Category: Erisa

As stated previously, you can access the Opinion and Order entered in the In Re WorldCom, Inc. ERISA Litigation case (Southern District of New York) here. (via WorldComErisaLawsuit.com) You can also access the pleadings in the case at WorldComErisaLawsuit.com as well. The action is being brought by participants in the WorldCom 401(k) Salary Savings Plan (the “Plan”).

The facts as alleged: The Plan provided a number of different funds, among which was a fund invested in WorldCom stock. WorldCom was the sponsor of the Plan, the named fiduciary of the Plan, the Plan Administrator, as well as the Investment Fiduciary. The Plan authorized WorldCom to appoint others to act as Administrator or Investment Fiduciary for the Plan, but WorldCom did not do so. A very key provision of the Plan was Section 14.02 which provided that “any WorldCom officer had authority to perform WorldCom’s functions as Plan Administrator and Investment Fiduciary.” However, if WorldCom did not appoint individuals to carry out the duties, then “any officer” of WorldCom had “the authority to carry out” on behalf of WorldCom, the “duties of the Administrator and the Investment Fiduciary.”

Here is a rundown of the complaints which did or did not survive the Motions to Dismiss:

• ERISA complaints against Officers: Motions to Dismiss were granted for two corporate officers and WorldCom’s Senior Vice President of Human Resources, but were denied for CEO, Bernard Ebbers, and CFO, Scott Sullivan.

• ERISA complaints against WorldCom Employees: Motions to Dismiss were granted for WorldCom’s Employee Benefits Manager, Director of Taxation and Cash Management, and Manager of Taxation and Cash Management. However, the complaint against WorldCom’s Employee Benefits Director, Donna Miller, was held to survive.

• ERISA complaints against WorldCom Directors were dismissed.

• An ERISA complaint against Merrill Lynch, the directed Trustee for the Plan, was held to survive the motion to dismiss.

• Complaints against auditor ArthurAndersen were dismissed.

Key Points of the Case:

1) The court held that plaintiffs stated a claim for breach of ERISA fiduciary duty “by alleging that Ebbers, Miller and Merrill Lynch were obligated to but failed to act with prudence regarding the Plan’s continued offer of WorldCom stock as a Plan investment.” The court went on to say: “WorldCom stock could have been removed as one of the investments offered under the Plan without amending the Plan and plaintiffs have adequately alleged that these fiduciaries should have, but failed, to consider or recommend doing so.”

2) The court also held a claim was sufficient that alleged Ebbers failed to disclose “material facts he knew or should have known about the financial condition of WorldCom.” Ebbers had argued that the duty to disclose arose under the federal securities laws and not under ERISA. The court stated that “Ebbers’s potential liability to employees who invested in WorldCom stock through the Plan for violations of the federal securities laws cannot shield him from suit over his alleged failure to perform his quite separate and independent ERISA obligations.” The court also stated: “When a corporate insider puts on his ERISA hat, he is not assumed to have forgotten adverse information he may have acquired while acting in his corporate capacity.”

3) Plaintiffs’ third claim alleged that Ebbers and Miller (Employee Benefits Director) breached their fiduciary duties by making material misrepresentations about the soundness of WorldCom stock and the prudence of an investment in WorldCom stock, and by transmitting materials containing the misrepresentations to Plan participants. The misrepresentations were alleged to have been contained in WorldCom’s SEC filings.

Ebbers and Miller argued that this claim imposed “a continuous duty of disclosure on ERISA fiduciaries that overwhelms the federal securities law disclosure requirements and compels fiduciaries to violate the prohibitions against insider trading.” The court noted that the defendants were trying to describe a “tension between the federal securities laws and ERISA that would require the dismissal” of the claim, but ruled against the defendants, stating that “[t]hose who are ERISA fiduciaries . . cannot in violation of their fiduciary obligations desseminate false information to plan participants, including false information contained in SEC filings.” The court acknowledged the “difficulties that exist in the analysis of this claim” due to the fact that Ebbers was both a corporate insider and an ERISA fiduciary, but stated:

“While there may be some case in which there will be a conflict between the two statutory schemes, it is not so evident that a conflict exists here. The Complaint alleges that WorldCom’s SEC filings contained material misrepresentations regarding WorldCom’s financial condition. Having spoken in its periodic SEC filings about the company’s financial condition, WorldCom had a duty under the federal securities laws to correct any prior material misrepresentation when it became aware of the falsity.”

You can access the Opinion and Order issued Tuesday by U.S. District Judge Denise Cote of the Southern District of New York in the case of In Re WorldCom, Inc. ERISA Litigation here. (via WorldComERISALawsuit.com) To be discussed . . .

U.S. District Judge Denise Cote of the Southern District of New York, in a 49-page opinion released late Tuesday, refused to dismiss ERISA claims against WorldCom Chief Executive Bernie Ebbers and others as reported here at Law.com. Much more on this later . . .

Readers have been expressing interest in some links for the ERISA litigation which has been the subject of several posts so I will list some important ones here and will create a section in the index under “401(k) Litigation Links”:

• Amended DOL Amicus Brief in the Enron case
  
• Amended DOL Amicus Brief in the Enron case (on the DOL website)
  
• American Bankers Association Amicus Brief in the Enron case (Benefitslink website)
  
• SPARK Amicus Brief in the Enron case and Supplemental SPARK Amicus Brief (filed by the Groom Law Group)
• Summary and Analysis of DOL Amicus Brief (Prepared by Martha Hutzelman, Partner, Bosely Hutzelman)(American Benefits Council website)
  
• The DOL’s Enron Brief: What it Means for 401(k) Investments (by Fred Reish and Debra Davis, at Reish Luftman McDaniel & Reicher, and also published in the The ASPA Journal, March-April 2003)

That is what Ronald Kilgard of Keller Rohrback says about the wave of post-Enron litigation against 401(k) plan sponsors under ERISA. This article–“Send in the Lawyers: Ethical Lapses Spawn Fiduciary Lawsuits”–for Defined Contribution News discusses the lack of staffing at the DOL and reports why the DOL has seemed to focus on filing amicus briefs in the cases, instead of filing its own actions. The article reports Steven Saxon, a partner in the Groom Law Group, as saying the DOL “doesn’t have the staffing to do its own cases” so that they have “made a decision to expend resources in appellate work…to have an impact when they file an amicus.”

See yesterday’s post here for additional articles on the subject.

This article by Jill Elswick for BenefitNews.com–“DOL develops educational resources for fiduciaries”–comments on the ERISA Advisory Council’s Working Group on Fiduciary Education and Training and its educational initiative to help fiduciaries comply with the myriad requirements of ERISA. The Group’s final report can be accessed here. The article also reports that the Foundation for Fiduciary Studies has released 27 “prudent investment practices”–each substantiated with existing legislation, case law, and regulatory opinion letters and vetted by the American Institute of Certified Public Accountants (AICPA)–into the public domain for comment here. Finally, the article discusses a new program for fiduciary education offered by New York Life Investment Management’s (NYLIM) retirement plan services division which you can read about here.

A very analytical article by David M. Gische and Jo Ann Abramson of Ross, Dixon & Bell LLP at Findlaw.com: “Corporate Fiduciary Liability Claims In The Post-Enron Era.” The article provides a detailed discussion of the class-action litigation that is going on in the ERISA arena against ERISA plan fiduciaries of 401(k) plans. The article gives a rundown of the Enron, Global Crossing, WorldCom, and Qwest cases which are making their way through the courts and provides a discussion about the parallel securities law claims which may provide double exposure for insurers, if the ERISA claims succeed.

Another article by Jason Hoppin for the Recorder at Law.com–“A Matter of Trust: Stung by corporate collapses, workers look to ERISA for relief“–also discusses the “burgeoning arena of ERISA cases filed on behalf of company employees who lose their retirement savings when corporate scandals hit.” He calls it “an oasis for plaintiffs’ lawyers, where you can make new law, the bar is friendly on both sides of the aisle, there are few competitors and, of course, huge recoveries are the norm.”

CorpLawBlog at a post here and Securities Beacon have also reported on the subject today.

Gary Young for the National Law Journal at Law.com reports on the case of Millsap v. McDonnell Douglas Corp., No. 94-CV-633-H, from the Northern District of Oklahoma. The case, according to Law.com, represents only a handful of cases in which employees have prevailed in a claim that their employer violated ERISA “by closing a plant with the intent to shed employees whose benefit costs were high or who were on the verge of vesting in pensions.” Unfortunately, the $36 million settlement will never reach the hands of plaintiffs unless a 10th Circuit Court rules on a “backpay” issue under ERISA, which many say is doomed under the holding of Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, decided by the U.S. Supreme Court last year.

The Society for Human Resource Management has posted this article online: “Helping Employees Work With Their 401(k)s–Employers have many resources for helping employees manage retirement assets.” The article highlights the fine line that plan sponsors must walk under ERISA between providing participants with investment education versus providing them with investment advice.

While it is always important for a plan fiduciary to have an ERISA attorney involved in advising them about their fiduciary duties under ERISA, CFO.com does provide some very good online resources and tools for ERISA plan fiduciaries: this 401(K) Checklist for Fiduciaries, and this article delving into why employees file lawsuits against their employers over their 401(k) plans, as well the this very handy Buyer’s Guide to 401(k) Plan Providers. The Guide allows users to compare the different providers and links allow the user to visit, from the online guide, the different websites of the various 401(k) providers.