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Claims Against Sovereign Stock Options Truncated

PHILADELPHIA (CN) - Sovereign Bancorp employees must scale back claims over company stock options given as a retirement investment, despite Sovereign's serious financial woes, a federal judge ruled.

Lead plaintiffs Emmanuel Schmalz and Gail Wentworth say Sovereign's employee-retirement plan suffered "tremendous losses" because the Philadelphia-based banking company allowed employees to acquire and hold Sovereign stock, which lost over 90 percent of its value from January 2002 to present.

In a February 2008 lawsuit, they accused Sovereign of allowing plan participants to continue investing in Sovereign stock even though the company had been unduly exposed to leveraged financing between 2007 and 2008.

That exposure "made Sovereign stock an extremely risky, artificially inflated, and imprudent investment for the plan," according to the suit, which was amended in July 2008.

Despite assertions by Sovereign's then CEO, defendant Joseph Campanelli, that the company was fundamentally sound, Sovereign ended up reporting a $1.3 billion net loss for fiscal year 2007, the suit said.

Sovereign failed to properly manage the retirement plan's assets when it continued offering company stock as an investment option for plan participants, even though the company's was on shaky financial footing, the class claimed.

Senior U.S. District Judge J. William Ditter Jr. dismissed that claim last week, citing legal precedent entitling fiduciaries to a "presumption of prudence" in cases like this.

To overcome that presumption, plaintiffs must allege that a "dire situation" demanded that the fiduciary cease investing in company stock, the judge noted.

Sovereign argued that plaintiffs failed to plead such a scenario, pointing out that Sovereign didn't file for bankruptcy, and that its stock remains publicly traded and retains value.

The class said they overcame that presumption by accusing defendants of artificially inflating its stock through "highly risky and improper activities."

But, Ditter called these allegations "non-specific and conclusory." The plaintiffs did not specify what those activities were and which defendants allegedly engaged in them.

"In short, the complaint ... is ... insufficient to overcome the presumption of prudence afforded to the fiduciaries," the judge found.

The class also said Sovereign's SEC filings were false and misleading, and that the company therefore breached its duty to communicate with plan participants.

Ditter found that allegation similarly short on specifics, ordering its dismissal.

The lone count that survived last week says Sovereign breached its fiduciary duty by loaning $40 million to the plan with "above reasonable market rate interest" of 10 percent to finance the purchase of 6.4 million shares of Sovereign stock.

Ditter said the class can proceed with that claim against certain defendants, noting that "the reasonableness of the interest rate is generally a question of fact that requires the presentation of evidence."

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