Fremont General Corp. employees lost millions of dollars on company stock in their retirement plans when the company was forced out of the troubled sub-prime loan business in March -- losses that Fremont's board should have foreseen and prevented, according to a lawsuit alleging violations of federal pension law.
The lawsuit, filed in federal court in Los Angeles this week, contrasts the employees' experience with that of Fremont's board of directors, whom the suit accuses of dumping their own Fremont shares.
Company Chairman James A. McIntyre sold $11 million worth of company stock in August, the suit says, while four other directors sold $5.5 million in stock this year.
Fremont, one of the biggest lenders to high-risk borrowers who can't get traditional bank loans, was forced out of the sub-prime business last month when the Federal Deposit Insurance Corp. accused its Brea-based bank, Fremont Investment & Loan, of making loans that borrowers couldn't repay.
The lender has sold most of its sub-prime mortgages and said last week that it was trying to sell its unit that handles collections and foreclosures.
Santa Monica-based Fremont referred calls for comment to its public relations firm, Abernathy MacGregor Group, where Vice President Daniel C. Hilley said Fremont and its directors didn't comment on litigation.
The complaint, filed late Tuesday, names nine Fremont directors as defendants. It seeks to recover unspecified losses that it describes only as "millions of dollars."
The suit contends that from 2003 through early this year the company engaged in unsafe lending practices in an attempt to boost Fremont's stock -- a strategy the suit said "began to unravel as, predictably, sub-prime borrowers began to default on loans in large numbers."
It contends that the directors knew or should have known the stock was not a prudent investment for Fremont's Employee Stock Ownership Plan, which held the stock exclusively, and a 401(k) retirement plan where employees had invested about two-thirds of their savings in Fremont shares.
Employee Stock Ownership Plans typically hold nothing but company shares but can invest in other assets from time to time, said Brian McTigue, a pension lawyer who filed the suit.
He acknowledged that the employees had chosen to invest their 401(k) savings in company stock rather than three available mutual funds. But he said that didn't excuse the directors from their obligations to provide prudent choices.
McTigue said that from 2004 through the present the defendants sold more than $60 million of their Fremont shares, evidence that they didn't consider it a great investment.
"They should have discontinued investing in Fremont common [stock] and begun an orderly sale of the existing stock in the plan," he said.
In a statement issued previously, Fremont said it had a "long history" of including restricted shares as part of executives' compensation, which they can sell back to the company to be used in employee-benefit plans.
The suit seeks status as a class action representing 3,300 participants in the 401(k) plan and 1,700 participants in the Employee Stock Ownership Plan. The two plans held more than 9 million shares of Fremont stock -- nearly 12% of the shares the company had issued -- as of Dec. 31, 2005, the last date for which Fremont reported holdings.
Fremont stock rose 38 cents, or 4.9%, on Wednesday to $8.13, about half its value late last year.
Assuming the employee retirement plans still have about 9 million shares, that means they have declined in value by about $72 million this year.