Jump to content

Worldcom/Investment Manager Suits


Guest ASM20
 Share

Recommended Posts

Guest ASM20

Does anyone know of any pension funds suing their investment manager because they invested in Worldcom stock? (Not suing Worldcom or its investment managers.) In general, does anyone know of any suits filed by pension funds because of bad investments by their investment managers?

Link to comment
Share on other sites

Unlike other companies E.g., Enron, where there was a long history of security law violations and complicity of financial intermediaries and the auditors over a period of years, Worldcom's bankruptcy was sudden and brought on by the disclosure that the CFO changed quarterly expense items to capital expenditures in order to meet the quarterly estimates of analyists over a period of several years. The CFO also deceived the outside auditors. Therefore investment managers who invested in World com have a defense that they relied on company reports that they reasonably believed to be accurate. Some state pension funds (NJ, Fla) have sued their investment mgrs for investing in other companies and sued companies for false reporting of earnings under the securities laws.

mjb

Link to comment
Share on other sites

According to the New York Law Journal ( June 19, P.1) the employees of WorldCom can proceed with a suit against Bernard Ebbers, Donna Miller (the WorldCom Benefits Director) and Merrill Lynch, the directed trustee of the 401(k) plan, for violations of their fiduciary duty under ERISA. According to the article, the Judge ruled that a corporate insider who acts as an ERISA fiduciary cannot withhold adverse information acquired while acting in a corporate insider capacity.

mjb

Link to comment
Share on other sites

Below is the portion of the decision referenced by mbozek. Also, although I have not posted it, the decision is also a good read regading Merrill Lynch-- who tries to get out on the "directed trustee" route.

Second Claim for Relief

Plaintiffs' second claim for relief alleges that Ebbers, as an "Officer and Director Defendant," breached his fiduciary duty under Section 404(a) in two ways: first, by failing "to monitor" the Plan's other fiduciaries in connection with the investment of the Plan's assets and, second, by failing to disclose to the "Investment Fiduciary," that is to WorldCom, and other "investing fiduciaries" material facts he knew or should have known about the financial condition of WorldCom. The plaintiffs argue in this connection that Ebbers had a duty to insure that WorldCom made public disclosures that complied with federal securities laws. [FN13] These allegations state a claim against Ebbers.

FN13. Plaintiffs suggest that public disclosures "coincident" with the SEC quarterly filings might have been adequate to comply with the ERISA duty to disclose.

Ebbers argues that the second theory--the duty to disclose--arises under the federal securities laws and not under ERISA. He argues that allowing plaintiffs to state an ERISA claim for failure to disclose information that, if material, Ebbers would have been required by the securities laws to disclose impermissibly extends the reach of ERISA and imposes on corporations a duty of continuous disclosure not contemplated by the well-developed regime of securities regulation.

*14 It is undisputed that every participant in WorldCom's ERISA Plan who sold or bought WorldCom securities is a putative member of the class in the companion WorldCom Securities Litigation, and that the Plan itself, like many other pension funds that invested in WorldCom stock, is also a putative class member. Ebbers is one of many defendants in that litigation. In the event of any judgment for plaintiffs or a settlement in the Securities Litigation, the Plan and its participants could share in any recovery.

But 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. When Ebbers wore his ERISA "hat" he was required to act with all the care, diligence and prudence required of ERISA fiduciaries. 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. Plaintiffs' allegation that Ebbers failed to disclose to the Investment Fiduciary and the other investing fiduciaries material information he had regarding the prudence of investing in WorldCom stock is sufficient to state a claim.

Third Claim for Relief

The plaintiffs' third claim alleges that Ebbers and Miller, as "WorldCom Defendants," 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. Plaintiffs allege that by failing to disclose fully and accurately infirmities in WorldCom's stock price, Ebbers and Miller caused plaintiffs to make and maintain investments in WorldCom stock even though Ebbers and Miller knew or should have known that WorldCom securities were not a prudent investment. The misrepresentations are alleged to have been contained in WorldCom's SEC filings, which were attached as required by the federal securities laws to a prospectus given to WorldCom employees. [FN14]

FN14. The federal securities laws require corporations that choose to sponsor a 401(k) plan that offers an employer's securities to file a Form S-8 registration statement with the SEC. Part I of the Form S-8 is the Section 10(a) prospectus that must be disseminated to employees under the Securities Act. See Securities Act, Rule 428, 15 U.S.C. § 77j; 17 C.F.R. § 230.428. The securities laws also require a Section 10(a) prospectus to attach other corporate SEC filings, including the filings giving rise to plaintiffs' third claim. See 15 U.S.C. § 77j; Commodity and Securities Exchanges Form S-8, 55 Fed.Reg. 23909-01, Item 3 (June 13, 1990) (Incorporation of Documents by Reference).

An ERISA fiduciary may not knowingly present false information regarding a plan investment option to plan participants. There is no exception to the obligation to speak truthfully when the disclosure concerns the employer's stock.

In arguments that overlap with those made in connection with the Second Claim, Ebbers and Miller argue that the Third Claim imposes 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. If an ERISA fiduciary who was also an insider discovers material information affecting the value of the investment in the Plan sponsor's stock, they posit that the fiduciary has one of two choices. If he discloses material information to Plan participants before making it publicly available, he would violate the insider-trading laws by suggesting to Plan participants that they divest stock based on material nonpublic information. See 15 U.S .C. § § 78u-1(a)(1)(B) & (b)(1)(A) (2002). If the fiduciary publicly discloses the material information, the Plan participants would be no more protected by virtue of ERISA than they would be as investors protected by the securities laws. They contend that plaintiffs' claim stretches ERISA far beyond its intended scope. They emphasize that the alleged material misstatements were the SEC filings incorporated by reference into the Plan SPDs and that those statements were prepared and published pursuant to the securities laws, not ERISA. Miller, in particular, argues that, if credited, plaintiffs' logic would impose ERISA fiduciary obligations on all authors of corporate SEC filings, a conclusion supported by neither the statute nor caselaw.

*15 Those who prepare and sign SEC filings do not become ERISA fiduciaries through those acts, and consequently, do not violate ERISA if the filings contain misrepresentations. Those who are ERISA fiduciaries, however, cannot in violation of their fiduciary obligations disseminate false information to plan participants, including false information contained in SEC filings. Claim Three adequately pleads that Ebbers and Miller, each of whom is alleged to have been a fiduciary through inter alia his or her administration of the WorldCom Plan, breached their fiduciary obligations under ERISA by at the very least transmitting material containing misrepresentations to Plan participants. [FN15]

FN15. Certain of the defendants' arguments, particularly those by Miller, are more appropriately made in the context of a motion pursuant to Rules 11 or 56, Fed.R.Civ.P. Because of the standards applicable to a claim governed by Rule 8 pleading standards, and the plaintiffs' decision to use generalized allegations against groups of defendants, the plaintiffs have not had to articulate in the Complaint how Miller would have acquired sufficient knowledge of WorldCom's financial condition to understand that it was not prudent or reasonable to rely on the company's SEC filings.

The defendants have tried to describe a tension between the federal securities laws and ERISA that would require the dismissal of this claim. Their arguments, however, cannot undermine the soundness of the general principle underlying Claim Three that ERISA fiduciaries cannot transmit false information to plan participants when a prudent fiduciary would understand that the information was false. Nor is there anything in Claim Three, despite the defendants' suggestions otherwise, that requires ERISA fiduciaries to convey non-public material information to Plan participants. What is required, is that any information that is conveyed to participants be conveyed in compliance with the standard of care that applies to ERISA fiduciaries.

The difficulties that exist in the analysis of this claim arise principally from the facts that at least one of the defendants, Ebbers, is alleged to be both a corporate insider and an ERISA fiduciary, and that the alleged misrepresentations concern the company itself. The defendants argue that the plaintiffs are imposing a duty of continuous disclosure on ERISA fiduciaries that does not exist under the federal securities laws. 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. See In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 268 (2d Cir.1993). In any event, the existence of duties under one federal statute does not, absent express congressional intent to the contrary, preclude the imposition of overlapping duties under another federal statutory regime. See United States v. Sforza, 326 F.3d 107, 111 (2d Cir.2003).

In conclusion, the motion to dismiss Claim Three is denied as to defendants Ebbers and Miller. This claim adequately alleges that they transmitted materially false information to Plan participants in breach of their fiduciary obligations

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...