Yesterday, Blawgletter rhapsodized on The Value of Class Actions to consumers.  Today we speak of their riskiness to class counsel.  The Fifth Circuit will help us illustrate the point.

Last Friday, the court affirmed summary judgment against a class of pension plan participants and beneficiaries.  In Kirschbaum v. Reliant Energy, Inc., No. 06-20157 (5th Cir. Apr. 25, 2008), the plaintiffs alleged that Reliant Energy, as sponsor of a pension plan for employees, shouldn’t have allowed investments in Reliant stock.  Shenanigans in Reliant’s accounting department inflated the price of the stock by more than 65 percent, making it an imprudent investment.  Evental exposure of the shenanigans popped the bubble, and the stock price tumbled, wiping out 40 percent of the value of the plan’s stock holdings.  The plaintiffs claimed that Reliant and other plan fiduciaries violated their duties under the Employee Retirement Income Security Act.

The district court, after certifying the case as a class action, granted summary judgment to the defendants.  The Fifth Circuit, per Chief Judge Edith H. Jones, affirmed.  The documents that governed the ERISA plan, the court noted, required a company stock fund as an available investment and mandated that the fund invest almost exclusively in the stock.  The plan’s terms thus compelled a presumption that the fiduciaries acted prudently in allowing the fund to continue holding and investing in Reliant stock.  And the plaintiffs failed to rebut the presumption, the court held.

The decision means that the Reliant plaintiffs take nothing on their ERISA claims and will recoup none of their losses.  Class counsel will share in their clients’ misfortune.  They likely spent several million dollars in time and expenses on litigating the case.

Kirschbaum thus illustrates the plaintiff-side perils of class litigation.  A huge investment and years of effort may come to naught. 

Our advice:  If you want sure bets and easy money, try another line of work.

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