I have read the DOL complaint filed this week against Enron and others, Chao v. Enron Corporation et al., and what follows is a summary of the allegations made in the case. Please remember that these are merely allegations made…
I have read the DOL complaint filed this week against Enron and others, Chao v. Enron Corporation et al., and what follows is a summary of the allegations made in the case. Please remember that these are merely allegations made in the complaint, and that a trier of fact will have to determine which, if any, of the allegations are true. The summary would be helpful, I think, to ERISA plan fiduciaries, as well as those who advise ERISA plan fiduciaries, since it demonstrates to some extent at least the DOL’s views on how an ERISA plan fiduciary should or should not act in fulfilling its duties and obligations under ERISA:
Defendants in the Case:
- The Enron Corporation Savings Plan (“Savings Plan”) and the Enron Corporation Employee Stock Ownership Plan (“ESOP”). The complaint states that the Plans are named as defendants “solely to assure that complete relief can be granted.” (Missing from the complaint is any mention of the Enron Corporation Cash Balance Plan. In the class action lawsuit which you can access here, plaintiffs have sued on behalf of the Cash Balance Plan as well.)
- Enron Corporation, alleged as the fiduciary responsible for selecting, monitoring and removing fiduciaries of the Plans and alleged as the fiduciary-administrator of the ESOP. The DOL alleges that Enron’s responsibilities to “appoint, monitor and remove” members of the Administrative Committee were exercised by certain executive officers who allegedly appointed the Administrative Committee members.
- Members of the Administrative Committee for the Plans, alleged to be fiduciaries as the “named fiduciary” of both of the Plans and the “administrator” of the Savings Plan.
Because they were the “named fiduciaries” the complaint alleges they were responsible for managing and overseeing the Plans’ investments in Enron stock “solely in the interest of the Plans’ participants and beneficiaries.”
It is also alleged that the Savings Plan document specifically gave to the Committee the duty to direct the Trustee as to the investment of the Trust Fund in Enron stock and that the ESOP plan document specifically gave the Committee the responsibility to direct the Trustee as to the purchase and sale of Enron stock as well. If the Committee did not direct the Trustee of the ESOP, the ESOP trustee was responsible for the “administration, investment and management” of the ESOP assets.
- Enron’s Board of Directors, including certain officers and non-officer directors, alleged as “fiduciaries” for being responsible for “selecting, monitoring and removing the ESOP’s trustee.”
Allegations:
- The complaint gives a detailed rundown of the facts alleged to have lead to the fall in the value of Enron stock throughout 2001 and alleges that the Administrative Committee (“Committee”) “was obligated to act on information . . . which they knew or should have known called into question the prudence of the Plans’ extensive holding in Enron stock.” The complaint also alleges that “the Committee Defendants never seriously examined the prudence of the Plans’ holdings of Enron stock, never made any inquiries about Enron’s financial health, and never analyzed the significance of the facts” which were unfolding.
The complaint alleges that the Committee only met as a group five times during 2001, that none of the meetings were attended by all of the Committee Defendants, and that “at none of these meetings did the Administrative Committee discuss or review the Plans’ investments in Enron stock or discuss the Plans’ catastrophic losses.” The complaint alleges that, only after an investor class action lawsuit was filed, did the Administrative Committee take notice of the “volatility” of Enron’s stock, meeting almost daily after the lawsuit was filed, but even then never taking any action with respect to the Plans’ investment in Enron stock.
Finally, the DOL alleges that “at no time did any of the Committee Defendants take any action to effectively monitor, review, analyze, question, alter, slow, stop or protect the plans’ investment in Enron stock.”
- The complaint alleges that Enron, a certain officer of the company, a certain member of the Plans’ Administrative Committee, and the Board of Directors ignored Sherron Watkins’ warnings in performing their fiduciary obligations. The complaint alleges that even though these individuals and the Board of Directors “knew or should have known that the Watkins’ memorandum described a grave threat to the Plans’ assets, they did nothing to protect the Plans’ interests.”
Of particular note, is the allegation that a certain member of the Committee “failed to inform the other members of the Administrative Committee about Watkins’ concerns and failed to ensure that any inquiry was undertaken on the Plans’ behalf into those concerns.”
- The complaint alleges that the Board of Directors failed to name a trustee for the ESOP “as required by the ESOP and as required by ERISA” and that this “failure . . . deprived the ESOP of a trustee . . to safeguard the interests of the ESOP.”
- The complaint alleges that Enron, the Board, and certain executive officers “possessed public and non-public information which should have caused them to question the prudence of the Plans’ continued investments in Enron stock” and “failed . . to advise the Plans’ other fiduciaries of the negative information known to them.”
- The complaint alleges that at least one Administrative Committee member “had specific reason to know of Enron’s one-sided and disadvantageous transactions with corporate insiders” and that “[a]t no time did [such individual] take action to protect the Plans’ investments in Enron stock from loss despite the specific information known to him” and that such knowledge “should have caused him to question Enron’s financial health and the accuracy of Enron’s publicly reported financial statements.”
- The complaint alleges that a certain executive officer “misrepresented to the Plans’ participants certain facts relating to Enron’s financial condition” and that at the time that these misrepresentations were made to participants, Enron, a certain Committee member, the Board of Directors and a certain executive officer were in possession of information contradicting those representations. The complaint also alleges that such Committee member failed to take action to correct the misstatements made by the executive officer to Enron participants and that such Committee member should have disclosed the Watkins’ memorandum to the other Committee members.
- There is also an allegation that the Defendants failed to comply with Plan document provisions since the ERISA duties were contained in the document.
Comment: Absent from the complaint is any mention of the trustee for the Savings Plan, Northern Trust, which was the directed trustee for the Savings Plan and one of the focuses of the DOL’s Amicus Brief filed in the Enron class-action lawsuit.
Also, please note that the governing documents for the ESOP provided that the ESOP would be “primarily” invested in Enron stock. In addition, the governing documents for the Savings Plan provided that participants could contribute up to 15% of their pay to the Plan and could direct their investments into a variety of investment funds, including an Enron stock fund. In addition, Enron made matching contributions to the Savings Plan and the Savings Plan provided that these matching contributions would “primarily” be invested in Enron stock.
More on Enron ERISA litigation here. . .