, which rejected “artificial inflation” of securities claims.

The company filed a notice of supplemental authority claiming that the Third Circuit's decision in Edgar v. Avaya Inc. in September last year supported the company's motion to dismiss the class action.

Diebold said the Edgar case allegations, which accused Avaya of misconduct by permitting a company 401(k) plan to invest in Avaya stock and by creating misrepresentations of the company's future prospects, were “strikingly similar” to the claims made in its case.

The Third Circuit affirmed dismissal of the Edgar case, ruling that the plaintiffs did not prove facts that overcame a presumption of prudence for all eligible individual account plans.

Diebold said that it had complied with all ERISA disclosure obligations and the documents that the plaintiffs asserted were misleading also mentioned the risks that Diebold and its investors faced.

Diebold's motion to dismiss asserted that a charge misrepresenting the true value of securities is governed by securities law, rather than ERISA.

“Plaintiffs' singular reliance on securities law principles to resuscitate their claims, e.g., 'fraud on the market' and 'presumptions of reliance,' and securities law precedent ... only confirms that they cannot state any claim under ERISA statutory language and precedent,” Diebold had said.

“Plaintiffs' invocation of securities law principles and case law to avoid the argument that securities law provides the singular remedy is both ironic and fatal to their cause.”

In 2005 and 2006, Diebold was served with 10 lawsuits by shareholders and participants in the company’s 401(k) savings plan. Plaintiffs in four of the lawsuits alleging breaches of duties in connection with the plan consolidated their actions late in 2006.

Diebold also became the subject of a formal SEC probe last August. The SEC first turned its attention to the company after it reduced 2005 fourth-quarter earnings by $7 million and net income by $4.2 million in order to record some revenue in later quarters.

The plaintiffs are represented by Climaco Lefkowitz Peca Wilcox & Garofoli, Schiffrin Barroway, Harwood Feffer, Goldman Scarlato & Karon, and Gainey & McKenna.

Diebold is represented by Morgan Lewis & Bockius and Jones Day.

The case is In re: Diebold ERISA litigation, case number 5:06-cv-00170 in the U.S. District Court for the Northern District of Ohio.

--Additional reporting by Ron Zapata, Brendan Pierson, Bailey Somers and Erin Coe