Month: November 2003

There is very little time to comment right now, but the Wall Street Journal reports this morning that the House has passed mutual fund legislation: “House Passes Bill to Curb Mutual-fund Corruption.”

By the way, a good article on the mutual fund saga appeared in the New York Times on Monday and quotes Rick Meigs of the 401khelpcenter.com: “Feelings Are Not Mutual in 401(k)’s.” (For those who would like to put a name with a face, the article also features a great picture of him.)

The 10b-5 Daily here and the New York Law Journal here discuss this opinion and order issued by Judge Denise Cote in the In re: WorldCom, Inc. Securities Litigation. Judge Cote in the opinion takes a law firm to task for not presenting “a forthright description of the advantages and disadvantages of both the individual action and class action options” as it pursued representation of pension funds in individual actions. The judge accused the law firm of “running the coordinated individual actions much as a de facto class action” and held that efforts to enlist plaintiffs had “resulted in some confusion and misunderstanding of the options available to the putative class members.” As of October 3, 2003, the law firm had filed at least 47 individual actions on behalf of over 120 pension funds, many of them public employee or union pension funds.

While the primary focus of the case is on the law firm and its alleged failings, the case also serves as a warning to ERISA plan fiduciaries and other fiduciaries who will be making decisions as to whether or not to sue and/or join class action lawsuits which may inevitably be filed on behalf of plans’ affected by recent corporate and mutual fund scandals. A decision to sue or not to sue on behalf of a pension fund is a fiduciary act subject to all of the fiduciary duties and responsibilities under ERISA. (Granted, the issue is more important with respect to 401(k) plans and other defined contribution plans where individual participant accounts must bear the risk of investment losses.) While the case mentioned also involved public funds which are not subject to ERISA, nevertheless even fiduciaries of these plans are subjected to state and common law fiduciary obligations and requirements. What the case reminds us of, I think, is how important it is for plan fiduciaries to engage in prudent processes, and document such processes, in reaching a decision as to whether or not to sue on behalf of a pension plan, whether or not to join a class action lawsuit, and in selecting a law firm for representation. As the opinion indicates, there is much to be wary of in making a prudent decision and selection.

Continue reading for excerpts from the opinion, keeping in mind that the term “investor” is referring to the various pension funds which are plaintiffs in the Individual Actions:

1) It is appropriate to begin with some bedrock truths. Every investor who has suffered a loss has the right to seek recovery. Every investor has the right to bring an individual action if it chooses to do so. Every investor will have the right to opt out of the certified class action.

2) [The law firm] has engaged in an active campaign to encourage pension funds not to participate in the class action and instead to file Individual Actions with [the law firm] as their counsel.

3) At this stage, [the law firm] is running the coordinated Individual Action much as a de facto class action.

4) [The law firm] has targeted a relatively sophisticated audience with important and serious fiduciary duties to its membership and beneficiaries. The private and public pension funds can be expected to have access to independent legal advice should they seek it, and to have attorneys on retainer or on their staffs who would be in a position to obtain alternative advice from that offered by [the law firm] should they desire it.

5) There is no reason to believe that the funds that have filed Individual Actions have done so with any but the best of intentions to obtain the maximum recovery for their constituency. And it is important to remember that constituency. After all, behind the lawyers and the pension fund officers stand the many individual state, local, public, and private employees whose lost retirement savings and benefits the funds seek to recover.

6) There may be sound and good reasons for filing an Individual Action and choosing to opt out of the class action. But, given the seriousness of the claims, and the gravity of the losses the defendants are alleged to have caused, every putative member of the class should have access to all of the relevant information about their legal options and the consequences of each choice. The are entitled to no less.

7) The communications with [the law firm] have resulted in some confusion and misunderstanding of the options available to putative class members. The deficiencies include the following:

a) From these submissions, [the law firm] does not appear to have presented a forthright description of the advantages and disadvantages of both the individual action and class action options.

b) It does not appear that the advantages and disadvantages of excluding Exchange Act claims from the Individual Action complaints have been adequately described.

c) The potential impediments to bringing claims based on the 1998 and December 2000 bonds are not fully described.

d) The potential statute of limitations impediments to bringing certain of the more recently filed Individual Actions do not appear to have been described. This could be a very serious problem for a litigant who chooses to opt out of the class, only to learn that the Individual Action it had filed was barred by the statute of limitations and it had lost all right to recovery. This very issue is not sub judice.

e) It is unclear whether those who have filed Individual Actions and who also had losses from investments in WorldCom stock have been adequately advised of the as yet undetermined risk that they may lose an opportunity to share in any recovery for their stock losses.

f) It does not appear that investors have been adequately advised that a fund does not need to file an Individual Action in order to obtain recovery for its losses. Without doing anything, each fund is a member of the class certified in this litigation, with the right to share in any recovery won on behalf of the class, free of the burden of pursuing its own separate action.

g) It does not appear that investors have been adequately advised that, within the class action, bondholders are represented by their own named representatives, and should there be any reason to believe that the allocation of any settlement between the bondholders and shareholders is not fair, then not only the named representatives of the bondholders, but also members of the class, will have an opportunity to object and to have their objections heard.

h) It does not appear that investors have been adequately advised that no distribution will be made to class members without the Court approving the fairness of the distribution.

i) It does not appear that investors have been adequately advised that before there is any award of attorneys’ fees to Class counsel, there will be an opportunity for objections to be heard and a careful review by the Court.

Note: Many of you may remember an article on a related subject–The Invasion of the Class Action Securities Lawyers–which was the subject of a previous post here as well as one at EthicalEsq? here.

The Wall Street Journal today has an interesting article: Is Pension Crisis a Scapegoat? The article notes that “[c]ompanies across the country have been taking an ax to their pensions, citing rising costs and the declining health of their pension plans.” The article goes on to say that “[e]mployers eager to cut pensions blame the “perfect storm” of falling stock prices and low interest rates” but that “employees say their pension plans aren’t as sick or costly as their employers claim.” The article mentions a Bear Stearns report released last week which said that pension plans are now on a “path to recovery,” predicting that by the end of 2004, pension underfunding for the 100 companies with the biggest benefit obligations in the Standard & Poor’s 500-stock index will drop to 2%, from 12% at the end of this year.

The most interesting part of the article:

In August, the American Bar Association’s leadership announced that it would be cutting the pension plan for 900 staffers, citing stock declines and low interest rates, even though both trends had reversed themselves this year. But 400 skeptical ABA staffers passed the hat and collected more than $10,000 to hire legal counsel and an actuary to go over the pension plan in detail. The actuary, Kathleen E. Manning of MWM Consulting Group in Chicago, found that the pension plan was well funded, and, in a report presented to the association in August, noted that the liability — and future costs — of the pension looked unreasonably high because the association’s projections assumed that interest rates and investment returns would remain seriously depressed. She added that a likely rise in interest rates and the stock market’s continuing recovery could solve much of the ABA’s potential pension problem.

I enjoyed Alvin Lurie’s article posted at Benefitslink.com entitled: “What Will Judge Posner Do Next? Balm or Bomb for Cash Balance Plans?” For those who do not know, the IBM case, Cooper et al. v. The IBM Personal Pension Plan et al., will go to the same court on appeal (the 7th Circuit) that decided the Xerox case, Berger et al. v. Xerox Corporation Retirement Income Guarantee Plan, with Judge Richard Posner being the likely author of any opinion in the IBM appeal. The article address the speculation that is running rampant that Judge Posner will not overturn the lower court decision which ruled that the IBM cash balance plan violated ERISA. Mr. Lurie calls the speculation “unwarranted” and predicts that “IBM has a fair chance of prevailing in his court, if the judge has his way.” The article distinguishes the Xerox case in which Judge Posner ruled in favor of employees’ claims:

But the point of this piece is not to criticize Xerox, but rather to describe it sufficiently to delineate its difference from the “rate of accrual” issue, as relates to the statutory test for age discrimination, which is the focus of the IBM litigation. . . It is immediately apparent that the matter decided in Xerox has no bearing on the discrimination issue in IBM, save that the decisions in both cases are heavily influenced by the “frontloaded” cash balance formats at issue, that is, “interest adjustments to a hypothetical (pay-based) allocation . . . provided through normal retirement age, even though the employee terminates employment . . . before that age.” (Treas. Reg. Sec 1.401(a)(4)-8(c)(3)(iv).) Neither the issue of the proper discount rate that so dominated the Xerox decision nor the matter of the effect of pre-retirement cashouts has pertinence to IBM.”

Please note that Judge Posner will be the featured judge for Howard Bashman’s “20 questions for the appellate judge” in December.

Also, a previous post here at Benefitsblog notes that, in a CNBC interview with Judge Posner entitled “Richard Posner discusses his position on law, pragmatism and democracy” on July 28, 2003 (prior to the issuance of the opinion in the Xerox case) Mario Bartiromo for CNBC asked Judge Posner about his views regarding employees suing pension funds over reduced payments. His response was that with all of the litigation and all of the “detailed regulations of pension funds,” Congress might have to “step in at some point and change the rules.”

Unfortunately, Congress has not changed the rules, but suspended the rules (which you can read about here, here and here), creating a great deal of further legal uncertainty for these types of plans.