WorldCom 401(k) Stock Suit Survives

June 18, 2003 ( - A federal judge says there is evidence to support a 401(k) participant suit against WorldCom officials and recordkeeper Merrill Lynch for breach of their fiduciary duties.

>US District Judge Denise Cote in Manhattan yesterday denied requests to end the case against former WorldCom Chief Executive Bernard J. Ebbers, Merrill Lynch (which administered MCI’s 401(k) plan), and Dona Miller, who headed the employee-benefits department at MCI.   However, the judge granted motions to dismiss the case against MCI’s former directors, other former employees, and the company’s ex-auditor, Arthur Andersen LLP.

>In her ruling, Judge Cote found there is enough evidence to support a claim that Ebbers violated the Employee Retirement Income Security Act (ERISA) in his role as fiduciary for MCI’s 401(k) plan.

>The MCI plan invested in company stock, and Cote said there is evidence Ebbers, knowing what he did about the firm’s faltering financial standing, was obliged to reveal what he knew to plan participants.

>In a 49-page opinion Miller’s motion to dismiss was rejected, the judge said, because she “exercised day-to-day authority” with respect to the plan.    As to Merrill Lynch, Judge Cote agreed that the company could not be held liable under ERISA for its role as investment advisor. However, the judge said a claim against Merrill could proceed to the extent that it was based on its role as trustee.

“Under the terms of the Plan and the Trust Agreement, Merrill Lynch was required to follow the directions as to investments given to it by the Investment Fiduciary, that is WorldCom, and the Plan participants,” Judge Cote said. “Nonetheless, Merrill Lynch retained the discretion and even the obligation as a directed trustee to abide by duties imposed by ERISA.”  The language was reminiscent of language in an amicus brief submitted by the Department of Labor in Enron’s 401(k) participant lawsuits (see  DoL stand draws concern of recordkeepers, directed trustees ).

>The judge said Merrill had claimed that the legislative history of ERISA supported its position that as trustee, it was required to “carry out investment instructions unless it was ‘clear on the face’ of the instructions that they violated ERISA or the Plan.”  However, “This is not an issue that must be resolved at this stage of the litigation,” Judge Cote said.

Other Claims

>A second claim against Ebbers that he failed to monitor other fiduciaries and failed to disclose material facts about the company’s worsening financial condition also survived, despite his claim that his duty to disclose arose under the securities laws, rather than ERISA.   Cote disagreed, saying “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.”

Judge Cote also allowed a claim based on misrepresentations about the soundness of WorldCom stock in materials sent to employees who participated in the plan, but she granted Ebbers’ motion to dismiss a charge that he had a conflict of interest because his compensation agreement gave him a personal interest in maintaining a high stock price.