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Imagine, if you will, a plaintiff lawyers’ oasis, 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. The Twilight Zone? Not exactly. It’s a burgeoning arena of ERISA cases filed on behalf of company employees who lose their retirement savings when corporate scandals hit. A few smaller firms, such as Los Angeles-based Liner Yankelevitz Sunshine & Regenstreif, Oakland’s Lewis & Feinberg and Seattle’s Keller Rohrback, have this growing area of the law virtually to themselves. They litigate what are essentially securities fraud cases without the troublesome constraints of the Private Securities Litigation Reform Act. Often, even the Department of Labor files amicus curiae briefs on their behalf. “The reality is the principle that the law that these cases are based on is old law,” said Keller Rohrback partner Derek Loeser. “It’s trust law.” But with the growth of 401(k) retirement plans, which give employees investment choices, plaintiffs lawyers have pushed the definition of fiduciary duty farther that it had gone before and, in the process, created their own litigation niche. Their clients are former employees of Enron Corp., WorldCom Inc., McKesson Corp. and a host of others who lost a good chunk of their retirement savings when their employers’ stock foundered amid financial scandal — when, as the joke goes, 401(k)s became 201(k)s. Under the 1974 Employee Retirement Income Security Act, company executives overseeing employee stock ownership plans have a fiduciary duty to ensure the investments are sound. Suits alleging a breach of that duty aren’t governed by the PSLRA, so lawyers can get early discovery — sometimes leading to a quick settlement. And these aren’t small settlements. Liner Yankelevitz’s Ronald Kravitz, a partner in the San Francisco office, recently settled a case on behalf of Rite Aid Corp. employees and pensioners for $68 million. In a pending suit, Kravitz estimates that McKesson employees lost $800 million when the San Francisco company’s market cap dropped $9 billion the day it revealed that an acquired company had widespread accounting problems. And the companies — particularly those that survive their scandals — seem eager to resolve their employees’ lawsuits. Rite Aid settled before a motion to dismiss was ever filed. Kravitz even wonders why McKesson lawyers are fighting that case, pending before U.S. District Judge Ronald Whyte, so vehemently. “There’s a potential for a win-win resolution in cases where it’s the company’s own employees who have been harmed,” Kravitz said. McKesson’s lawyer, Timothy Miller in the San Francisco office of Skadden, Arps, Slate, Meagher & Flom, said he could not comment on the case. Lawyers engaged in ERISA fraud litigation have had to educate judges. The first thing they point out is that their case is, at heart, a trust case — not a typical securities fraud case. It doesn’t always help that the judges assigned the securities fraud case usually land the ERISA action too. “Now they’re more knowledgeable about them,” Kravitz said. “There’s some concern, but I think we can explain the difference,” said Lewis & Feinberg’s Jeffrey Lewis. Loeser’s experience has been similar to Lewis’ and Kravitz’s — happy clients, genial bar, large and quick settlements. “I think the companies recognize their exposure. I think the companies recognize how unattractive of a position they’re in,” Loeser said. “When the same people that are engaging in those activities are also the fiduciaries for the retirement plan, they’re in a bit of a bind.” Keller Rohrback has cases pending against a who’s who of corporate scandal, from Global Crossing Inc. to Tyco International Inc. to Enron Corp. “As long as the list is,” Loeser said, “we’ve actually been pretty selective.” With Enron, the press began to focus on how employees there stood by helplessly as their retirement savings went down with the company. “Enron has helped immeasurably” to raise awareness about ERISA remedies, Kravitz said. Courts are still working out the limits of fiduciary duties in these cases, so lawyers like Kravitz find themselves making new law as they go along. 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? Faced with that Catch-22, McKesson’s lawyers are asking Whyte to recognize an insider-trading defense. “What’s exciting about this area is that there’s not a lot of law, so these cases are creating new law in some respects,” Kravitz said. Some defense lawyers also argue that since 401(k) plans offer employees a choice of investments, the company itself shouldn’t be held liable for violating a fiduciary duty. They say employees could have invested elsewhere. But Loeser said that’s akin to selling someone a house that falls apart and then arguing that the buyer should have bought a different house. “Which is, for lack of a better term, kind of a stupid argument,” Loeser said. For the employees, ERISA suits are a boon. They can recover twice — once through ERISA litigation and again through private securities suits. Consequently, they will come closer to recovering their actual losses than other investors can. 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. “One advantage of them is that they go after a different pocket,” said Lieff Cabraser Heimann & Bernstein partner James Finberg, who has handled a handful of ERISA suits himself. And — for now at least — the niche isn’t beset by the kind of rancor that sometimes afflicts private securities suits. Lawyers say that’s because it’s a relatively small group of lawyers who work the field. “It’s a much more collegial bar,” Lewis said. “Partly because there aren’t that many people who do ERISA litigation.” But, he added, “it’s starting to grow.”

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