Gardner, Carton & Douglas provides this article--"Enron Case Moves Forward: Plan Fiduciaries Should Take Note." You can read more about the recent Enron case--Tittle v. Enron Corp., 2003 WL 22245394 (S.D. Tex. Sept. 30, 2003)--in many previous posts which you can access here.
After making my way through most of the 331-page decision in Tittle v. Enron Corp., 2003 WL 22245394 (S.D. Tex. Sept. 30, 2003), the part of the opinion that stands out the most is the directed trustee discussion which may, in the end, have the most far-reaching impact in the benefits arena. In Count II of the case, Plaintiff-participants of the Enron 401(k) plan and the ESOP, have sued a trust company for breach of its fiduciary duties based on the lockdown (freeze, blackout) of the two plans, alleging inadequate notice to participants. The reason for the lockdown was that the plans were switching to a new record keeper and the trust company was in the process of transferring the business to a new trustee. Count III also alleges a failure to diversify the 401(k) plan's assets. As part of the allegation, the complaint alleges that the trust company should not have followed the plan administrative committee's directions that were contrary to ERISA.
The "Directed Trustee Liability" discussion (beginning on page 109 of the opinion) begins with the "factual dispute" over whether the trust company was a "directed" trustee or a "discretionary trustee." Plaintiffs argued that it was the latter and the trust company argued it was the former:
The complaint alleges that [the trust company] was the trustee of the Savings Plan and exercised discretionary authority and control over plan assets when it imposed the lockdown, in spite of the fact that it had the power to postpone the lockdown until the price of Enron stock stabilized to avoid injury to the participants, and that numerous red flags should have alerted [the trustee company] to the dangers of proceeding with the scheduled lockdown. Furthermore, the complaint asserts, plan documents and the trust agreement gave [the trust company] discretionary authority and control over plan assets and plan administration where there was no direction by the Administrative Committee. Alternatively, the complaint asserts that if [the trust company] was a directed trustee and if the Administrative Committee gave written instructions to [the trust company] regarding the lockdown, [the trust company] breached its fiduciary duties in following the lockdown instructions because the directions were contrary to ERISA and [the trust company] knew or should have known that the lockdown instructions violated ERISA.The court first notes the fact that caselaw addressing the duties of a directed trustee is "minimal" and also "in conflict" and then goes on to try to interpret the confusing provisions of ERISA pertaining to the subject, beginning with section 403(a)(2) of ERISA:[The trust company] contends that it was a "directed trustee," as opposed to a "discretionary" trustee, under provisions in the plan documents and trust agreement that subject it to direction by the Administrative Committee, that the Administrative Committee exercised total authority and discretion over the plan assets and management, and that [the trust company] thus had no responsibility or liability for the lockdown.
All assets of an employee benefit plan shall be held in trust by one or more trustees. Such trustee or trustees shall be either named in the trust instrument or in the plan instrument described in section 402(a) or appointed by a person who is a named fiduciary, and upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan, except to the extent that -The court then seeks to provide meaning to the terms "proper" and "made in accordance with the terms of the plan" and "not contrary to ERISA" and places great emphasis upon the statutory construction of section 403(a)(2) of ERISA espoused in Patricia W. Hatamyar's article See no Evil? The Role of the Directed Trustee under ERISA, 64 Tennessee Law Review 1-90 (1996):(1) the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustee shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to [ERISA].
The Court has found Ms. Hatamyar's article to be the most extensive and authoritative source regarding construction of statutory provisions in ERISA relating to the directed trustee. The article is cited as persuasive authority by most of the few courts addressing the directed trustee issue.
Defendants argued that a directed trustee was only required "to determine whether the directed action facially complies with the terms of the plan and of ERISA and relied on this paragraph in the legislative history of ERISA section 403(a)(1) as its main authority:
If the plan provides that the trustees are subject to the direction of named fiduciaries, then the trustees are not to have the exclusive management and control over the plan assets, but generally are to follow the directions of the named fiduciary. Therefore, if the plan sponsor wants an investment committee to direct plan investments, he may provide for such an arrangement in the plan. In addition, since investment decisions are basic to plan operations, members of such an investment committee are to be named fiduciaries . . . . If the plan so provides, the trustee who is directed by an investment committee is to follow that committee's directions unless it is clear on their face that the actions to be taken under those directions would be prohibited by the fiduciary responsibility rules of the bill or would be contrary to the terms of the plan or trust.The American Bankers Association also supported this position in its Amicus Brief (link via Benefitslink.com) and placed great importance on the fact that "the banking and trust industry has relied on this facial compliance standard since ERISA was enacted in 1974." The Court rejected this argument.
Instead, the court cited "rules of statutory construction, the common law roots of the directed trustee concept, the Department of Labor's interpretation, as well as some of the case law, in support for its position" and held:
After extensive research, this Court concludes for the reasons discussed supra that even where the named fiduciary appears to have been granted full control, authority and/or discretion over that portion of activity of plan management and/or plan assets at issue in a suit and the plan trustee is directed to perform certain actions within that area, the directed trustee still retains a degree of discretion, authority, and responsibility that may expose him to liability, as reflected in the structure and language of provisions of ERISA. At least some fiduciary status and duties of a directed trustee are preserved, even though the scope of its "exclusive authority and discretion to manage and control the assets of the plan" has been substantially constricted by the directing named fiduciary's correspondingly broadened role, and breach of those duties may result in liability.It is interesting that the court went through pages and pages of discussion over why it believed the standard was not the "facial compliance standard", but then in the end concluded that even if that had been the standard, it would have ruled that plaintiffs had stated a claim.In any ERISA retirement plan, where the plaintiffs, as in Tittle, allege with factual support that the directed trustee knew or should have known from a number of significant waving red flags and/or regular reviews of the company's financial statements that the employer company was in financial danger and its stock greatly diminished in value, yet the named fiduciary, to which the plan allocated all control over investments by the plan, directed the trustee to continue purchasing the employer's stock, there is [a]factual question whether the evidence is sufficient to give rise to a fiduciary duty by the directed trustee to investigate the advisability of purchasing the company stock to insure that the action is in compliance with ERISA as well as the plan.
Finally, even if the Court construed section 403(a) to require only that the trustee find that the directions he received from the named fiduciary are "proper" and facially in compliance with the terms of the plan and of ERISA, it finds that the Tittle Plaintiffs still state a claim: "Plaintiffs submit that any order to proceed with lockdowns on its face violated the duties of prudence and circumstances, laid out in the complaint, made its timing highly suspect and clearly injurious to plan participants and beneficiaries.
Also, please note that the WorldCom decision discussed in a previous post here also seems to reject the "facial compliance standard," but did not seem to go as far as the court did in the Enron case. (Interestingly enough, footnote 8 of the case notes that the directed trustee in that case argued that the "facial compliance standard" should apply, but the court said that it was "not an issue that must be resolved at this stage of the litigation.") In WorldCom, the court ruled that the directed trustee "was not required to exercise its independent judgment in deciding how and whether to [invest employee funds as directed]. It only had to make sure [that WorldCom's] directions were proper, in accordance with the terms of the plan, and not contrary to ERISA." The court in WorldCom went on to say that if the directed trustee in the case "followed instructions to invest employee funds in WorldCom stock when a prudent trustee would know that WorldCom's decision to continue to offer its own stock to its employees as an investment option was imprudent, or otherwise in violation of WorldCom's obligation under ERISA," then the directed trustee might be liable as an ERISA fiduciary. In other words, the standard in WorldCom seems to be that the directed trustee is only liable if it "knows" the direction is not proper, in accordance with the terms of the plan, or contrary to ERISA, whereas the standard promulgated in the Enron case seems to be that the directed trustee will be liable if it "should have known."
Are there any flaws to this reasoning? And what is the impact of this decision and the WorldCom decision on those entities serving as directed trustees? Stay tuned for Part II of this discussion . . .
The Groom Law Group has a good summary of Tittle v. Enron Corp., 2003 WL 22245394 (S.D. Tex. Sept. 30, 2003) (331 pages) which was issued last Wednesday and which was discussed in previous posts here and here: "Executive Summary – Enron ERISA Litigation Ruling." There is also a chart summarizing the claims which you can access here.
From Reuters: "Northern Trust Pension Suit an Eye-Opener." The article quotes Eli Gottesdiener, a lawyer representing Enron employees, as saying that the decision made clear the responsibly that trustees have in protecting pension funds, even if they are told what to do by the companies that employ them. "This is huge in terms of precedent," he said. "It establishes that even directed trustees have fiduciary obligations and cannot blindly follow orders."
Additional Quote of Note: "The court's decision could put more of an onus on trustees, said Scott Henderson, a lawyer who specializes in investment management and matters of pension funds for Boston-based law firm Bingham McCutchen LLP. While directed trustees have no discretion on investments, Henderson said they might have to start assessing the risk of including company stock in pension investments. "Pension funds are already nervous about the role company stock plays in their investment line-up," he said. "Now they could be responsible for assessing the quality of company stock."
Links to the Enron case and other articles at this previous post today.
Lyle Roberts at the 10b-5 Daily blog has a post on the Enron case as well.
This just in from the Wall Street Journal: "Ruling Lets Enron Workers Sue Lay, Northern Trust Over Lost Savings." (Subscription required.) More articles:
You can read more about the Enron litigation at this link. Also there are links over on the right under "401(k) Litigation Links" which contain additional information regarding the case.
UPDATE: Link to the federal district court for the Southern District of Texas Notable Cases page which contains the link to the Memorandum and Order re: Tittle Defendants' Motions to Dismiss in the case of Tittle, et al v. Enron Corporation, et al, Civil No. 4:01-CV-3913 is here. It is a 331-page document which the court's website says may take 11 minutes to download. Link to the actual Memorandum and Order is here.
Much more on this later . . .
CorpLawBlog and 10b-5 Daily have both written about this case--In Re Merrill Lynch & Col., Inc. Research Reports Securities Litigation (June 30, 2003)--which you can read about in today's edition of the Wall Street Journal and here at FindLaw.com. The following paragraphs from the opinion written by Judge Milton Pollack of the Southern District of New York reveal his low opinion of the claims being brought:
At the times here involved, the stock markets were in the throes of a colossal "bubble" of panic proportions. Speculators abounded to capitalize on the opportunities presented by this bubble.The market "bubble" burst intervened before plaintiffs got out of their holdings and their holdings lost value. The plaintiffs, learning of the subsequent actions of the regulators concerning the conflicts mentioned above, rushed to the courts in these cases seeking to recover the losses they experienced due to the intervening cause, the burst of the bubble. . .
The record clearly reveals that plaintiffs were among the high-risk speculators who, knowing full well or being properly chargeable with appreciation of the unjustifiable risks they were undertaking in the extremely volatile and highly untested stocks at issue, now hope to twist the federal securities laws into a scheme of cost-free speculators’ insurance. Seeking to lay the blame for the enormous Internet Bubble solely at the feet of a single actor, Merrill Lynch, plaintiffs would have this Court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners. Those few lucky winners, who are not before the Court, now hold the monies that the unlucky plaintiffs have lost -- fair and square -- and they will never return those monies to plaintiffs. Had plaintiffs themselves won the game instead of losing, they would have owed not a single penny of their winnings to those they left to hold the bag (or to defendants).
(Coincidentally, another New York federal judge, Harold Baer Jr., also dismissed class-action claims Tuesday against three other Wall Street firms by investors alleging losses on the stock of Covad Communications Co. Those firms were Goldman Sachs Group Inc., the Credit Suisse First Boston unit of Credit Suisse Group, and Morgan Stanley. The Wall Street Journal reports that Judge Baer's ruling was made on narrower procedural grounds, didn't include such fiery criticism of the plaintiffs, and wasn't considered as likely to affect other cases.)
What's the impact of this case on other litigation, including the post-Enron ERISA litigation which is going on in the courts and which has been discussed here frequently?
The Wall Street Journal reports John Coffee, a Columbia University professor who specializes in securities law, as saying that the ruling was "a significant victory for Merrill Lynch" and that it might well set a precedent in other similar cases. However, he said it might not apply to other situations where the analysts were so close to the management of companies they followed that they may have known about adverse information that they did not include in their reports.
It seems that the case should have little impact on the post-Enron 401(k) litigation involving company stock since those cases will focus on whether the ERISA fiduciaries involved were fulfilling or breaching their fiduciary duties under ERISA by continuing to invest in company stock and/or offer the company stock as an investment for participants. Many times the complaints have alleged fiduciaries had inside information which they had a duty to disclose to other fiduciaries and to the participants of the plans involved. It is doubtful that "the burst of the bubble" theory, in those cases, would be deemed to relieve ERISA fiduciaries from liability for losses incurred by participants where fiduciaries had inside information and/or failed to act with "procedural prudence."
Christine Dugas for USAToday via Yahoo! News.com reports: "Enron hit with federal lawsuit." The article reports Ann Combs, assistant secretary for the Employee Benefits Security Administration, as saying that the DOL has been under pressure by some in Congress to hold corporations accountable for retirement plan losses and that it has launched investigations into WorldCom and Global Crossing. Combs says her office won't be pressured to bring a case until it is ready. In addition the article reports: "Because the department is in charge of interpreting and applying pension law, its lawsuit puts more pressure on the defendants to settle, some experts say."
Read more on the Enron litigation from previous posts here . . .
If you are in the neighborhood, stop on by the 10b-5 Daily for an interesting post on the Enron securities and ERISA litigation: "Enron's Employees Get Three Bites At The Apple."
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:
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.
Allegations:
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."
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."
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."
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:
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 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’ pension assets. If you put those assets in jeopardy through neglect or malfeasance, we will hold you accountable.
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":
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.