In re Ferro Corp. Erisa Litigation, No. 1:05CV1594.

Citation422 F.Supp.2d 850
Decision Date21 March 2006
Docket NumberNo. 1:05CV1594.
PartiesIn re: FERRO CORPORATION ERISA LITIGATION
CourtU.S. District Court — Northern District of Ohio

Joseph C. Weinstein, Steven A. Friedman, Thomas S. Kilbane, Squire, Sanders & Dempsey, Cleveland, OH, for Ferro Corporation, Anne M. Granchi, Joseph S. Usaj, James C. Bays, Thomas M. Gannon and Patricia J. Stilwell.

MEMORANDUM OF OPINION

MANOS, District Judge.

On June 10, 2005, Jon Mark Duquette, Plaintiff, filed the above-captioned ERISA class action against Ferro Corporation (Ferro), Anne M. Granchi, Joseph S. Usaj, and several John Does. (Docket No. 1.) On September 6, 2005, Plaintiff filed an amended complaint adding defendants James C. Bays, Thomas M. Gannon, and Patricia J. Stilwell. (Docket No. 12.)

On November 14, 2005, Defendants filed a motion to dismiss the amended complaint. (Docket No. 24.) On January 13, 2006, Plaintiff filed a brief in opposition. (Docket No. 30.) On February 13, 2006, Defendants filed a reply. (Docket No. 32.) On February 27, 2006, Plaintiff filed a surreply. (Docket No. 34.)

For the following reasons, the motion to dismiss (Docket No. 24) is DENIED.

I. FACTUAL BACKGROUND
A. The Parties

Plaintiff is a participant in the Ferro Corporation Savings and Stock Ownership Plan (the "Savings Plan"). (Docket No. 12, "Compl.," at ¶¶ 1, 12.)

Ferro is an Ohio corporation and leading producer of performance materials sold to a broad range of manufacturers serving diverse markets throughout the world. Id. at ¶ 13. Ferro is the Plan sponsor, the named fiduciary, and a Plan Administrator. Id.

Defendant Granchi is a Plan Administrator and Director of Compensation and Benefits. Id. at ¶ 15. Defendant Bays is Vice President and General Counsel of Ferro and a Plan Administrator. Id. at ¶ 16. Defendant Gannon is Vice President and Chief Financial Officer of Ferro and is authorized by the Plan Administrators to act as a Plan Fiduciary. Id. at ¶ 17. Defendant Stilwell is Corporate Manager at Ferro, and is authorized by the Plan Administrators to act as a Plan Fiduciary. Id. at ¶ 18. Finally, Defendant Savings and Stock Ownership Plan Committee and its various John Doe members are fiduciaries who exercise discretionary authority over the Plans and/or the Ferro Company Stock Fund. Id. at ¶ 14, 19.

B. The Plans

The Savings Plan and the Ferro Corporation Bargaining Unit 401(k) Plan (the "Unit Plan") are "employee benefit plans" within the meaning of 29 U.S.C. §§ 1002(3) and 1002(2)(A). Id. at ¶ 20. Both Plans are "defined contribution" or "individual account" plans within the meaning of 29 U.S.C. § 1002(34). Thus, retirement benefits provided by the Plans are based solely on the amounts allocated to each individual account. Id. at ¶ 21.

The Savings Plan is available to all Ferro employees who are not represented by a union group. Id. at ¶ 22. The Unit Plan is available to all Ferro employees represented by a union group that has a plan agreement with Ferro. Id. Both Plans are considered voluntary contribution plans whereby participants make pre-tax contributions at a rate of up to 40% of their eligible compensation. Id. at ¶ 23. Participants then direct the Plans to purchase investments from options pre-selected by the Plans' fiduciaries. Id. The Plans offer several investment options, including the Ferro Company Stock Fund (the "Company Fund"). Id. at ¶ 26.

The Company Fund, which is comprised of Ferro common stock, Ferro convertible preferred stock, and cash, is a utilized fund and is a portion of, the Savings Plan. Id. at ¶ 28. It is an employee stock ownership plan ("ESOP") within the meaning of 29 U.S.C. § 1107(d)(6)(A). The Plans also qualify as eligible individual account plans ("EIAP") within the meaning of 29 U.S.C. § 1107(d)(3)(A).

Ferro makes matching contributions to the Plans. Id. at ¶ 24. Participants are fully vested in their own contributions, while matching contributions vest pursuant to a deferred scale. Id. at ¶ 25. Because of these vesting requirements and other rules prohibiting the transfer of matching contributions, a certain portion of the Company Fund cannot be removed or transferred at the participant's direction at a given time. Id. at ¶ 29.

The Plans' assets are commingled with the Ferro Corporation Defined Contribution Master Trust (the "Trust"). They represent the Trust's single largest asset. Id. at ¶ ¶ 31-34.

C. The Allegations

From February 6, 2003 to April 27, 2004, Ferro announced quarterly increases in sales over the preceding years. Id. at ¶ 82-96. Throughout this period however, the Performance Chemical segment, which included the Polymer Additive business, struggled due to low demand and high raw material costs. Id. Nonetheless, Ferro CEO Hector Ortino and Defendant Gannon remained optimistic. Id. at ¶ ¶ ¶ 84, 87, 88. Specifically, Defendant Gannon predicted a 6-8% increase in the chemical segment for the next quarter over the preceding year. Id. at ¶ 93.

On April 27, 2004, Ferro announced its financial results for Q:1 04 and reported a 12.4% revenue increase over the preceding year. Id. at ¶ 96. With regard to the Performance Chemical segment, Ferro reported an 8.2% revenue increase, attributed to increased demand and pricing. Id. at ¶ 98. In response, CEO Ortino stated, "we are very optimistic that we will reach our long-term revenue growth targets of 6-8 percent annually, while profits after a dramatic recovery in 2004, should reach our growth targets of 12 percent." Id. at ¶ 97.

However, on July 23, 2004, Ferro surprised the investing public with an announcement that it would have to lower its earnings expectations for the second quarter by more than 70% due to inappropriate accounting entries. Id. at ¶ 99. According to the press release:

The second quarter 2004 fully diluted earnings per share from continuing operations are expected to be between $0.10 to $0.12. This compares with the analysts' second quarter earnings estimate range of $0.34 to $0.35 per share. The shortfall is largely the result of poor performance by the Polymer Additives business and charges to be taken in the Polymer Additives business unit to remedy inappropriate accounting entries....

During our financial review process we recently identified several issues in the preliminary results of our Polymer Additives business, commented Hector R. Ortino, chairman and chief executive officer. "Upon a further examination, we determined that the Polymer Additives business unit's performance was well below our expectations and that it will be necessary to take a non-cash charge to earnings related to inappropriate accounting entries."

The second quarter changes stemmed from an internal investigation of accounting entries made in the Company's Polymer Additives business unit, which both overstated the business unit's performance and undetermined the reliability of the forecasting process in that unit ....

Id. On the same day, Ferro's market value decreased by 16%. Id. at ¶ 100. As of December 31, 2004, the Plans' investments in the Company Fund depreciated by $10 million. Id. at ¶ 38. As of January 1, 2005, the Company Fund was "frozen." Id. at ¶ 30. Thus, new investments from new contributions and transfers from old contributions were prohibited. Id. Nonetheless, the Plans remained heavily invested in the Company Fund. Between January 1, 2005 and May 13, 2005, the Plans' investments in the Company Fund depreciated by another $10.4 million. Id. at ¶ 40.

Both the Securities and Exchange Commission ("SEC") and Ferro, through independent firms, are currently investigating the inappropriate accounting entries. Id. at ¶¶ 99, 103-112. The ongoing investigations have revealed that the irregularities date back to FY 01 and extend beyond the Polymer Additives business. Id. at ¶¶ 102-06. Although Ferro had initially blamed a former subordinate divisional employee, later investigations have identified "isolated instances" of what could be considered possible discussions of inappropriate accounting. Id. at ¶¶ 105, 110.

On April 21, 2005, auditor KPMG announced that it was "unable to conclude at this time that the investigation was adequate for its purposes." Id. at ¶ 111. Thus, the Audit Committee has "decided to engage an independent firm specializing in investigations to review the original investigative team's procedures and conclusions." Id. To date, Ferro has not provided any further information regarding the accounting irregularities and has not filed its Form 10-K for the year ending 2003, or its restated Form I-Q for the first quarter 2004. Id. at ¶ 112.

Plaintiff alleges that the individual Defendants knew or should have known that the Company Fund was an imprudent investment. Id. at ¶ 80. Specifically, Plaintiff alleges that the individual Defendants knew or should have know about the accounting irregularities by virtue of their positions at Ferro. Id. at ¶ 115. Thus, according to Plaintiff, they breached their fiduciary duties of loyalty, prudence and to avoid conflicts of interest, and did not provide complete and accurate information to the plan participants. As to Ferro, Plaintiff alleges that it did not adequately monitor the individual Defendants.

On November 14, 2005, Ferro filed a motion to dismiss raising eight issues:

(1) Has plaintiff stated a claim for breach of the duty of loyalty and prudence under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29 U.S.C. § 1001-1461, where the alleged plan fiduciaries had no discretion to eliminate the Company Stock Fund as an investment option?

(2) Has plaintiff stated a claim for breach of the duty of loyalty and prudence where the Complaint does not allege that Ferro's financial condition was seriously deteriorating or that any...

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