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A federal judge has refused to dismiss claims that former WorldCom Chief Executive Bernie Ebbers violated his duty to employees who invested in company stock as part of their retirement plan. U.S. District Judge Denise Cote, of the Southern District of New York, found that the employees had properly alleged that Ebbers had made misrepresentations and withheld negative information about the company’s finances in violation of the Employment Retirement Income Security Act of 1974. “When a corporate insider puts on his ERISA hat, he is not assumed to have forgotten adverse information he may have acquired while acting in his corporate capacity,” Judge Cote ruled in In Re WorldCom Inc. ERISA Litigation, Master File 02 Civ. 4816. The ruling was the latest in a series by Judge Cote concerning litigation over the bankrupt telecommunications company, which admitted to the largest accounting fraud in U.S. history in a scandal that has already seen several top executives, although not Ebbers, charged with crimes. Judge Cote is also presiding over a consolidated class action and dozens of other suits brought by WorldCom shareholders and bondholders who claim the company’s multibillion-dollar fraud led to the collapse of its stock price and its bankruptcy filing last summer. The ERISA suits charge that Ebbers and others breached their fiduciary duty by hiding the company’s perilous fiscal condition and continuing to offer WorldCom stock as part of benefit plans for employees. In a 49-page opinion released late Tuesday, Judge Cote dismissed ERISA claims against company directors and employees who she found were not fiduciaries under ERISA. She also dismissed claims against WorldCom’s auditor, Arthur Anderson LLP. But the judge rejected the bulk of the motions to dismiss made by Ebbers, WorldCom’s Employee Benefits Director Dona Miller, and Merrill Lynch Trust Co. of America, a trustee of the company’s 401(k) plan. 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 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.” “This is not an issue that must be resolved at this stage of the litigation,” Judge Cote said. “It would appear, however, that the standard that should apply to Merrill Lynch’s conduct is the prudent person standard articulated in the text of the statute.” FIDUCIARY DUTY Furthermore, Judge Cote said the plaintiffs had stated a claim that Ebbers and Miller breached their fiduciary duties to act with “prudence” under 404(a)(1)(B) of the act. 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 Ebbers’ claim that his duty to disclose arose under the securities laws and not under ERISA. Judge 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.” The judge 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 labored under a conflict of interest because his compensation agreement gave him a personal interest in maintaining a high stock price. Lead counsel for the plaintiffs are Lynn Lincoln Sarko, Gary A. Gotto and Erin M. Riley of Seattle. George M. Newcombe and Patrick E. King of Simpson Thacher & Bartlett represent the director defendants. David Wertheimer and Lyndon Tretter of Hogan & Hartson represent Mr. Ebbers. Eliot Lauer of Curtis Mallot Prevost Colt & Mosley represents Arthur Anderson. Merrill Lynch is represented by William J. Kilberg and Paul Blankenstein of Gibson, Dunn & Crutcher.

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