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Robert A. Izard Jr., of the Hartford, Conn., class action firm Schatz & Nobel, said employees with 401(k) plans have a new weapon in the battle against corporate wrongdoing. In the wake of the Enron and WorldCom scandals, companies hit with fraud and mismanagement charges are being sued by particularly angry mobs of shareholders — their own employees. Now, instead of just filing the standard stockholders’ class action, litigants who bought their own company’s stock have found a sharper legal weapon. It’s the federal Employee Retirement Income Security Act, or ERISA, created to protect workers’ retirement funds. Robert A. Izard Jr., of Hartford’s Schatz & Noble, recently prevailed in a test case on that legal theory, Vivien v. WorldCom, winning a key round against WorldCom’s top executives: CEO Bernard J. Ebbers and Chief Financial Officer Scott D. Sullivan. EASIER TO PROVE WorldCom’s lawyers protested strenuously before U.S. District Court Judge Richard W. Weiking, in San Francisco, contending that the plaintiffs were trying to use the wrong law against the wrong people, and should have their case thrown out. Instead, the judge approved the ERISA-based theory as a new and viable legal approach. Even though Ebbers and Sullivan aren’t formal trustees of WorldCom’s 401(k) plan, Weiking acknowledged, ERISA looks at a person’s acts, rather than their title, to determine whether they are a fiduciary. “The first amended complaint sufficiently alleges that Ebbers and Sullivan were fiduciaries of the plan,” Weiking concluded, finding that the plaintiffs had a valid claim that the officials breached their ERISA duties. The WorldCom strategy was a novel departure, Izard said. “Instead of bringing claims for employees’ 401(k) losses under the Private Securities Litigation Reform Act, or PSLRA, we brought these claims under ERISA.” And instead of having to prove fraud, the plaintiffs only need to prove the officials breached a fiduciary duty, “which is easier to prove and more beneficial to the employees,” he maintained. The employees claim their investment in WorldCom stock was imprudent, and that company officials knew it shouldn’t have been offered as a plan option. OVERLAPPING DUTIES “This is all pretty new,” noted Izard. When companies began phasing out their old-fashioned pension plans and shifting to “defined contribution” 401(k) plans, the stock market — and 401(k) plans themselves — were enjoying a long and historic rise. There was more reason to exult than sue. A key 1996 U.S. Supreme Court precedent, Varity Corp. v. Howe, established a distinction between company officials’ ordinary business decisions, which impact the plan indirectly, and the actions of an ERISA fiduciary, which are aimed at the employees. As recently as last year, a federal court in South Carolina, in Hull v. Policy Management Systems Corp., rejected an attempt to hold corporate directors liable on an ERISA theory. WorldCom argued that Hull was “nothing more than an ineffective attempt to recast the securities action as an ERISA action.” Weiking disagreed. In Hull, the court found no real overlap between the CEO’s specific duties and the narrow fiduciary duties listed in the plan’s governing document. But the plaintiffs in Vivien phrased their complaint more broadly, alleging that, as one of their duties, WorldCom officials had an ongoing responsibility to explain the plan. Under ERISA’s section 404, an employer, Izard noted, can be liable for imprudent investments. There’s an exception, however, if the employee is both independent and informed enough to make sound investment decisions. To qualify for that exception, WorldCom directed employees to its filings with the SEC. But the plaintiffs’ complaint alleged that many of WorldCom’s SEC disclosures were false. Weiking found this direct connection between the ERISA plan and the regular SEC disclosures significant, and distinctly different from the Varity and Hull situations. For Izard, the California win not only advances his WorldCom case, it may have new life in about 10 similar class actions his firm is currently pursuing. Schatz & Nobel made an ERISA claim in its securities litigation against Enron, but so far no decision has been handed down on that issue, said Izard, who is on the executive committee for Enron plaintiffs’ lawyers. “These things are a bit of an evolution,” Izard acknowledged. “The reason we love [Weiking's decision] is because we can use it in other cases.”

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