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LOS ANGELES-Defense attorneys are hailing a series of recent court victories in lawsuits filed on behalf of employees who lost money in their 401(k) and other retirement plans because of the declining price of their employer’s stock. The so-called “stock drop” suits, which were filed under the Employee Retirement Income Security Act of 1974, or ERISA, were brought alongside hundreds of shareholder class actions following the demise of Enron Corp. In the past year, several rulings-coupled with an action by the U.S. Department of Labor-have put limits on the liability of directed trustees, who are hired by an employer to manage employee retirement plans. Plaintiffs allege that companies and trustees they hire to manage their retirement plans had a fiduciary duty to shift employee investments out of their stock after learning of an impending decline in the share price. So far, many of the cases have settled or survived defendants’ motions to dismiss their claims. But in the first trial among the ERISA stock-drop cases, a federal judge in June limited that liability by ruling that US Airways, which administered its employees’ 401(k) fund, did not have a fiduciary duty to change the company stock holdings of its employees who had a myriad of investment options from which to choose. DiFelice v. US Airways, No. 04cv00889 (E.D. Va.). Christopher Weals, a partner in the Washington office of Morgan, Lewis & Bockius who represents US Airways, said that the rulings signal “a potential shift in this law. “We see this as an obviously promising and positive development for employers fighting these cases,” he said. “There have been many settlements in these cases. Some of the settlements have been very large, from $10 million to $100 million. It’s a breath of fresh air to look at the theories and say there’s not a lot there.” Plaintiffs’ lawyers note that most of their cases have survived dismissal, but they acknowledge that the recent rulings are changing the way they litigate them. “There is a trend toward limiting the liability of outside trustees,” said Edwin Mills, of counsel at New York’s Stull, Stull & Brody who recently negotiated a $100 million proposed settlement fund with Time Warner Inc. in an ERISA stock-drop case. “I wouldn’t name a directed trustee unless it’s an exceptional issue. Six months or a year ago, I would have said differently.” Defense attorney William Kilberg, a partner at Los Angeles-based Gibson, Dunn & Crutcher, is similarly encouraged. “We’re starting to see these cases get litigated and to completion,” he said. “The position that I and other defense lawyers have been advocating is: There is less to these than meets the eye.” Getting creative The latest wave of lawsuits were filed in the midst of corporate wrongdoing scandals that followed Enron, whose employees suffered widespread financial losses in their retirement plans that were tied to the company stock. “You have widespread corporate fraud or alleged mismanagement that’s the driving cause of the plan’s problems,” said Jeffrey Lewis, a shareholder at Lewis, Feinberg, Renaker & Jackson in Oakland, Calif. “Given the volume of litigation, lawyers are getting creative. People are coming up with new theories on the plaintiffs’ and defense side.” Many of the original suits were filed against the members of corporate committees who oversee employee retirement plans and the outside trustees hired to manage those investments, such as Merrill Lynch & Co. and State Street Corp. Rulings in the cases have focused in large part on motions to dismiss, most of which have been denied as judges point to certain circumstances in which plaintiffs’ lawyers might be able to prove that a breach of fiduciary duty occurred. Limited view But in the past year, judges have made new rulings as more facts in the cases come to light. The recent rulings come on the heels of a field assistance bulletin issued by the U.S. Department of Labor in December 2004 that limits the fiduciary duty of directed trustees. In the bulletin, the Labor Department said that a directed trustee, who typically takes orders from an employer, has an obligation to question the prudence of holding a company’s stock only if the trustee were in possession of information that had not been made public. “Following that, the case law began to turn,” Lewis said. “There were three decisions after that that endorsed or went further than Department of Labor.” The first ruling came in an ongoing ERISA stock-drop case against WorldCom Inc., which is now a subsidiary of Verizon Communications Inc. In re WorldCom Inc. ERISA Litigation, 354 F. Supp. 2d 423 (S.D.N.Y. 2005). Employees at WorldCom lost money in their 401(k) plans after the company announced in June 2002 that it would restate financial reports due to $3.8 billion in accounting irregularities. As part of the case, plaintiffs’ lawyers sued Merrill Lynch Trust Co. FSB, alleging that as a trustee of the 401(k) plan the financial firm breached its fiduciary duty by continuing to hold WorldCom stock while knowing of the company’s financial troubles. In February 2005, U.S. District Judge Denise Cote granted summary judgment to Merrill Lynch, stating that a directed trustee had a fiduciary duty to override 401(k) investments in company stock only if there was nonpublic information indicating concerns about its financial health. “The Department of Labor bulletin was a great help in the case,” said Paul Blankenstein, of counsel to the Washington office of Gibson, Dunn & Crutcher who represented Merrill Lynch. Lynn Sarko, managing partner of Seattle-based Keller Rohrback, plaintiffs’ lawyer in the WorldCom case, dismissed any negative impact of the ruling, which he said could help in future cases by providing clarity on the liability of directed trustees. “Clearly, if the directed trustee has less liability because they had a right to take direction from people giving them instructions, it makes the case get easier and better against the regular fiduciary [the retirement plan committees] because they’re the ones who are responsible,” he said. “As plaintiffs’ attorneys, we don’t really care who pays.” As part of the case, the WorldCom defendants agreed to settlements totaling more than $47 million. Spreading risk The second ruling came in the DeFelice case brought against US Airways, and the first ERISA stock-drop case to go to trial. On June 26, U.S. District Judge T.S. Ellis said that the risks associated with holding the company’s stock were appropriate given that employees had a portfolio of various investments in their retirement plans. “If you have lots of choices and the choices allow you to diversify your portfolio and spread risk around, in that context company stock is perfectly OK,” said Weals, who represents US Airways. The judge also noted that executives at US Airways, which was facing bankruptcy following the terrorist attacks of Sept. 11, 2001, took steps to protect employee investors, such as looking for an independent fiduciary to manage the 401(k) plan. But Richard Finberg, a partner at Pittsburgh-based Malakoff, Doyle & Finberg, who represents the plaintiffs, said, “they didn’t act soon enough.” “Beginning right after Sept. 11, they should have done steps to protect the participants,” he said. “That should have happened much sooner when the plan had half as many shares.” He said he has filed a notice of appeal to the 4th U.S. Circuit Court of Appeals. In the third ruling, Judge Richard Posner of the 7th Circuit wrote in a June 28 opinion that a directed trustee, State Street, did not violate its fiduciary duty by retaining in employee retirement plans stock of the employer, UAL Corp., the parent company of United Airlines. Summers v. State Street Bank & Trust Co., nos. 05-4005, 05-4317 (7th Cir. June 28, 2006). In a lengthy opinion peppered with economic theories, Posner also said that other factors such as a company’s debt-equity ratio would be better measures of determining UAL’s economic health than reliance entirely on stock price. Randall Sunshine, a partner at Los Angeles-based Liner Yankelevitz Sunshine & Regenstreif who represents State Street, issued a statement on the ruling: “This is a landmark decision because it is the first appellate decision to address the fiduciary duties of directed trustees,” he said. “The court’s decision follows the trend set by the U.S. Department of Labor’s guidance.” Steve Berman, managing partner of Seattle-based Hagens Berman Sobol Shapiro, which brought the case against State Street, did not return calls seeking comment. Plaintiffs’ roadmap Sarko said that Posner’s decision didn’t eliminate the viability of ERISA stock-drop cases, but clarified that plaintiffs needed to argue about more than just the drop in the stock price. “What Judge Posner did was give plaintiffs a roadmap to an easy and clear way to plead the case,” said Sarko, who has brought new suits against Delphi Corp. and Ford Motor Co. He and other plaintiffs’ lawyers noted their overwhelming success in obtaining recent opinions in which judges denied motions to dismiss, such as in cases against Goodyear Tire & Rubber Co., AON Corp. and Cardinal Health Inc. But other plaintiffs’ lawyers acknowledge the difficulties in bringing ERISA stock-drop cases against trustees given the recent court decisions. Many of the suits now target only the 401(k) committee or the corporation whose stock declined, said Mills. He noted that he did not sue the directed trustee in recent cases he brought against Sears, Roebuck & Co., now Sears Holding, and Tribune Co. because of the recent rulings. Mills said that eliminating the directed trustee as a defendant could add challenges in cases where the company has filed for bankruptcy protection, even when insurers foot the legal bills. “It’s a tough go, but it’s doable,” he said.

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