Category: Erisa

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. . .

The Houston Chronicle has this article by Eric Berger: “Former Enron employees welcome Labor suit.” The article discusses the separate class action lawsuit filed some time ago by former Enron employees which you can read about here. The article reports that lawyers for the former employees in the class action suit said “having a government agency endorse many of the same legal theories will only bolster their case.” The article also reports that “[t}he biggest pot of money available is probably $85 million in liability insurance Enron had purchased for those responsible for Enron’s retirement plans.”

CFO.com offers these two articles:

“Expensing Options: Better Now Than Later: Study claims many companies will be hurt by waiting for FASB to act. Plus: why don’t CFOs mentor?” by Lisa Yoon. The article refers to a study by Buck Consultants which you can read about here and discusses how the “wait and see” approach to stock option expensing can hurt companies.

More on the Chao v. Enron Corporation et al. lawsuit filed yesterday . . .

Kirstin Downey for the WashingtonPost reports: “Restitution Sought From Enron Officials.” The article quotes Marc Machiz, a former Labor Department lawyer in charge of pension programs, as stating that “the lawsuit could have ramifications for the “30 to 40″ private lawsuits moving through the courts that allege that executives exhorted workers to buy stock that subsequently fell in value.” The article quotes Mr. Machiz as stating further that workers at many other companies were hurt as badly or almost as badly as at Enron, including those at WorldCom Inc., Global Crossing Ltd., Williams Cos. and Dynegy Inc.

The Associated Press for the Boston Globe reports in this article: “US sues Enron over pension losses: Ex-executives, directors also targeted in attempt to recover millions.”

I am reviewing the DOL Enron complaint filed yesterday and will report on it here shortly. In the meantime, you can read more on the lawsuit here . . .

The following articles report on the Chao v. Enron Corporation case filed today by the Department of Labor:

• Findlaw.com has this article by Leigh Strope for the Associated Press: “Labor Department Sues Enron Over Pensions.”
  
• Reuters has this article by Peter Szekely: “US Sues to Recoup Enron Workers’ Pension.”
  
• USAToday reports: “U.S. suing Enron, former execs over pension losses.”
  
• Bloomberg.com provides this account: “U.S. Sues Enron, Former Officers Over Pension Losses.”

In this article by the Houston Chronicle–“Enron facing pension lawsuit; Former executives called negligent”–Eric Berger reports that Rep. John Boehner, R-Ohio, chairman of the House Education and Workforce Committee, praised the lawsuit and stated:

“The Department’s action puts corporate executives and pension plan administrators on notice: Take your fiduciary duty to act in the best interests of your workers seriously or the Labor Department will hold you accountable.”

The following articles report on the Chao v. Enron Corporation case filed today by the Department of Labor:

• Findlaw.com has this article by Leigh Strope for the Associated Press: “Labor Department Sues Enron Over Pensions.”
  
• Reuters has this article by Peter Szekely: “US Sues to Recoup Enron Workers’ Pension.”
  
• USAToday reports: “U.S. suing Enron, former execs over pension losses.”
  
• Bloomberg.com provides this account: “U.S. Sues Enron, Former Officers Over Pension Losses.”

In this article by the Houston Chronicle–“Enron facing pension lawsuit; Former executives called negligent”–Eric Berger reports that Rep. John Boehner, R-Ohio, chairman of the House Education and Workforce Committee, praised the lawsuit and stated:

“The Department’s action puts corporate executives and pension plan administrators on notice: Take your fiduciary duty to act in the best interests of your workers seriously or the Labor Department will hold you accountable.”

The Segal Company has published this article: IRS Issues Final Regulations on ERISA Section 204(h) Notices of Reductions in Future Pension Benefits. The article discusses the final regulations under section 204(h) of ERISA which were issued back in April of this year.

The Secretary of Labor has filed a lawsuit in the federal district court of Houston, Texas against Enron, Kenneth Lay and Jeff Skilling, the Administrative Committee members of Enron’s ESOP and 401(k), and members of the Board of Directors for Enron. According to the press release issued by the DOL, the suit seeks to recover losses plan participants suffered “due to the mismanagement of two of Enron’s pension plans.” You can view the complaint filed here as well as a Fact Sheet and Chronology of Enron-related DOL Activity, both posted on the DOL’s website here.

The following remarks were made by Secretary of Labor Elaine Chao today in announcing the lawsuit:

We are sending a message to every pension plan officer, director and fiduciary: you have a solemn duty to safeguard your employees

This Western District of North Carolina case provides a lesson in how mistakes can often lead to big problems in the plan administration arena. Thankfully, the court allowed the mistake to be rectified, but not without a great deal of legal cost. This article at EBIA Weekly comments on the case.

The case involves the following unfortunate facts:

Mr. Neal was an employee of General Motors and a participant in the GM Plan, for which he designated his wife as the sole beneficiary. They were later divorced. Pursuant to the terms of their divorce, Mr. Neal and his former spouse signed a Qualified Domestic Relations Order (QDRO), which provided that the former spouse (as “Alternate Payee”),would receive 50% of Mr. Neal’s total vested account balance in the GM Plan.

The opinion states that, upon Fidelity’s receipt of the QDRO, “Fidelity failed to remove” the former spouse’s name as sole beneficiary under the GM Plan, which left intact the existing 1992 Beneficiary Form in Fidelity’s database. Accordingly, upon Mr. Neal’s death, Fidelity declared the former spouse to be the sole beneficiary and established a beneficiary account in her name and transferred all of the remaining GM Plan assets into that account. Subsequently, the former spouse requested and received a complete liquidation and withdrawal of the entire balance from that account. Fidelity later, after determining that the former spouse was not the correct beneficiary for a portion of the account, contacted her and later her estate, requesting that the incorrectly disbursed assets be returned.

In holding for GM and Fidelity, allowing recovery of the payment made in error to the former spouse, the court stated:

“Having determined that a federal common law claim of unjust enrichment is appropriate under ERISA when the facts at issue accord with the archetypal unjust enrichment scenario, and its application would further the plan contract while continuing to advance ERISA policy objectives, and found all of these elements to be present in the instant case, the court holds that it is appropriate to fill in the interstitial gaps of ERISA by allowing a federal common law remedy of unjust enrichment to lie.”

Comment: It is interesting to note that there is no mention of whether or not Mr. Neal failed to file a new beneficiary designation form with the Plan as was discussed in a case reported on by EBIA Weekly here which produced a different result. The North Carolina district court seems to focus on a failure by Fidelity to remove the former spouse as sole beneficiary under the Plan and emphasized this language which was contained in the QDRO Approval Guidelines (i.e. QDRO procedures):

“In the event that 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 (with the exception of the amount awarded under the Order), Fidelity 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.”

That’s the advice in this article–“401(k) trustees feel heat”–by Harriet Johnson Brackey for the Miami Herald. Derek Loeser, a partner in the Seattle law firm Keller Rohrback, in discussing ERISA plan fiduciaries states: “[t]heir duty as fiduciaries is the highest known to law. This should remind them they can’t operate on autopilot.” Thomas Noonan, president of Union Financial, a registered investment advisor in Fort Lauderdale, warns that “especially at smaller companies, the 401(k) plan trustees often rely blindly on an investment advisor.” A good time for ERISA fiduciaries to consider this . . .