As The 10b-5 Daily has discussed in numerous posts over the past few months, the recent trend in securities fraud cases is for employees who lost retirement savings as a result of their investment in company stock to file an ERISA class action against the company that parallels the pending securities class action on behalf of all investors. In the ERISA class action, the employees allege the company and its officers violated their fiduciary duties under ERISA by making false statements that induced employees to invest in the stock at artificially inflated prices. One of the problems with these cases, commentators have noted, is that they allow plaintiffs to make an end run around the procedural safeguards of the PSLRA. Because they are brought under ERISA, rather than the federal securities laws, plaintiffs can obtain early discovery and seek to force a quick settlement.
The AOL Time Warner litigation may provide some comfort for defendants on this issue, especially if they are able to obtain consolidation of the pre-trial proceedings in the cases. The Judicial Panel on Multidistrict Litigation consolidated the AOL Time Warner ERISA and securities class actions last December, "in order to eliminate duplicative discovery, prevent inconsistent pretrial rulings (especially with respect to questions of class certification), and conserve the resources of the parties, their counsel and the judiciary." In re AOL Time Warner, Inc. Sec. Litig., 235 F. Supp. 2d 1380 (J.P.M.L. 2002). The consolidated action is being heard before Judge Kram in the S.D.N.Y.
The court has recently ruled on whether a discovery stay should be applied to the consolidated action, despite the fact that the PSLRA mandatory discovery stay does not apply to ERISA cases. In re AOL Time Warner, Inc. Sec. and "ERISA" Litig., 2003 WL 22227945 (Sept. 26, 2003 S.D.N.Y.). Judge Kram found that "the ERISA plaintiffs are seeking very broad discovery, a significant portion of which concerns issues common to the Securities Action." Not only was the burden on defendants high, but "if the Securities Action does survive the Motion to Dismiss, the entire discovery process will likely have to be repeated." The court rejected the ERISA plaintiffs' argument that they would suffer prejudice as a result of the stay, noting that there were no time-sensitive claims at issue, and found that the creation of a protective wall between the ERISA plaintiffs and the securities plaintiffs would be untenable. As a result, the court concluded that "a stay of all non-ERISA-specific discovery is efficient, non-prejudicial, and best comports with the purposes of the PSLRA."
Holding: Motion for limited stay of discovery granted.
Quote of note: "If plaintiffs in a securities case could, by tacking ERISA claims onto underlying Securities actions, obtain discovery to which they would otherwise not be entitled under the PSLRA, then the PSLRA's mandatory stay provision would, as a practical matter, never apply. Congress could not possibly have intended for the PSLRA to be so easily marginalized."
The Associated Press reports that Judge Melinda Harmon of the S.D. of Tex. has denied the motions to dismiss by Enron and Kenneth Lay in the ERISA class action brought by participants in the company's retirement plan. In its 329-page order, however, the court did dismiss some of the other defendants (banks and Merrill Lynch).
There have been a wave of class actions alleging that companies and their officers violated their fiduciary duties under ERISA by making false statements that induced employees to invest in company stock at artificially inflated prices. (See this post in The 10b-5 Daily discussing how these suits parallel securities class actions.) The Enron suit is complicated by allegations that Enron executives sold off company stock while workers were locked out of their 401(k) accounts and the company's stock price plummeted.
The Atlanta Business Chronicle (via MSNBC News) has an article on the proliferation of ERISA class actions by employees being filed in the wake of similar securities class actions by shareholders. BellSouth and Scientific-Atlanta are two companies facing this situation. The 10b-5 Daily has commented on the issues raised by these parallel ERISA suits.
Quote of note: "The lawsuits are among the first in what could be many by members of company retirement plans, who, under federal law, can sue their employers more easily than average shareholders. Such lawsuits have already prompted some companies to extricate themselves from the process of overseeing their retirement plans."
There is already a securities class action and an ERISA class action seeking damages on behalf of Enron's employees who invested in Enron stock through the company's pension plan. Now the Department of Labor is joining the bandwagon. The Houston Chronicle reports that the DOL has brought its own ERISA claim on behalf of the employees for violations of the pension laws. The suit "accuses former Chairman Ken Lay, former CEO Jeff Skilling, the former board of directors and officers on a committee overseeing Enron's retirement plans with failing to fulfill their responsibilities." Reuters also has an article.
Just as in the securities and ERISA suits, however, the DOL's suit appears to focus on alleged false statements that induced employees to invest in the stock at artificially high prices. But isn't this circumventing the PSLRA? (See this post for a discussion of the conflict.) And aren't the public and private ERISA suits going after the exact same sources of recovery? (See this post about a similar overlap problem between the SEC and securities class actions.)
Quote of note (Houston Chronicle): "'Mr. Lay went so far as to tout Enron stock as a good investment for employees even after he had information on the accounting scandals,' said Elaine Chao, U.S. Secretary of Labor."
Quote of note (Reuters): "Radzely [Labor Solicitor] later told Reuters that the department would seek to recover money where it could, including from each individual defendant and from an $85 million fiduciary liability insurance policy that covers some of them. But the court will determine the extent of each defendant's liability, he said. 'We're going to go wherever the money is,' he added."
Benefitsblog has collected links to related articles.
In case anyone thought that the issues noted by The 10b-5 Daily here were merely theoretical, along comes the motion to dismiss decision in In re WorldCom Inc. ERISA Litigation (S.D.N.Y.). As reported yesterday in the New York Law Journal (via law.com), the court made two rulings of note: 1) it dismissed the ERISA claims against directors and employees who it found were not fiduciaries under ERISA; and 2) it held that ERISA claims could be brought against WorldCom's former CEO both for failing to disclose material facts about the company's financial condition and for making affirmative missrepresentations concerning the prudence of investing in the company's stock in SEC filings. The second ruling was made despite the former CEO's argument that his duty to disclose arose under the securities laws and not ERISA. Benefitsblog has a full summary of the opinion.
Quote of note (from the opinion): "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."
Quote of note (from the opinion): "Ebbers' 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."
It is axiomatic that bad facts make for bad law. One area of the law that is changing rapidly in response to the recent corporate scandals is Employee Retirement Income Security Act of 1974 ("ERISA") litigation. ERISA creates a right of action against company executives overseeing employee stock ownership plans who violate their fiduciary duties to the plan participants.
The recent trend, however, is for employees who lost retirement savings as a result of their investment in company stock to file an ERISA class action against the company that parallels the pending securities class action on behalf of all investors. In other words, the employees allege the company and its officers violated their fiduciary duties under ERISA by making false statements that induced employees to invest in the stock at artificially inflated prices. These parallel ERISA class actions have been filed, for example, against Enron, Qwest, WorldCom, and Global Crossing.
ERISA class actions based on false statements to the market are problematic for two reasons. First, the suits attempt to significantly expand the scope of ERISA liability to include officers not responsible for the management of plan assets and statements that are not related to plan benefits. David Gische and Jo Ann Abramson of Ross, Dixon & Bell have an excellent overview of these issues in an article entitled "Corporate Fiduciary Liability Claims in the Post-Enron Era" that was written last year. (Thanks to the Securities Law Beacon for the link.) Second, the suits allow plaintiffs to make an end run around the procedural safeguards of the PSLRA. Because they are brought under ERISA, rather than the federal securities laws, plaintiffs can obtain early discovery and seek to force a quick settlement. An article in Monday's edition of The Recorder discusses the growth of these suits and their overlap with securities class actions.
Quote of note (The Recorder): "One of the reasons companies don't always mount the most aggressive defense to ERISA suits is that any settlement comes from a fiduciary liability insurance fund -- separate from insurance for securities litigation -- that's often untapped. Consequently, the mainstream securities fraud bar usually has no problem with the ERISA suits."
Quote of note II (The Recorder): "Courts are still working out the limits of fiduciary duties in these cases . . . For example, what if an executive has inside information that the company's financial picture isn't as good as touted? As fiduciaries, shouldn't they divest employee stock? Sure. But wouldn't that be insider trading?"