When is a company stock fund not a company stock fund?
Perhaps more precisely when is it no longer a company stock fund. That’s likely the heart of a new lawsuit filed by participant-plaintiffs John E. Quigley and Frances Quigley who have just filed suit on behalf of the ConocoPhillips Plan and a class of participants in the Plan whose retirement assets were invested in the “Phillips 66 Stock Fund” or the “Phillips 66 Leveraged Stock Fund” from Jan. 18, 2017, to the date of judgment in this Action.
According to the complaint (Quigley v. ConocoPhillips Co., W.D. Okla., No. 5:23-cv-00062, complaint 1/18/23), on April 30, 2012, ConocoPhillips transferred what it called its “downstream businesses,” including its refining, marketing and transportation operations, to Phillips 66 and spun-off Phillips 66 from ConocoPhillips. Phillips 66 became a separate, independent company. Indeed, the suit says the two firms referred to the transactions that effectuated the spin-off as the “Separation.”
Then in connection with the “Separation,” ConocoPhillips and Phillips 66 entered into an Employee Matters Agreement (“EMA”) providing that employees of Phillips 66 would no longer participate in benefit plans sponsored or maintained by ConocoPhillips, and then—“after the Separation of Phillips 66 from ConocoPhillips was completed, Participant Plan accounts invested in the ConocoPhillips Stock Fund and the ConocoPhillips Leveraged Stock Fund received 1 share of Phillips 66 stock for every 2 shares of ConocoPhillips stock, as was true of all ConocoPhillips shareholders. In the Plan, these new shares were immediately transferred to a new Phillips 66 Stock Fund and a new Phillips 66 Leveraged Stock Fund.”
At which point, the plaintiffs argue, that employer stock investment was not an investment in employer securities, but more accurately an investment in a single, undiversified stock. At the end of 2012, the Plan held approximately $767,455,000 worth of Phillips 66 stock between the two Funds, representing just under 15% of the Plan’s assets, according to the suit.
“Because Phillips 66 had separated from ConocoPhillips and employees who went with the Phillips 66 businesses were no longer employed by ConocoPhillips, and because the plan was only available to ConocoPhillips employees, the funds were not invested in qualified employer securities, which would have protected defendants from ERISA’s requirements of diversification,” according to the suit—which also claimed that the concentration of this stock also fell out of line with prudent stock diversification practices.
The suit echoes claims made by different plaintiffs in a different federal court back in 2017. In Schweitzer v. Inv. Cmte. of the Phillips 66 Savings Plan (No S.D. Tex., No. 4:17-cv-03013), participants in the Phillips 66 Savings Plan contend that the plan’s investment committee and the plan’s financial administrator breached their fiduciary duties by failing to actively monitor and remove imprudent investments in the plan by continuing to invest plan assets in the single stock of ConocoPhillips. That suit was ultimately decided in 2020 favor of the defendants—but Bloomberg Law notes that they (the U.S. Court of Appeals for the Fifth Circuit) concluded that the Phillips 66 investment committee appropriately handled the risk posed by a single-stock fund by closing off new investments and by warning participants about associated risks.
However, that conclusion isn’t binding in the Western District of Oklahoma, which sits within the Tenth Circuit. This new suit claims that the defendants breached their fiduciary duties of loyalty, prudence, and diversification under ERISA § 404, 29 U.S.C. § 1104 in various ways, including, but not limited to, the following:
(a) defendants improperly allowed the Plan to offer the Phillips 66 Funds as investment options for the Plan, “even though they knew that the Funds were undiversified and had an established track record of being more volatile and riskier for Plan Participants than prudently diversified alternative investment options, without any expectation of higher returns,”
(b) they “improperly allowed the Plan to maintain its investment in the Phillips 66 Funds, even though they knew that the Funds were undiversified and had an established track record of being more volatile and riskier for Plan Participants than prudently diversified alternative investment options, without any expectation of higher returns,” and
(c) “failed to liquidate the Funds’ substantial holdings in Phillips 66 common stock thereby subjecting the Plan and its participants to the risks associated with being too heavily invested in one company (‘company risk’) and one industry (‘industry risk’).”
The suit claims that the “Plan’s overly concentrated position[i] caused the Plan and participant Plan accounts to lose over $260 million as the price of Phillips 66 stock fell during the Class Period relative to the performance of prudent alternatives, including diversified US Stock Funds, into which Defendants should have transferred the Phillips 66 stock because it offered demonstrably lower risk without sacrificing any expected return.”
The plaintiffs argue that “because Phillips 66 had separated from ConocoPhillips and employees who went with the Phillips 66 businesses were no longer employed by ConocoPhillips, and because the Plan was only available to ConocoPhillips employees, the Funds were not invested in qualified employer securities, which would have protected Defendants from ERISA’s requirements of diversification and prudence with respect to diversification.”
“Defendants did not independently assess whether to keep the Phillips 66 Funds as investment options even as they recognized that Phillips 66 stock was not a ‘qualifying employer security’ for the Plan,” the plaintiffs allege. “The Defendants’ failure to remove the Phillips 66 Stock Funds as Plan investment options has cost the Plan’s participants over $260 million compared to the returns they would have enjoyed had the assets been moved into prudently diversified alternative equity options like the Vanguard Institutional Index Fund, another plan investment option, at the beginning of the Class Period.”
Note: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you’ll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
[i] Phillips 66 stock began trading separately from ConocoPhillips on April 30, 2012. The suit goes on to claim that “the track record established between April 30, 2012 and December 31, 2016 was sufficient for a prudent fiduciary to recognize that: (1) Phillips 66 Stock was more volatile than diversified investments; and (2) this higher risk did not come with an expectation of higher reward. As a result, a prudent fiduciary would have realized before December 31, 2016, and during the entirety of the Class Period, that prudence and diversification required divestiture of the Phillips 66 Stock Funds in the ConocoPhillips Plan. Additionally, the Plan’s heavy concentration in Phillips 66 Stock exposed the Funds and the Plan to the risk of large losses.”