The plan wasn’t very large, but a company founder is alleged to have violated ERISA’s duty to diversify by putting most of the plan’s assets in a single stock.
In McClain v. Poppell, N.D. Fla., No. 3:16-cv-00502, complaint filed 9/30/16, the two plaintiffs — both former participants (the suit claims they were fired in retaliation for their whistleblower role in the case) — allege that Dr. Samuel Poppell, founder of Emerald Coast Eye Institute LLC, managed the company's 401(k) investments, despite having “no meaningful expertise, education, or professional knowledge in finance, investment management, or portfolio management,” according to the suit.
More importantly, Poppell chose to “significantly concentrate” the ECEI plan assets in a single holding, specifically VirnetX (VHC) – and “further failed to remove this holding as it continued to lose value.” And by significantly, the suit claims that the plan’s non-cash investments were at times entirely concentrated, or nearly entirely concentrated, in that stock. The suit claims that he improperly allocated and managed the ECEI plan, failed to prudently invest the ECEI plan, failed to diversify plan investments, and failed to properly monitor and remove inappropriate holdings.
As of Dec. 31, 2014, the ECEI plan’s total exposure to VirnetX was in excess of 50%, and by the end of 2014, the ECEI plan’s position in VirnetX had already declined in value by $543,235.91 since the plan’s initial purchase. Through the filing of this suit, VirnetX’s share prices have declined more than 90% compared to the share price on June 1, 2012. The 401(k) plan had fewer than 30 participants during the past year and ended 2015 with just over $300,000 in assets.
Troll ‘Boot’?
According to the suit, VirnetX has widely been identified as, referred to as, and accused of being a “patent troll” — companies that exist “primarily or exclusively to pursue aggressive patent-infringement lawsuits against other companies."
Not that Poppell wasn’t warned, according to the suit, which claims that “on multiple occasions Defendants rejected suggestions and recommendations,” not only from the plaintiffs, but also from the plan’s recordkeeper/TPA Warren Averett, of the need to retain a qualified investment advisor or manager to manage the ECEI plan portfolio, and the fiduciary obligation to “diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.”
All that said, on the very same day that the suit was filed (Sept. 30), VirnetX won a $302 million jury verdict in a patent infringement lawsuit against Apple Inc. concerning the tech giant’s FaceTime video messaging platform, in which the U.S. District Court for the Eastern District of Texas ruled that Apple infringed on four of the company’s patents. In response, VirnetX stock jumped significantly (approximately 35%).
The plaintiffs in this proposed class action are seeking damages “for lost wages, benefits, and other remuneration; reinstatement or back pay in the event reinstatement is not awarded; reinstatement of full fringe benefits and seniority rights; damages for mental and emotional distress; compensatory damages; interest — including pre-judgment interest on lost wages; costs; attorneys’ fees; and such other relief as this Court deems appropriate.”
