Bankrupt Mirant Corp.’s employee retirement plans weren’t intended to maximize returns on employee investments. Rather, they “were specifically designed” to bolster Mirant’s stock sales, according to court papers filed this month by the energy marketer. The 401(k) plans were crafted to interest employees in becoming shareholders and to give them an easy way to buy stock, court documents say. According to Mirant’s attorneys at Alston & Bird, H. Douglas Hinson and Michael G. Monnolly, the federal Employee Retirement Income Securities Act sanctions this function. The attorneys also argue that federal regulations governing retirement and pension funds exempt fund managers “from any responsibility to diversify company assets that are invested in company stock.” Those assertions, filed in U.S. District Court on Jan. 9, are part of Mirant’s motion to dismiss a 9-month-old potential class action brought by employees and retirees. Judges in other circuits have refused to dismiss similar litigation against fellow energy marketer Enron and against communications giant WorldCom Inc. But Mirant attorneys argue that unlike with Enron and WorldCom, news that their client was under federal scrutiny, allegedly for overstating its earnings and otherwise manipulating the markets, was no secret. Mirant, its attorneys contend, promptly disclosed accounting errors once they were discovered. The energy marketer’s motion to dismiss offers an instructive glimpse of how corporate officers viewed Mirant’s employee retirement funds and ERISA. Some of those assertions may surprise employees who assumed that 401(k) plans, which are rapidly replacing guaranteed pensions at companies across the country, were intended solely to provide workers with a comfortable retirement. MIRANT ENTRENCHED IN TROUBLE Mirant’s troubles — and their impact on workers’ retirement accounts — are manifold. In 2002, the energy marketer became the target of litigation in California and a related inquiry by the U.S. Federal Energy Regulatory Commission. Once the investigation became public, the company’s retirees and employees watched the value of their 401(k) accounts nosedive as Mirant’s stock prices plummeted from a 2001 high of nearly $50 a share to less than $4 a share. Last year, faced with a slew of suits alleging it illegally manipulated the energy market in California while artificially inflating its stock prices, Mirant declared bankruptcy in Fort Worth, Texas. Since July, it has been attempting to reorganize under Chapter 11 of the U.S. Bankruptcy Code. The questions surrounding Mirant’s retirement plans are complicated by its metamorphosis from a wholly owned Southern Co. subsidiary to an independent, publicly traded company. When Southern Co. first made Mirant stock available in an initial public offering in September 2000, it retained 80 percent of Mirant’s shares. In April 2001, Southern Co. distributed its Mirant holdings to Southern Co. shareholders, including employees enrolled in Southern Co. retirement programs. That stock distribution has been nicknamed “The Spin,” according to Mirant’s motion seeking dismissal of the suit. In connection with the Spin, Southern Co. stockholders received as a bonus pro rata shares of Mirant stock, based on the number of Southern Co. shares they held, according to Mirant’s motion to dismiss. “These spun-off shares account for most of the Mirant stock held in the [retirement] plans at the end of 2001,” according to the motion. By the end of 2001, Mirant’s retirement savings plan held assets of more than $129 million, according to the dismissal motion. Of that, $16.4 million, or 12.7 percent, was invested in Mirant stock. In 2001, a separate retirement plan for unionized employees had invested nearly 10 percent of its holdings in Mirant stock. A DUTY TO DISCLOSE James Brown, the lead plaintiff in the Atlanta ERISA suit against Mirant, is a Southern Co. retiree. He is represented by the Pennsylvania firm of Schiffrin & Barroway, which specializes in plaintiffs’ side class action securities litigation. Brown v. Mirant, No. 103CV1027 (April 17, 2003). Despite numerous calls, neither Richard S. Schiffrin nor partner Joseph H. Meltzer could be reached for comment. The firm’s local counsel, Joshua A. Millican, referred questions about the case to Meltzer. Assertions that Mirant is liable for its employees’ depleted retirement portfolios “is an area of developing and controversial law,” the company’s lawyers argue. No federal circuit court has held that a corporation has a duty to disclose information about company stock to retirement plan participants who have bought stock through their 401(k)s, the motion states. It continues, “Neither the 11th U.S. Circuit nor any district court in this circuit has addressed the existence of the duty to disclose [that] plaintiffs seek to impose here.” One of Mirant’s attorneys, Hinson, claims that such disclosures already are required by federal securities laws, and those plaintiffs have redress through pending securities fraud suits. “Securities laws are specifically designed to tell people in public companies who are responsible for disclosure what they have to disclose and when,” he said. “ERISA has no place in that scheme.” According to Mirant’s lawyers, ERISA was designed specifically to encourage the establishment of Individual Retirement Accounts “which invest in employer stock.” The lawyers claim that ERISA specifically exempts those given responsibility for managing corporate retirement funds from any requirement that they must diversify assets that are invested in company stock. Plan fiduciaries also are exempt from ERISA prohibitions against self-dealing and conflicts of interest with respect to investments in employer stock, the motion claims. In addition, retirement accounts involving company stock are exempt from the 10 percent cap ERISA applies to other stock holdings, Mirant’s dismissal motion alleges. “Congress has adopted several tax provisions that specifically encourage employee stock ownership through ERISA plans,” according to the motion. “Congress has also expressly instructed the courts not to erect barriers that interfere with the goal of promoting employee stock ownership through ERISA plans.” MATCHING CONTRIBUTIONS In designing ERISA legislation, Congress intended to encourage companies to use their own stock in retirement plans, insists Hinson. Mirant’s matching contributions to the company retirement plans and its profit-sharing contributions were invested in Mirant stock, even if employees had selected other mutual funds, according to Mirant’s dismissal motion. But Mirant attorneys argue that employees never were required to invest their own contributions in Mirant. The attorneys also say that contributors immediately could transfer funds invested in Mirant to any of the plan’s 11 other mutual funds. “It’s not a guaranteed investment by any means, and I think the employees of Mirant understood that,” Hinson said. “I think we don’t give people credit for understanding that investments are risky. Certainly, investing in a single stock carries more risk than a diversified investment. … I think it’s selling people short to think they don’t understand that.” DIFFERENT FROM ENRON? Mirant’s attorneys describe the ERISA litigation in court filings as “novel and untested” in the 11th U.S. Circuit Court of Appeals. Company filings also suggest that Mirant employees have an uphill battle in seeking redress. Hinson and Monnolly note that district courts in California, New York, North Carolina, Oregon and Rhode Island have dismissed similar ERISA suits. But they concede in court filings that there also have been rulings that favored employees, specifically in suits against WorldCom, the international communications firm that toppled into bankruptcy last year, and Enron, the notorious Texas energy marketer whose corporate executives are the target of an ongoing U.S. Department of Justice investigation. Like Mirant, Enron has been accused of illegally manipulating the California energy market. Four years ago, Enron was accused of artificially boosting electricity rates — and its profits. Enron executives also have been accused of engaging in creative accounting that overstated company profits and resulted in artificially and illegally inflated stock prices. Hinson said that recent ERISA cases litigated in tandem with similar securities fraud litigation “tend to break down on a fairly common dividing line-that is, whether or not you have some catastrophic, egregious facts that were secret and that the company or fiduciaries in the plans knew and yet didn’t disclose. … [A]nd once they were disclosed, the company sinks like a stone and goes into oblivion.” That was true of Enron and WorldCom, Hinson said. “Those are cases where, in my view, the courts have gone the extra mile and allowed these claims to proceed.” Mirant’s situation is different, he argued. “There was no deep, dark secret here that got revealed and caused the company’s demise,” he said. “The company was certainly impacted by a lot of different factors-the collapse of Enron and its industry certainly being large among them. But there was no deep, dark secret like at Enron, like at WorldCom, where the revelation of that secret led the company to collapse. Here, it was a slow slide, frankly. At no point on the way would anybody have predicted that Mirant would not recover and a Chapter 11 filing would be necessary.” And, he suggested, “Hindsight doesn’t support a valid claim.” Allegations that Mirant secretly manipulated the California energy market to maximize its profits first surfaced in 2000, Hinson said. But, he continued, “Mirant talked about those things in public filings. It’s not as if those were dark secrets.” Mirant’s attorneys insist that no one with fiduciary responsibility for the 401(k) funds had access to secret information about alleged improprieties prior to their release by public officials in California and in SEC filings. But attorneys also argue that participants in Mirant’s retirement plans “are obviously not entitled to more or better information than the public markets” — a potential violation of federal securities laws banning insider trading. In similar ERISA suits against WorldCom and Enron, however, judges have found that those companies’ 401(k) plan committee members did have a duty to disclose accounting misrepresentations that eventually “had a catastrophic effect” on company stock prices, according to Mirant attorneys. “Absent the most unusual circumstances, nobody can predict with reasonable certainty the long-term future price of a publicly traded stock. … These courts dismissed claims where plaintiffs failed to plead facts indicating that sufficiently unusual circumstances occurred to support second-guessing the fiduciary’s decisions,” according to Mirant’s motion to dismiss. ‘MINOR ACCOUTNING ADJUSTMENTS’ Mirant attorneys also argue that the company’s California trading practices — which made it the target of suits by that state’s attorney general and of an investigation by the Federal Energy Regulatory Commission — and what they describe as “minor accounting adjustments” are “not sufficiently significant” to require Mirant to warn shareholders in its retirement plans. According to Mirant’s news releases and SEC filings, the energy marketer’s “minor accounting adjustments” included re-audits of its 2000 and 2001 SEC filings and the announcement that it had overstated earnings in both years by a total of $188 million. Mirant’s restated net income for 2000 dropped 8 percent, from $359 million to $330 million. In 2001, its restated income fell 28 percent, from $568 million to $409 million, according to SEC filings. In company releases, Mirant has stated that its auditors found no fraud, while acknowledging that the SEC had begun conducting an “informal inquiry” in 2002. That inquiry became a formal investigation in February 2003, and is ongoing, according to SEC filings. One of several investigations by the Federal Energy Regulatory Commission was settled last month when Mirant agreed to pay $3.66 million to FERC. Others are ongoing. DESCENT INTO BANKRUPTCY Mirant attorneys also argue that information regarding the alleged manipulation of California’s gas market did not cause the demise of Mirant. Nor did it cause its descent into bankruptcy. “Although the price of Mirant stock declined in 2002, this was in line with a general downturn in the economy and a specific downturn in the energy trading business following Enron’s collapse,” attorneys claim. “In fact, most other energy trading companies suffered similar reversals of fortune during this period.” Mirant, they insist, “is expected to survive its bankruptcy reorganization, an unfortunate event that an independent (and non-party) fiduciary was unable to predict before it occurred.”
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