A class action has been filed against TV-top cablebox manufacturer Scientific-Atlanta, Inc. and certain company officials on behalf of current and former employees whose retirement plans were invested in the company's stock. The action alleges that the executives breached their fiduciary responsibilities in violation of federal labor law when they knew of the company's financial problems but continued to encourage employees to purchase stock for their plans, sometimes while selling their own shares. The action seeks compensatory and punitive damages.

The action contends CEO James F. McDonald and four other executives disposed of shares worth $64 million, of which McDonald's part was $57 million, while the company retirement plan was acquiring stock at artificially inflated prices. The action is among the first in what could be many by participants in company retirement plans, who, under federal law, can sue their employers more easily than average shareholders. Actions like this one have already prompted some companies to extricate themselves from the process of overseeing their retirement plans.

A separate action alleging securities fraud, also seeking class-action status, has been filed against the company. What makes this case different is that it is based on federal laws governing management of retirement funds instead of relying on securities law. The action is filed under the Employee Retirement Income Security Act (ERISA). ERISA governs the conduct of employers who sponsor 401(k) plans and other retirement plan accounts.

There is a much lower burden of proof in determining whether the responsibilities of a fiduciary were met under ERISA, making the likelihood of success for the employees relatively greater. The action alleges that there was a basic conflict of interest for the company's executives to oversee the retirement plans of the company's employees, because the employees' best interest was to know that the company was in trouble financially so they could get rid of the company stock, but it was in the company's best interest for no one to find out that information so investors wouldn't sell the company's stock.

The action also alleges that company officials engaged in "channel stuffing," inducing customers and retirement plan participants to purchase larger volumes of product than purchased ordinarily, thus pulling orders forward into present quarters that otherwise would be placed in future quarters. Allegedly, the company pumped up sales and other performance criteria--in violation of generally accepted accounting principles--in order to meet personal performance goals. Meeting those goals allegedly resulted in hundreds of thousands of shares of stock for CEO McDonald alone.