Merrill Wins WorldCom Directed Trustee Case

February 1, 2005 (PLANSPONSOR.com) - In a closely watched case because of its implications for the responsibilities of directed trustees, a federal judge on Tuesday threw out a case against Merrill Lynch for not telling former WorldCom workers to dump their company shares.

US District Judge Denise Cote of the US District Court for the Southern District of New York ruled that Merrill wasn’t liable for the WorldCom employees’ massive retirement plan losses in its role as 401(k) trustee, Dow Jones reported. Merrill wasn’t the fiduciary that made investment decisions for the plan, but had been trustee of the plan for a predecessor company since June 1994. WorldCom plunged into bankruptcy in 2002, wiping out much of the retirement savings of employees who held the company’s stock.

An employee lawsuit had charged that Merrill, as trustee of the plan, should have refused to invest employee funds in the company’s stock (See  Class Action Granted Against Merrill Lynch in WorldCom Case ). However Cote ruled that the plaintiffs failed to prove that Merrill had nonpublic information about the company’s stock that would have warranted such an “extraordinary action.”

“As a directed trustee, Merrill Lynch was under no duty, of course, to investigate the manner in which WorldCom administered the plan, and had no duty to inquire whether WorldCom was undertaking prudence reviews of the plan’s holdings,” Cote wrote in her ruling.

Cotealso said fund officials appeared to be aware of the risk of the investments. “Merrill Lynch fielded pointed questions from WorldCom in 2002 about post-Enron compliance issues and the wisdom of holding company stock in 401(k) plans,” she said, referring to the collapsed Houston energy company.

“We are pleased that the court recognized there was no merit to this claim,” Merrill spokesman Mark Herr told Dow Jones. “We are obviously disappointed,” said plaintiffs’ attorney Lynn Sarko. He said no decision on an appeal has been made.

The case was closely watched because it was the first in which employees tried to hold a “directed trustee” responsible for investments that went sour in their plans,  Sarko  said (See  Divining Line ) .It was also the first in which the judge relied on a recent Department of Labor bulletin addressing how much discretion trustees have over retirement plan investments, he said (see  DoL stand draws concern of recordkeepers, directed trustees ).

Last October, the telecommunications company, which emerged from bankruptcy as MCI Inc., agreed to a $51 million settlement with employees on behalf of former Chief Executive Bernard Ebbers and other officers, directors and executives over their management of the retirement plan.

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