WaMu employees’ lawsuit against JPMorgan dismissed

SEATTLE — An attempt by former Washington Mutual Inc. employees to recoup their retirement account losses from JPMorgan Chase & Co., part of a complex tangle of litigation stemming from WaMu’s collapse last year, has been dismissed.

Some former WaMu directors and individuals who served on 401(k) fund committees remain partly on the hook, but the New York banking giant cannot be held liable for mismanagement that may have occurred before the Federal Deposit Insurance Corp. seized what was once the nation’s largest thrift because of bad housing loans, U.S. District Judge Marsha J. Pechman ruled Monday.

Also dismissed as a defendant in the lawsuit was Kerry K. Killinger, chief executive of WaMu from its explosive growth after he took over in 1990 until shortly before it ran aground on Sept. 25, 2008, in the largest bank failure in U.S. history.

Steve W. Berman, a lawyer for the employees, said Wednesday he would move within a week to challenge the ruling in the 9th U.S. Circuit Court of Appeals.

The case is the first to pose the questions of whether a successor corporation is liable for retirement fund management under the Employee Retirement Income Security Act and of whether ERISA liability is transferred from a bank holding company such as WaMu to the buyer of the bank that is its principal asset, Berman said.

Retirement plans for tens of thousands of employees of the Seattle-based bank shriveled in the banking industry crisis that began in 2007, and many vaporized after the FDIC sold Washington Mutual Bank and other WaMu assets to JPMorgan for $1.9 billion on the day of the collapse.

According to the lawsuit, the funds were poorly managed and monitored and participants should have been advised by fund managers that WaMu stock was increasingly risky well before the collapse.

Pechman let stand some claims against former members of the human resources committee of WaMu’s board of directors and against members of the Plan Investment Committee and Plan Management Committee. The two committees are fiduciaries of the 401(k) plans, meaning they bear responsibility for management and oversight.

The judge is presiding over a welter of WaMu-related cases filed in federal courts around the country, including a separate group of lawsuits involving the holding company’s securities. Berman said Pechman eventually will be asked to make the retirement case a class-action lawsuit, a move also likely in the securities litigation.

At the end of 2005, WaMu’s 401(k) plans had more than 70,000 participants. The plans were required to offer WaMu stock, but each participant had the option of investing in other stocks. Still, as of Dec. 1, 2006, the plans held about eight million shares of WaMu stock worth about $341.4 million.

The percentage of the funds held in WaMu stock and the value of other securities in the funds remain undetermined, Berman said.

WaMu has practically no assets, although it is seeking more than $4 billion worth of deposits in bankruptcy proceedings. The directors and committee members are covered by “substantial liability insurance policies” that would provide some recovery if the former employees prevail but less than could be gotten from JPMorgan, Berman said.

Pechman wrote that to hold JPMorgan responsible, she would have to find that the FDIC had the legal authority to transfer liability for prior 401(k) fund management with the purchase and that the federal agency did so.

“Allowing plaintiffs to proceed against JPMC (JPMorgan) runs the risk of expanding the FDIC’s jurisdiction well beyond its statutory reach,” she concluded.

The FDIC has only “limited authority over bank holding companies,” Pechman wrote, while “the statute that empowered the FDIC to take WaMu Bank into receivership refers only to failed ‘depository institutions.’”