Frontier Propped Up Verizon Shares, ERISA Suit Says

By David Matthews

Law360 (September 12, 2018, 10:11 PM EDT) — A proposed class has accused a “tainted” Frontier Communications board of propping up the price of Verizon Wireless stock at the expense of its own employees by over-investing its retirement plan in the telecom giant, according to a lawsuit in Connecticut federal court.

The complaint lodged Tuesday claims that Frontier’s board of directors has cost employees more than $100 million in 401(k) earnings by sinking nearly $355 million into Verizon stock since 2010, when Frontier first began acquiring $19 billion worth of Verizon wired networks. Verizon appointed three members to Frontier’s board after the first deal in 2010.

The result has been a violation of the Employee Retirement Income Security Act, according the suit, as Verizon shares make up an “excessive concentration” of Frontier’s 401(k) plan holdings. The complaint puts the figure at more than 13 percent of the plan’s holdings, dwarfing the level of exposure major mutual funds have to the telecom giant.

“Verizon and its shareholders effectively controlled the Frontier Board of Directors Retirement Plan Committee … which was responsible for selecting and monitoring the Plan’s investments,” the complaint said. “Because a plan divestiture of Verizon stock would have put material downward pressure on the price of Verizon stock, Defendants were incentivized to continue the Plan’s investment in Verizon.”

Frontier paid $8.5 billion in 2010 for Verizon’s local line business in 14 states. Frontier paid about $10.5 billion in 2015 for another wired Verizon network in California, Florida and Texas.

And the complaint notes that one former Verizon executive who owned $15 million in Verizon stock was appointed to Frontier’s retirement and investment committee in 2013.

Frontier’s 401(k) plan contrasts with the company’s pension fund, which unlike the 401(k) promises a certain rate of return to participants and does not hold any Verizon stock, according to the compliant.

Likewise, compared to the 13 percent exposure the Frontier plan has to Verizon shares, the company doesn’t make up more than one percent of holdings in any blue-chip index fund offered by the likes of Fidelity or Vanguard, according to the complaint, which says Frontier’s telecom-heavy 401(k) fund lags in the rallying stock market.

AT&T stock also makes up about 4.6 percent of Frontier’s 401(k) holdings following Frontier’s $2 billion purchase of a wired AT&T network in 2014, according to the suit.

The complaint says Verizon share prices trailed one S&P 500 Index by 77 percentage points between December 2012 and Aug. 13.

“Prudent fiduciaries of retirement plans would not have permitted such a concentrated investment in the volatile stock of a single company, particularly for so long,” the complaint says.

The size of the class is unknown, but the complaint says more than 17,000 people participated in Frontier’s 401(k) at the end of 2016. The complaint estimates participants’ losses at more than $100 million.

The proposed class action asks the court to order Frontier to restore plan participants’ losses, and make members of its retirement committee return any profits they earned through the 401(k). The lawsuit also seeks an order demanding Frontier appoint an independent fund manager.

Mary Reidt, the named plaintiff, is a Florida woman participating in Frontier’s 401(k) plan.

A Frontier representative and an attorney representing Reidt did not immediately return messages seeking comment.

Reidt is represented by Robert A. Izard, Mark P. Kindall and Douglas P. Needham of Izard, Kindall & Raabe LLP; and Gregory Y. Porter and Mark G. Boyko of Bailey & Glasser LLP.

Attorney information for the defendants was not available.

The case is Reidt v. Frontier Communications Corp. et al., case number 3:18-cv-01538, in the U.S. District Court for the District of Connecticut.

–Additional reporting by Benjamin Horney. Editing by Pamela Wilkinson.

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