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Employees who squirreled away portions of their paychecks for retirement only to have their plans for the future dashed by stock scandals and employer bankruptcies are boosting business for attorneys scuffling over who is to blame. The plaintiffs are employees, either former or present. The defendants are often huge publicly traded companies, either suffering or bankrupt. And whether the actions involve 401(k) plans or so-called traditional pension plans, an increasing number of attorneys are working on cases where a company’s retirement well is running low. Yet despite the rush of recent filings, resolution most likely will be slow in this largely untested area of the law. “There’s a body of law evolving, but it doesn’t answer a lot of penultimate questions,” said Proskauer Rose partner Myron Rumeld. The New York firm recently hired all 11 lawyers in Shook, Hardy & Bacon’s New Orleans office to expand its Employee Retirement Income Security Act (ERISA) work. Rumeld supervises a team that not only defends ERISA class actions but also represents the fiduciaries in charge of companies’ retirement plans. The group handles cases such as those filed by plaintiff attorney Lynn Sarko, managing partner of Seattle-based Keller Rohrback. About 15 lawyers in the 55-attorney firm practice ERISA law and have represented employees in class actions against Enron Corp., Marsh & McLennan Cos., Xerox Corp., Merck & Co. and many other public companies. ERISA ARENA GROWS Different from typical shareholder actions where plaintiffs allege damages when stock prices plummet upon news of alleged accounting fraud, most of the current ERISA actions claim that plaintiffs — as employees who own their employers’ stock as part of their 401(k) plans — lost money when their value sank. Keller Rohrback was an “early pioneer” in 401(k) company-stock cases, said Sarko, a former associate at Arnold & Porter of Washington and clerk for Ninth Circuit U.S. Court of Appeals Judge Jerome Farris. He points to a seminal ERISA case that his firm handled, Whetman v. Ikon, 86 F. Supp. 2d 481 (E.D. Pa. 2000). The Ikon case, among other things, recognized ERISA class actions as separate from shareholder securities actions. The court held that ERISA claims were not subject to the stringent pleading standards required in many securities cases. Sarko said he is seeing more plaintiffs’ class action lawyers entering the ERISA arena. “A number of firms that used to be involved in filing securities fraud cases have decided to try to move into this field,” he said. But cookie-cutter cases these aren’t, he said, adding that ERISA lawsuits and securities class actions are very different. For example, those pleading requirements in ERISA cases may be easier than those in securities class actions, which demand a strong showing from plaintiffs before courts will allow the cases to proceed. But establishing that company directors themselves, as opposed to the board’s appointees overseeing the plan, had a fiduciary duty and that the duty was breached by imprudent investing can be a formidable task in ERISA claims. In 2003, plaintiffs filed 119 ERISA class actions in federal district courts, according to the Administrative Office of U.S. Courts. By comparison, plaintiffs brought 94 such actions in 2002 and 57 cases in 2001. Wolf Popper, a New York firm known for its securities class actions, filed one such case earlier this month against American International Group (AIG) in the Southern District of New York. That case followed an ERISA class action Wolf Popper filed in November against Aon Corp. in the Northern District of Illinois. Other plaintiffs’ firms filing recent ERISA actions are Cohen, Milstein, Hausfeld & Toll of Washington; Goodkind Labaton Rudoff & Sucharow; Stull, Stull & Brody of New York; and Scott + Scott. Those lawsuits come amid a slew of articles in business and trade publications within the last few weeks, cautioning executives and pension fiduciaries to brace themselves for potential ERISA litigation. Scott + Scott Managing Partner David Scott said that his Colchester, Conn.-based firm has received a significant increase in inquiries from employees seeking to recover for deflated 401(k) plans. “We get inquiries from employees even in cases where there has been no underlying securities fraud issue,” he said. Although Scott recognizes procedural differences between ERISA actions and securities class action litigation, he said that the two types of cases “overlap” so that some plaintiffs’ firms readily can do both. “It’s a natural fit, if you’re a good litigator,” he said. THE LATEST BREED Many of the cases stem from prior charges of accounting malfeasance leveled by the Securities and Exchange Commission or New York Attorney General Eliot Spitzer against public companies whose stock value dropped as a result of the allegations. But the latest breed of ERISA cases, such as the ones Wolf Popper filed, followed Spitzer’s announcement in October of a probe into commission payments at several insurance brokers. Those actions, brought against Marsh & McLennan, AIG, Aon Corp. and others allege that executives in charge of the companies’ 401(k) plans breached their fiduciary duty to oversee the plans. Plaintiffs claim that because the brokers failed to disclose that they were engaged in what the lawsuits say was bid-rigging, the companies’ stock prices collapsed when Spitzer revealed his investigations. The result, plaintiffs contend, was devastating losses to their 401(k) plans, part of which included investments in company stock. Wolf Popper attorneys did not return phone calls seeking comment about the cases. But a press release issued when the firm filed the AIG action stated that the plaintiffs allege that “because of AIG’s central involvement” in a “bid rigging scheme,” it was “exposed to massive penalties and/or fines.” Among the unanswered questions in ERISA cases is exactly who, if anyone, is responsible when these plans go south. The issue is “one of the first fights” in the cases, said Douglas Hinson, a partner with Alston & Bird in Atlanta. His work focuses on benefits litigation and class action defense. He explained that plaintiffs generally want to “put the fiduciary hat on as broad a group as possible,” including directors. But defendants argue that primary fiduciary responsibility rests solely with those who directly oversee the plan. Plaintiffs’ attorneys point to the Enron case as providing guidance on the matter. In Tittle v. Enron, 284 F. Supp. 2d 511 (S.D. Texas 2003), a case that Keller Rohrback handled, a U.S. district court in Houston found that several of Enron Corp.’s directors could be liable for losses the company’s employees suffered. In a 329-page decision, the court held that Enron’s former directors were fiduciaries under ERISA because they exercised “the power to appoint, retain and remove persons” from fiduciary positions. The court also held that sufficient evidence existed to support claims that the officers and directors breached their ERISA fiduciary duties by failing to disclose to the retirement plan participants the true financial condition of the company. An $85 million partial settlement is pending. TRADITIONAL PLANS UNDER FIRE While the ERISA lawsuits related to alleged accounting fraud or bid-rigging charges are creating a stir among attorneys, traditional pension plans, also known as defined benefit plans, held by employees of bankrupt companies are piquing their interest as well. “What everyone is concerned about is whether [the companies] will try to terminate the plans,” Hinson said. In these situations, employees have contributed to pension funds with the expectation of receiving a set amount each month upon their retirement. Most companies no longer offer defined benefit plans, and instead use 401(k)s or other plans to give employees more investment options and employers less responsibility. But some old-economy corporations, including those in the airline, steel and tire industries, still provide defined benefits plans. The problems arise when those companies underfund their plans or, worse, go bankrupt. “In some cases, you have parties sparring over the scraps,” said Steve Friedman, chairman of San Francisco-based Littler Mendelson’s employee benefits practice group. Friedman likened the current stock market and legal climate to the “perfect storm.” He explained that with the low interest rates in the last few years, companies’ funding obligations have increased. That situation, added to tepid stock performances of the companies themselves and an increasing penchant among employees to sue for losses, indicates that a “financial crisis is brewing,” he said. Making matters worse is that the Pension Benefit Guaranty Corp. (PBGC) — the government agency that insures pensions plans, up to a certain percentage of what the employee should have received — has racked up a record-breaking $23.3 billion deficit. “It has created a tremendously bad environment for pension funding,” he said. WATCHING UNITED Attorneys are closely watching the bankruptcy cases of U.S. Airways Group Inc. and United Air Lines, which could involve the largest pension defaults in U.S. history. Both companies have ceased contributing to their pension plans as they work to emerge from bankruptcy. Last month, the court-appointed fiduciary that now oversees United’s pension plans, Independent Fiduciary Services, asked the U.S. Bankruptcy Court for the Northern District of Illinois to require the airline to continue making contributions, totaling as much as $994 million, to the pension fund, despite the Chapter 11 petition. Specifically, Independent Fiduciary, represented by Washington’s Steptoe & Johnson, wants the court to declare those contributions as administrative expenses, which would make them a higher priority than regular obligations to the airline’s creditors. The motion points out that United did not seek to terminate its pension obligations when it filed for bankruptcy protection. The larger issue for United, U.S. Airways and other companies that provide defined benefits plans is whether the courts will determine that they can become viable and still contribute to their pension plans. And if not, the question becomes whether the beleaguered PBGC can pick up the slack. “It’s giving the entire pension community a great deal of concern,” Friedman said. Leigh Jones is a reporter with The National Law Journal, a Recorder affiliate based in New York City.

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