Shareholders Name Qwest, Nortel in 401(k) Suits

March 26, 2002 ( - An atmosphere that has found increasing numbers of 401(k) participants willing to take their employer to court for retirement-plan misdeeds had led to recent lawsuits against Nortel Networks Corp and Qwest.

In both the Nortel suit in US District Court for the Middle District of Tennessee and the Qwest complaint in US District Court for the District of Colorado, participants allege the corporations withheld details of their deteriorating financial conditions.

Shareholders of both plans charged that insufficient and inaccurate knowledge of their employer’s financial status led them to buy company stock when it was not prudent to do so.

The two companies joined the ranks of other major US employers recently hit with ERISA suits in addition to Enron including Global Crossing, Williams Cos., Lucent Technologies and Rite-Aid.

Price Pump Suit

Nortel, which was once the largest company in Canada, has made recent announcements that it is cutting its workforce from a peak of 95,000 employees to around 48,000. Nortel stock has lost 38% of its value in 2002.

By intentionally misstating Nortel’s financial health in Securities and Exchange Commission filings, Nortel executives tried to pump up their share price so they could more easily and more profitably sell their own stock holdings, the lawsuit claimed.

Nortel executives “engaged in a scheme and course of conduct to artificially inflate the price of Nortel stock, thereby allowing them to sell their own shares of stock at inflated prices and put their own interests ahead of those of the Plan,” the lawsuit alleged.

By overallocating plan assets into Nortel stock, the suit charged, Nortel didn’t sufficiently diversify plan assets as required to minimize the risk of large losses.

Data Withheld?

Similarly, the Qwest suit charged that executive weren’t forthcoming about the telecommunications company’s serious financial problems that, according to the complaint, was caused by:

  • improper accounting,
  • an early recognition of revenue from sale of internet services, and
  • changed pension accounting leading to a $299-million pension credit in 2000

The lawsuit named eight Qwest executives as defendants, alleging that the executives prevented participants from selling their Qwest stock, while the executives reaped profits of over $430 million by selling their shares.
The lawsuit further alleged that Qwest and its executives didn’t properly warn participants that their 401(k) investments were at risk because the Qwest plan was overallocated with company stock. According to the lawsuit, Qwest common stock constituted 39% of all plan assets as of Dec. 31, 2000.

The suit said Qwest matched 81% of employee 401(k) contributions up to 6% with company stock. The plan prohibited participants younger than age 55 from selling company stock to invest in another plan option.

The Nortel case is Kauffmann v. Nortel Networks Corp., M.D. Tenn., No. 3:02cv253.

The Qwest case is Brooks v. Qwest Communications International Inc., D. Colo., No. 1:02cv464.