Author: jfortenberry@fortenberrylaw.com

CorpLawBlog and 10b-5 Daily have both written about this case–In Re Merrill Lynch & Col., Inc. Research Reports Securities Litigation (June 30, 2003). You can read about the case in today’s edition of the Wall Street Journal and here at FindLaw.com. The following paragraphs from the opinion written by Judge Milton Pollack of the Southern District of New York summarily reveal his low opinion of the claims being brought:

At the times here involved, the stock markets were in the throes of a colossal “bubble” of panic proportions. Speculators abounded to capitalize on the opportunities presented by this bubble.

The market “bubble” burst intervened before plaintiffs got out of their holdings and their holdings lost value. The plaintiffs, learning of the subsequent actions of the regulators concerning the conflicts mentioned above, rushed to the courts in these cases seeking to recover the losses they experienced due to the intervening cause, the burst of the bubble. . .

The record clearly reveals that plaintiffs were among the high-risk speculators who, knowing full well or being properly chargeable with appreciation of the unjustifiable risks they were undertaking in the extremely volatile and highly untested stocks at issue, now hope to twist the federal securities laws into a scheme of cost-free speculators’ insurance. Seeking to lay the blame for the enormous Internet Bubble solely at the feet of a single actor, Merrill Lynch, plaintiffs would have this Court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners. Those few lucky winners, who are not before the Court, now hold the monies that the unlucky plaintiffs have lost — fair and square — and they will never return those monies to plaintiffs. Had plaintiffs themselves won the game instead of losing, they would have owed not a single penny of their winnings to those they left to hold the bag (or to defendants).

(Coincidentally, another New York federal judge, Harold Baer Jr., also dismissed class-action claims Tuesday against three other Wall Street firms by investors alleging losses on the stock of Covad Communications Co. Those firms were Goldman Sachs Group Inc., the Credit Suisse First Boston unit of Credit Suisse Group, and Morgan Stanley. The Wall Street Journal reports that Judge Baer’s ruling was made on narrower procedural grounds, didn’t include such fiery criticism of the plaintiffs, and wasn’t considered as likely to affect other cases.)

What’s the impact of this case on other litigation, including the post-Enron ERISA litigation which is going on the courts and which has been discussed here frequently?

The Wall Street Journal reports John Coffee, a Columbia University professor who specializes in securities law, as saying that the ruling was “a significant victory for Merrill Lynch” and that it might well set a precedent in other similar cases. However, he said it might not apply to other situations where the analysts were so close to the management of companies they followed that they may have known about adverse information that they did not include in their reports.

It seems that the case should have little impact in the post-Enron 401(k) litigation involving company stock since those cases will focus on whether the ERISA fiduciaries involved were fulfilling or breaching their fiduciary duties under ERISA by continuing to invest in company stock and/or offer the company stock as an investment for participants. Many times the complaints have alleged fiduciaries had inside information which they had a duty to disclose to other fiduciaries and to the participants of the plans involved so that the fiduciaries could make decisions about whether or not to continue to invest in, or offer as an investment, company stock and so that participants could make educated decisions about whether or not to invest in company stock. It is doubtful that “the burst of the bubble” theory, in those cases, would be deemed to relieve any ERISA fiduciaries from the liability imposed under ERISA for losses incurred by participants where such inside information was involved or where fiduciaries failed to act with “procedural prudence.”

CorpLawBlog and 10b-5 Daily have both written about this case–In Re Merrill Lynch & Col., Inc. Research Reports Securities Litigation (June 30, 2003)–which you can read about in today’s edition of the Wall Street Journal and here at FindLaw.com. The following paragraphs from the opinion written by Judge Milton Pollack of the Southern District of New York reveal his low opinion of the claims being brought:

At the times here involved, the stock markets were in the throes of a colossal “bubble” of panic proportions. Speculators abounded to capitalize on the opportunities presented by this bubble.

The market “bubble” burst intervened before plaintiffs got out of their holdings and their holdings lost value. The plaintiffs, learning of the subsequent actions of the regulators concerning the conflicts mentioned above, rushed to the courts in these cases seeking to recover the losses they experienced due to the intervening cause, the burst of the bubble. . .

The record clearly reveals that plaintiffs were among the high-risk speculators who, knowing full well or being properly chargeable with appreciation of the unjustifiable risks they were undertaking in the extremely volatile and highly untested stocks at issue, now hope to twist the federal securities laws into a scheme of cost-free speculators’ insurance. Seeking to lay the blame for the enormous Internet Bubble solely at the feet of a single actor, Merrill Lynch, plaintiffs would have this Court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners. Those few lucky winners, who are not before the Court, now hold the monies that the unlucky plaintiffs have lost — fair and square — and they will never return those monies to plaintiffs. Had plaintiffs themselves won the game instead of losing, they would have owed not a single penny of their winnings to those they left to hold the bag (or to defendants).

(Coincidentally, another New York federal judge, Harold Baer Jr., also dismissed class-action claims Tuesday against three other Wall Street firms by investors alleging losses on the stock of Covad Communications Co. Those firms were Goldman Sachs Group Inc., the Credit Suisse First Boston unit of Credit Suisse Group, and Morgan Stanley. The Wall Street Journal reports that Judge Baer’s ruling was made on narrower procedural grounds, didn’t include such fiery criticism of the plaintiffs, and wasn’t considered as likely to affect other cases.)

What’s the impact of this case on other litigation, including the post-Enron ERISA litigation which is going on in the courts and which has been discussed here frequently?

The Wall Street Journal reports John Coffee, a Columbia University professor who specializes in securities law, as saying that the ruling was “a significant victory for Merrill Lynch” and that it might well set a precedent in other similar cases. However, he said it might not apply to other situations where the analysts were so close to the management of companies they followed that they may have known about adverse information that they did not include in their reports.

It seems that the case should have little impact on the post-Enron 401(k) litigation involving company stock since those cases will focus on whether the ERISA fiduciaries involved were fulfilling or breaching their fiduciary duties under ERISA by continuing to invest in company stock and/or offer the company stock as an investment for participants. Many times the complaints have alleged fiduciaries had inside information which they had a duty to disclose to other fiduciaries and to the participants of the plans involved. It is doubtful that “the burst of the bubble” theory, in those cases, would be deemed to relieve ERISA fiduciaries from liability for losses incurred by participants where fiduciaries had inside information and/or failed to act with “procedural prudence.”

Today’s Federal Register contains temporary and proposed regulations which provide rules governing transfers of certain compensatory stock options (nonstatutory stock options). In addition, there are final regulations amending the anti-abuse rule under Regulation Sec. 1.367(e)-2(d) (pertaining to outbound liquidations of domestic corporations) by narrowing the scope of the rule to apply only to outbound transfers to a foreign corporation in a complete liquidation of a domestic corporation in which a principal purpose of the liquidation is the avoidance of U.S. tax. The regulations also clarify the application of the anti-abuse rule.

What’s the PBGC doing these days and how is this agency handling all of the retirees which are receiving pensions under the purview of the agency due to so many bankrupt pension plans? Read this very interesting article from the WashingtonPost by Kirstin Downey: “Federal Pension Provider Overwhelmed.” The article reports the PBGC as saying that it takes an average of three years to receive a final determination of benefits (an improvement over a 2000 report which said it took from 6 to 20 years to receive a final determination of benefits.) The delay is due, apparently, to corporate bankruptcy proceedings which can drag out for years and figuring out how much the agency can collect as a creditor of the failed enterprise. In addition, the article quotes Mary Ellen Signorile, an AARP lawyer specializing in employee benefits, as saying that the agency sometimes confronts a “paperwork nightmare” when it takes over a pension plan so that the agency has to reconstruct participant records.

France is just waking up to the idea of providing tax breaks for private pensions as reported by Bloomberg.com: “France May Pass Law Granting Tax Breaks for Pensions.” The article discusses how this is all part of a solution to “prevent the state pension system from buckling under the burden of an aging population and shrinking workforce” and to avoid more of this as discussed in a previous post here.

The Society of Human Resource Management has this helpful article: Departure Plans: Educating employees About retirement planning is an area where you need high touch more than high tech.” The article states that helping employees plan for retirement will increasingly become “a hot topic” for employers because of the mass of baby boomers retiring in the next 10 to 20 years. The article remarks that health coverage is the most “frightening aspect” of those considering retirement now.

EBIA Weekly reports on another divorce case:–Keen v. Weaver, 2003 Tex. LEXIS 82 (June 19, 2003)–in which the participant designated the former spouse as the beneficiary prior to the divorce but then failed to change the designation afterwards. In this opinion, the Supreme Court of Texas affirmed the lower court’s decision to remove the former spouse as beneficiary, but it did so by applying “federal common law” and determining that the former spouse’s waiver of plan benefits under the divorce decree was enforceable under the federal common law of waiver. A dissent argued (in agreement with a DOL Amicus Brief filed in the case) that a federal common law of waiver should not be applied to the issue after the U.S. Supreme Court case of Egelhoff v. Egelhoff which held that ERISA preempts state statutes which operate to revoke a participant’s beneficiary designation in favor of a spouse.

Please see this previous post here discussing a case where QDRO procedures under the plan seemed to fix the problem. EBIA Weekly recommends to plan sponsors that they consider using the judicial procedure of interpleader when a participant fails to change the beneficiary designation card naming his or her spouse after a divorce and there is a conflicting claim. One might also consider including language in the plan and the QDRO procedures, such that, in the event the QDRO contains language divesting the alternate payee of all right and interest in the participant’s account under the plan or waiving such right and interest, that the plan administrator will interpret this language as voiding any beneficiary designation completed by the participant prior to the issuance of the order to the extent that the alternate payee is named as beneficiary.