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In October 2001, Delta Air Lines executives, worried about a possible bankruptcy, quietly proposed a set of executive trusts that guaranteed them full pensions now worth an estimated $45 million. But while Delta executives were hedging their bets as to whether the airline would survive, they continued to use company stock to match employees’ 401(k) contributions, according to two suits filed in federal court in Atlanta. Not until last month were employee contributions to the stock plan halted after an independent financial adviser hired by Delta determined that “the prudent course of action” was to freeze the fund, according to the suits. By then, Delta stock prices had plummeted more than 90 percent — from an average $35 per share when the executive pension trusts first were established to $3.35 Tuesday — decimating airline employees’ 401(k) funds, according to the suits. Smith v. Delta Air Lines Inc., No. 1:04CV2593 (N.D. Ga. Sept. 3, 2004); Toma v. Delta Air Lines Inc., No. 1:04CV2657 (N.D. Ga. Sept. 10, 2004). The suits, filed by two Delta employees, seek reimbursements for “millions of dollars in losses” for a potential class of as many as 69,500 Delta employees enrolled in the airline’s 401(k) plans. According to the plaintiffs, those plans have been devalued because they remained too highly concentrated in Delta stock. Earlier this month, Delta CEO Gerald Grinstein warned employees and Wall Street that labor costs, spiraling fuel prices, a substantial debt burden and the threat that a large number of pilots might take early retirement to secure lucrative retirement packages could force Delta into bankruptcy. Grinstein also announced plans to lay off as many as 7,000 employees and shut down Delta’s Dallas hub. Tuesday, just four days after Delta’s stock fell to a 52-week low of $3.26 a share, Grinstein announced 10 percent, across-the-board pay cuts, increases in health care premiums and a planned reduction in retiree benefits. He also announced an agreement with Delta pilots that should stall the anticipated wave of early retirements that could have disrupted the airline’s flight schedule. TROUBLED CORPORATIONS Delta is not the first troubled corporation to face employee suits that seek redress for 401(k) plan losses incurred as a result of a company’s declining stock prices. Last year, Atlanta-based energy marketer Mirant Corp.’s employees filed a similar class action, seeking compensation for employees whose 401(k) plans plummeted in value after Mirant stock prices nose-dived from nearly $50 a share in 2001 to less than $4 a share. Also last year, Mirant declared bankruptcy in Fort Worth, Texas, where it is seeking to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Energy marketer Enron is also being sued by employees who invested in its 401(k) plan before its executives became the targets of a federal securities fraud investigation. So are WorldCom Inc., McKesson Corp. and Tyco International Ltd. — companies whose executives, like Enron’s, have become the subject of federal criminal investigations into corporate malfeasance. NO PLACE FOR COMPANY STOCK “In my view, there is no place for company stock in 401(k) plans,” said Boston College professor Alicia H. Munnell, director of the Center for Retirement Research. Federal Employee Retirement Income Security Act (ERISA) regulations allow employers to use company stock to match employee contributions to 401(k) plans, and, she acknowledged, “Employers love it.” But doing so creates an inherent conflict of interest for employers at companies facing financial difficulties, she said. Executives must either publicly announce financial ills that could prematurely depress stock prices and worsen a company’s bottom line, let their employees unknowingly continue to invest in potentially troubled stock, or notify plan trustees and risk allegations of insider trading, Munnell said. “What do you do when something is going wrong with the company? You don’t want to stand up and say your company is really getting in trouble,” she said. But if you don’t do that, you are not taking care of your employees properly. “It puts the company in an untenable position. Either they have to announce trouble much earlier than they want … or risk allowing their employees to continue holding or investing in an asset that they know is troubled. “I think, if anything, this highlights what a bad idea this is. I guess if you are going to take advantage of this provision where you can provide company matches with company stock, maybe that’s the deal you have to sign on to,” she said. LACK OF DISCLOSURE Delta executives’ willingness to allow their employees to continue to invest for retirement in company stock “while they were in possession of material and adverse information that plan participants did not have access to” is at the heart of the two ERISA cases, said Corey D. Holzer, the plaintiffs’ Atlanta counsel and a partner at Holzer Holzer & Cannon. “We believe that in order to exercise the [fiduciary] duties that executive management had with respect to this plan, they were required to disclose adverse information to the plan members in a timely fashion,” Holzer said. But Delta executives and board members responsible for administering the company’s retirement plans failed to do so, he said, even though they knew or should have known that Delta stock was an imprudent investment and the company was facing possible bankruptcy. Plaintiffs Dennis Smith and Culver City, Calif., resident Jacklin Toma both worked for Delta. They are seeking class action status on behalf of current and former Delta employees who participated in the airline’s 401(k) plans between Nov. 14, 2000 — when Delta publicly reported a drop in net income amid threats of a pilot strike — and Aug. 9, 2004 — when the common stock investment plan was frozen. On Dec. 31, 2003, Delta’s retirement investment plans had 69,500 participants holding 23 million shares of Delta common and preferred stock, according to the airline’s 2004 proxy statement. Holzer declined to provide any additional information about the plaintiffs. His firm is acting as their liaison counsel.The Pennsylvania class action securities boutique Schiffrin & Barroway has petitioned to consolidate the two cases and is seeking appointment as lead plaintiffs’ counsel. Schiffrin attorney Joseph H. Meltzer did not return calls for comment. The airline, several executives and members of the board’s personnel and compensation committee, including CEO Grinstein, have been named as defendants. Both cases have been assigned to U.S. District Senior Judge G. Ernest Tidwell. Delta attorneys say the ERISA suits have no merit. Delta lawyer D. Michael Keen noted that the ERISA suits concern only Delta’s supplemental retirement savings plan, not its employee pension plan. The company’s primary retirement plan is a defined benefits plan that contains no Delta stock “and has not been affected at all,” he said. Delta uses company stock for the first $1,700 it matches in employee 401(k) plans, but Keen said senior employees have the option to diversify their corporate match shares. YOU LOSE TWICE Munnell, of Boston College, said that using company stock as a 401(k) match “violates the basic notion of diversification. It certainly doesn’t make sense to put retirement holdings where your earnings are,” because if a company goes bankrupt, “people lose not only their job but their retirement holdings … If something goes bad, you lose twice,” she said. In multiple ERISA suits across the nation, the U.S. Labor Department has been weighing in on behalf of employees. In an ERISA suit against Enron, Tittle v. Enron Corp., No. H-01-3913 (S.D. Texas Aug. 30, 2002), U.S. Labor Department lawyers argued in an amicus brief that Enron’s executives had the duty to ensure that 401(k) plan fiduciaries had accurate information about the company’s financial condition, “particularly in light of the Defendants’ own alleged complicity in deceiving the investing public, including the plans.” Those executives, Labor Department attorneys insisted, “could not stand by silently and watch” without informing the trustees administering the retirement investment funds of the company’s financial problems.

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