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Merrill Lynch won a major round Tuesday in the ongoing ERISA litigation arising from WorldCom’s collapse when a federal judge ruled in its favor on a summary judgment motion. Southern District of New York Judge Denise Cote, who is also presiding over WorldCom’s securities class action cases, held that as a “directed trustee” under ERISA, Merrill Lynch’s fiduciary duties were limited in nature and that its decision not to block investment in WorldCom stock by the company’s 401(k) participants did not amount to a breach of its fiduciary duties. The decision, In re WorldCom, Inc. ERISA Litigation, 02 Civ. 4816, is one of many class actions filed in the wake of WorldCom’s 2002 bankruptcy. The former telecommunications giant implemented an $11 billion accounting fraud in which it overstated revenues and hid expenses in an effort to keep up with investor expectations. When news of the overstatement became public, the company quickly fell into bankruptcy. It emerged last April under its former name, MCI. Several former executives pleaded guilty to securities fraud. WorldCom’s former chief executive, Bernard Ebbers, is being tried on charges of securities fraud and related claims before Southern District Judge Barbara Jones. The plaintiffs in the case before Judge Cote, a class of employees who participated in WorldCom’s 401(k) plan, accused Merrill Lynch of breaching its fiduciary duty as a trustee administering the retirement plan. They blamed Merrill Lynch for failing to warn participants about investing in WorldCom stock — an investment option under the plan — and not encouraging the selling of WorldCom shares as its prospects and stock price began crumbling amid news of government investigations, resignation by top executives and mounting concerns about the company’s financial viability. Under its contract with WorldCom, Merrill Lynch was a “directed trustee” under ERISA, the Employee Retirement Income Security Act, Cote held. She found that WorldCom held the power to select the investment options for its employees participating in the 401(k) plan. Merrill Lynch merely followed WorldCom’s instructions on how funds were to be invested. Although it provided WorldCom with market and investment information, Merrill Lynch’s contract imposed no obligation to review the soundness of the plan’s investment options. Because of its limited role, Merrill Lynch was a directed trustee under the law, Cote held, and faced a lower standard of fiduciary duty than WorldCom had with its control of investment options. As a directed trustee, Merrill Lynch’s fiduciary obligations would be judged by the “prudent man standard of care,” held the court. “Under this standard, a directed trustee may not follow the directions of a named fiduciary [WorldCom] in circumstances where it has ‘knowledge’ that such directions represent a breach of the named fiduciary’s duties,” Cote wrote. NON-PUBLIC INFORMATION Applying case law and advisory materials issued by the Department of Labor, the federal agency in charge of overseeing ERISA plans, Cote held that Merrill Lynch would have breached its fiduciary responsibilities had it possessed information not known to the general public or should have acted differently because of publicly available information. Cote found that Merrill Lynch did not possess any non-public information that would have provided it with special insight unknown to other investors. The remaining question for Cote was under the litany of public revelations of problems at WorldCom: Did Merrill Lynch act prudently or did it breach its fiduciary duty by allowing WorldCom employees to continue to invest in the company’s ailing stock? DUTY OF INQUIRY “When a directed trustee receives a direction to invest plan assets in the securities of a company … [it] has a fiduciary duty of inquiry under ERISA when it knows or should know of reliable public information that calls into serious question the company’s short-term viability,” Judge Cote held. “Knowledge that a company’s fortunes are declining does not impose a duty of inquiry,” she continued. News of a Securities and Exchange Commission investigation into the validity of WorldCom’s financial statements did not obligate Merrill Lynch to do anything differently, Cote ruled, although an actual filing of a civil or criminal charge might lead to a different conclusion. Neither news of the company’s dramatic drop in revenue and earnings during the first half of 2002 nor the resignation of senior executives obliged Merrill Lynch to question WorldCom’s instructions to continue to offer its stock as one of several investment options for 401(k) participants. Keller, Rohrback of Seattle, Lewis, Feinberg, Renaker & Jackson of Oakland, Calif., and Stull, Stull & Brody of New York represented plaintiffs. Gibson, Dunn & Crutcher represented the defendants.

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