DukeEmployees.com - Duke Energy Employee Advocate
Legal - Page 12
"I think none of us realized the amount of wholesale corporate fraud going on in the U.S."
- Joseph Whatley Jr., partner at Whatley Drake
More 401 (k) Lawsuits
Miami Daily Business Review– Dan Christensen – July 24, 2002
Several South Florida lawyers are catching a rising national wave of litigation against scandal-plagued corporations by filing shareholder class action lawsuits in Florida against WorldCom Inc. and Tyco International Ltd.
The twist is that the plaintiffs named in the half-dozen lawsuits filed in U.S. District Court in South Florida aren't ordinary shareholders who suffered enormous losses caused by alleged corporate or accounting misdeeds and who are filing standard fraud actions.
Instead, the plaintiffs in these new suits are current and former WorldCom and Tyco employees whose 401(k) retirement savings plans have been crushed by collapsing company stock prices. The employees claim that company officials violated various provisions of the Employee Retirement Income Security Act (ERISA) by manipulating and deceiving them about the holdings in their 401(k) plans.
Since June 28, three civil enforcement actions against WorldCom, former CEO Bernard J. Ebbers and other company officers and directors have been filed in U.S. District Court in South Florida. Judge Daniel T.K. Hurley in West Palm Beach has drawn two of those cases; one is assigned to Judge William P. Dimitrouleas in Fort Lauderdale.
The plaintiffs are current and former employees of Clinton, Miss.-based WorldCom who reside out-of-state. Attorney Steven M. Katzman of Boca Raton, Fla., says he and his co-counsel filed the two suits in South Florida because WorldCom administers its self-directed 401(k) accounts out of an office in West Palm Beach. Coral Gables, Fla., solo practitioner Robert C. Gilbert has filed a similar lawsuit against WorldCom. He was unavailable for comment.
In nearly identical language, the three complaints allege that WorldCom and its officers and directors exerted "undue influence" over employees to encourage them to invest in the company's stock. WorldCom also restricted the ability of participants to freely sell those shares, the complaints allege.
In addition, the WorldCom suits allege that the company breached its fiduciary duty to the 401(k) participants and violated the provisions of ERISA by failing to provide accurate information about the company's financial condition, then allowing those employees to concentrate too much money in WorldCom stock.
"The company had a duty to protect them at the same time the company was playing fast and loose with its financial reporting," says Katzman, a partner at Katzman, Wasserman & Bennardini. "WorldCom was more interested in meeting the [stock] analysts' numbers and maintaining a high share price than they were in using numbers with integrity. The end result was when the truth came out, the employees' retirements were destroyed."
The complaints seek class certification, restitution, interest and attorney fees. Spokesmen for WorldCom did not return telephone calls seeking comment.
The employee lawsuits against Tyco make similar allegations.
The $63 billion implosion of Enron Corp. last year threw a national spotlight on corporate liability regarding employee retirement plans. But even before that attention, the number of ERISA suits involving retirement plan losses filed nationwide climbed 12 percent last year to 10,292 cases, according to statistics compiled by the Administrative Office of the U.S. Courts.
Still, the court's statistics show, ERISA lawsuits remain rare in federal court in South Florida. No cases categorized as ERISA lawsuits have been pending in court in Florida since at least 1997. ERISA claims, however, are sometimes included in other types of cases.
"It's a pretty small fraternity of lawyers who do these cases, but I think it's about to grow a lot," says Joseph Whatley Jr., a partner at Whatley Drake in Birmingham, Ala., who is co-counsel in one of the WorldCom suits.
"There are so many more cases out there now. This is a relatively new area of litigation. I think none of us realized the amount of wholesale corporate fraud going on in the U.S. in company after company."
Even before WorldCom's $107 billion bankruptcy filing Sunday, many of the long-distance and data-service company's 17,000 employees had been hit hard. Two years ago, before WorldCom disclosed it had improperly booked $3.8 billion in operating expenses as capital expenditures, the company's stock was trading at $56 a share. By late Monday, a share of WorldCom cost 14 cents.
The total loss to WorldCom's 401(k) participants -- whose plan was 62 percent invested in WorldCom stock, according to court papers -- is estimated to be $800 million.
In contrast, when he quit in April, Ebbers received a $1.5 million annual pension, a $750,000 annual pension for his wife, free medical and life insurance benefits for life and the part-time use of WorldCom's corporate jets.
WorldCom's filing for Chapter 11 bankruptcy protection drains away lots of money that could have been recovered for the 401(k) participants. But a large pool of cash and assets remains, Whatley says.
"We're also suing individuals, and there is a lot there, and, if that's not nearly enough, there's always the insurance policies," he adds. The policies include those that cover WorldCom's directors and officers, and any ERISA fiduciary policies. Still, "there won't be enough to cover all the losses," Whatley says.
About 10 similar cases seeking class action status have been filed in federal courts elsewhere; steps are being taken to consolidate the cases, Katzman says. Where that will be, and which lawyers will get the lucrative job of leading the WorldCom 401(k) litigation, has yet to be decided, he says.
FIRST TYCO SUITS
Besides his work on the WorldCom case, Whatley is co-counsel with Lee & Amtzis in Deerfield Beach, Fla., in one of three ERISA class action lawsuits that seek to represent all of Tyco's 401(k) plan participants.
The three Tyco ERISA suits have been filed since July 3 in U.S. District Court in South Florida. They are apparently the first of their kind in the nation against Tyco, says Lee & Amtzis partner Eric Lee. The defendants are Tyco and its directors and officers, including its recently departed and indicted CEO L. Dennis Kozlowski.
George Barrett, a partner at Barrett, Johnston & Parsley in Nashville, Tenn., is co-counsel with Lee & Amtzis on another Tyco 401(k) lawsuit and with Gilbert on a WorldCom case. The allegations in those suits track the allegations in the other 401(k) cases.
Investors have punished Tyco's stock this year amid questions about its accounting practices and business plan, particularly since Kozlowski's indictment for tax evasion last month. In January, the stock traded around $58 a share. Today, a share is worth about $11.
"This is similar to the Enron situation, in which people lost their life savings," Lee says. "Tyco had a fiduciary obligation to these people."
Like the named WorldCom plaintiffs, the Tyco plaintiffs identified in the lawsuits don't live in South Florida. But the suits were filed in Florida because the Bermuda-based conglomerate's huge fire and security business, including Sensormatic and ADT, is headquartered in Boca Raton.
Two Tyco cases are assigned to Senior U.S. District Judge Kenneth L. Ryskamp of the Southern District of Florida, with another case assigned to Judge Hurley.
Tyco spokesman Gary Holmes declined comment because the litigation is pending.
CLAIMS AGAINST BROKERAGES
Lawsuits aren't the only way that battered employee-stockholders are fighting back. Some are pursuing securities arbitration claims with the nation's stock exchanges against brokerage houses.
For example, Klayman & Toskes in Boca Raton represents about 70 WorldCom employees who participate in the company's Employee Stock Option Plan (ESOP). Those employees have lost more than $50 million, says partner Lawrence L. Klayman.
WorldCom employees now have claims pending against Salomon Smith Barney, Morgan Stanley and Merrill Lynch.
"The suits allege that the firms failed to recommend to WorldCom ESOP participants hedging strategies to protect their concentrated position in WorldCom as a result of the exercise of their stock options through the use of margin," says a notice the firm issued to WorldCom employees late last month.
"The recent events surrounding WorldCom's disclosure of accounting irregularities points out the fallacy behind any advice given to clients to concentrate all of their assets in a single stock without any protection," says the notice.
The brokerage firms have denied any improper conduct.
Matthews v. Duke Energy
Employee Advocate – July 22, 2002
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NORTH CAROLINA
JIM MATTHEWS, on behalf of himself and a class of persons similarly situated,
DUKE ENERGY CORP, CHARLOTTE WAYLAND, G. ALEX BERNHARDT, SR., JEFFREY L. BOYER, ROBERT J. BROWN, WILLIAM A. COLEY, WILLIAM T. ESREY, ANN MAYNARD GRAY, DENNIS R. HENDRIX, HAROLD S. HOOK, GEORGE DEAN JOHNSON, JR. MAX LENNON, LEO E. LINBECK, JR. JAMES G. MARTIN, RICHARD J.OSBORNE,RICHARD B. PRIORY, JAMES T. RHODES, RUSSELL M. ROBINSON, II, John Does 1-30, and Richard Roes 1-30,
COMPLAINT FOR VIOLATIONS OF THE EMPLOYEE RETIREMENT INCOME SECURITIES ACT
CLASS ACTION COMPLAINT
For his Complaint against Defendants, Plaintiff alleges as follows:
I. NATURE OF ACTION
- This is a civil enforcement action brought pursuant to § 502 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §1132.
- The lawsuit concerns the Duke Retirement Savings Plan (the “Plan”), a retirement plan established by Duke Energy Corporation (“Duke” or the “Company”) as a benefit for its employees to permit tax-advantaged savings for retirement and other long-term goals. The Plan is a defined contribution plan covering most of Duke’s full and part-time employees in the United States.
- Plaintiff sues the Company; Charlotte Wayland and John Does 1-30, the individual members of the Company’s Benefits Committee during the Class Period; G. Alex Bernhardt, Sr., Robert J. Brown, Williams A. Coley, William T. Esrey, Ann Maynard Gray, Dennis R. Hendrix, Harold S. Hook, George Dean Johnson, Jr., Max Lennon, Leo E. Linbeck, Jr. James G. Martin, Richard B. Priory, James T. Rhodes, Russell M. Robinson, II, and Richard Roes 1-30, who are the directors of the Company during the Class Period, Richard J. Osborne, who was the Company’s Executive Vice President and Chief Financial Officer during the Class Period and Jeffrey L. Boyer, who was the Company’s corporate controller during the Class Period.
- The Plaintiff, Jim Matthews, is an employee of Duke and a participant in the Plan. Plaintiff alleges that Defendants, Duke itself and certain individuals, are fiduciaries of the Plan, and breached their fiduciary duties to him and to the other participants and beneficiaries of the Plan, in violation of ERISA §409, 29 U.S.C. §1109, in connection with the Plan’s holdings of Duke stock. Plaintiff alleges that Defendants are obliged under ERISA to make the Plan whole for the losses suffered as a result of Defendants’ failure to discharge their fiduciary obligations.
- Because his claims apply to the participants and beneficiaries as a whole, and because ERISA authorizes a participant such as Mr. Matthews to sue for plan-wide relief for breaches of fiduciary duty, he brings this action on behalf of himself and all the participants and beneficiaries of the Plan during the relevant period.
II. JURISDICTION AND VENUE
- This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §1331 (federal questions) and ERISA §502(e)(1), 29 U.S.C. §1132(e)(1), and personal jurisdiction over Defendants pursuant to Fed. R. Civ. P. 4(k).
- Venue is proper in this district pursuant to ERISA §502(e)(2), 29 U.S.C. §1132(e)(2), because the Plan was administered in this district, some or all of the fiduciary breaches for which relief is sought occurred in this district, and some Defendants reside in this district.
- Plaintiff is a resident of North Carolina. He has worked for Duke from 1972 through the present.
- Plaintiff is a “participant” in the Plan within the meaning of ERISA § 3(7) 29 U.S.C. § 1102(7)). During the Class Period, Plaintiff’s interest in the Plan was invested in Duke common stock.
- Defendant Duke Energy is a North Carolina corporation with its principal place of business located at 526 South Church Street, Charlotte, NC 28202. The Company offers physical delivery and management of both electricity and natural gas throughout the United States and abroad.
- Defendant Charlotte Wayland was at times relevant hereto the Chairman of the Benefits Committee.
- Defendant Richard J. Osborne was at time relevant hereto the Company’s Chief Financial Officer.
- Defendant Jeffrey L. Boyer was at time relevant hereto the Company’s corporate controller.
Defendants John Does 1-30 are residents of the United States and are or were members of the Company’s
- Benefits Committee during the Class Period. Their identity is now unknown to Plaintiff. Once their identity is discovered, Plaintiff will seek leave to amend to join them under their true names.
- (a) Defendant G. Alex Bernhardt, Sr. was at times relevant hereto a director of the Company.
(b) Defendant Robert J. Brown was at times relevant hereto a director of the Company.
(c) Defendant William A. Coley was at times relevant hereto a director of the Company.
(d) Defendant William T. Esrey was at times relevant hereto a director of the Company.
(e) Defendant Ann Maynard Gray was at times relevant hereto a director of the Company.
(f) Defendant Dennis R. Hendrix was at times relevant hereto a director of the Company.
(g) Defendant Harold S. Hook was at times relevant hereto a director of the Company.
(h) Defendant George Dean Johnson, Jr., was at times relevant hereto a director of the Company.
(i) Defendant Max Lennon was at times relevant hereto a director of the Company.
(j) Defendant Leo E. Linbeck, Jr. was at times relevant hereto a director of the Company.
(k) Defendant James G. Martin was at times relevant hereto a director of the Company.
(l) Defendant Richard B. Priory was at times relevant hereto a director of the Company.
(m) Defendant James T. Rhodes was at times relevant hereto a director of the Company.
(n) Defendant Russell M. Robinson, II was at times relevant hereto a director of the Company.
- Defendants Richard Roes 1-30 are residents of the United States, and are or were members of the Company’s Board of Directors during the Class Period. Their identity is now unknown to Plaintiff. Once their identity is discovered, Plaintiff will seek leave to amend to join them under their true names.
- The Defendants referred to in paragraphs 11-16 are collectively referred to herein as the “Individual Defendants.”
- Because of the Individual Defendants’ positions with the Company, they had access to adverse undisclosed information about its business, operations, products, operational trends, financial statements, markets, and present and future business prospects via access to internal corporate documents (including the Company’s operating plan, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors’ meetings and committees thereof, and via reports and other information provided to them in connection therewith.
IV. APPROPRIATENESS OF CLASS ACTION
- Plaintiff brings this action pursuant to Rule 23 of the Federal Rules of Civil Procedure on behalf of himself and a class (the “Class”) of all persons similarly situated. The Class itself consists of all persons who were participants in or beneficiaries of the Plan at any time from January 1, 2000 through the present (the “Class Period”).
- Plaintiff meets the prerequisites to bring this action on behalf of the Class because:
Numerosity. The Class consists of thousands of individuals and is so numerous that joinder of all members as individual Plaintiffs is impracticable.
Commonality. There are questions of law and fact common to the Class.
Typicality. Plaintiff’s claims are typical of the claims of the Class.
Adequacy. Plaintiff will fairly and adequately protect the interests of the Class. He has no interests that are antagonistic to or in conflict with the interest of the Class as a whole, and he has engaged competent counsel, highly experienced in ERISA class actions concerning employer securities in 401(k) plans, as well as in other class and complex litigation, to ensure protection of the interests of the Class as a whole.
- As an ERISA breach of fiduciary duty action for plan-wide relief, this is a classic Rule 23(b)(1)(B) class action. The prosecution of separate actions by the members of the Class would create a risk of adjudications with respect to individual members of the Class which would, as a practical matter, be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests. However, this action is also maintainable as a class action under the other subsections (b) of Rule 23:
Rule 23(b)(1)(A). The prosecution of separate actions by the members of the Class would create a risk of inconsistent or varying adjudications with respect to the individual members of the Class, which would establish incompatible standards of conduct for Defendants.
Rule 23(b)(2). The Defendants have acted or refused to act on grounds generally applicable to the Class, thereby making appropriate final injunctive, declaratory, or other appropriate equitable relief with respect to the Class as a whole.
Rule 23(b)(3). Questions of law and fact common to members of the Class predominate over any questions affecting only individual members, and the class action is superior to other available methods for the fair and efficient adjudication of the controversy.
- There are one or more putative or certified class action securities cases pending against Duke and other defendants. The claims herein are under ERISA and related principles of federal common law and are not being asserted by the plaintiffs in those other class actions. The named plaintiffs in those class actions do not adequately represent the plaintiff or the Class herein with respect to ERISA claims and may be subject to defenses and limitations of liability under the PSLRA and other statutes and Rules that do not apply to the claims asserted herein.
- Under and required by ERISA, defendants carry insurance for claims asserted herein that may not be available to the defendants in the securities class actions.
- The Class contains persons who made purchases within the time frame implicated in the securities class actions, as well as persons who made no purchases within the class period for the securities actions, and persons who purchased both within and outside the securities class action time frame.
- There are people in this Class who are not members of the classes or putative classes in the securities class action cases.
- There are defendants in this case who are not defendants in the securities class actions.
V. THE PLAN
- By information and belief, the Plan is an “employee pension benefit plan” within the meaning of ERISA §3(2)(A), 29 U.S.C. §1002(2)(A). Further, it is an “eligible individual account plan” within the meaning of ERISA §407(d)(3), 29 U.S.C. §1107(d)(3), and also a “qualified cash or deferred arrangement” within the meaning of I.R.C. §401(k), 26 U.S.C. §401(k). The Plan is not a party to this action. Pursuant to ERISA, however, the relief requested in this action is for the benefit of the Plan.
- Duke is the sponsor of the Plan. Its Sponsor Identification Number is 56-0205520 and the Plan Number is 002.
- Subject to Internal Revenue Service limitations, participants of the Plan were permitted to contribute up to 15% of pay – in before and after tax payroll deductions – to the Plan. Participants directed the investment of their contributions to various investment options available in the Plan.
- Most of these options were diversified mutual funds. However, the options also included the Duke Common Stock Fund.
- The Company matched the participants’ contributions, at certain specified percentages, by making contributions to the participants’ accounts in Company common stock.
VI. DEFENDANTS’ FIDUCIARY STATUS
- During the Class Period, the Defendants had discretionary authority respecting management of the Plan and/or the management or disposition of the Plan’s assets and had discretionary authority or responsibility for the administration of the Plan.
- During the Class Period, all of the Defendants acted as fiduciaries of the Plan pursuant to ERISA § 3(21)(A) (29 U.S.C. § 1002(21)(A)) and the law interpreting that section.
- ERISA requires every plan to provide for one or more named fiduciaries, who will have “authority to control and manage the operation and administration of the plan.” ERISA § 402(a)(1) (29 U.S.C. § 1102(a)(1)). Instead of delegating fiduciary responsibility for the Plan to external service providers, the Company chose to comply with the requirement of section 402(a)(1) by internalizing the fiduciary function. It did so in various ways.
- First, during the Class Period, the Company designated a Benefits Committee as Plan administrator, thereby making the members of that committee named fiduciaries of the Plan.
- Second, ERISA treats as fiduciaries not only persons explicitly named as fiduciaries under Section 402(a)(1), but also any other persons who act in fact as fiduciaries, i.e., perform fiduciary functions. ERISA § 3(21)(A)(i) (29 U.S.C. § 1002(21)(A)(i)) makes a person a fiduciary “to the extent . . . he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management of disposition of its assets. . .”. During the Class Period, the Defendants performed fiduciary functions under this standard, and thereby also acted as fiduciaries under ERISA, by, among other things, appointing Plan administrators amd making statements to participants with respect to the Company, its financial results and business prospects.
- In addition, under ERISA, in various circumstances non-fiduciaries who knowingly participate in fiduciary breaches may themselves be liable. To the extent any of the Defendants are held not to be fiduciaries, they remain liable as non-fiduciaries who knowingly participated in the fiduciary breaches described below.
VII. FACTUAL BACKGROUND TO BREACHES OF FIDUCIARY DUTY
- During the Class Period, and before, Duke offered physical delivery and management of both electricity and natural gas throughout the United States and abroad.
- During the Class period, Duke employed nearly 25,000 people. In retaining existing employees and in recruiting prospective employees, Duke told employees that they would be expected to work hard but that they would be well rewarded for their efforts.
- During the Class period, Duke touted itself as experiencing outstanding, sustainable growth, and as continuing to demonstrate positive results.
- In reality, Duke knew that its growth prospects were quite different from its past record and from what it was publicly indicating. On May 17, 2002, the Company issued a press release announcing that it had “analyzed its trades for the three-year period from 1999 through 2001 to identify those trades which may have some of the characteristics of sell/buy-back trades.” These trades, known as “round-trip” or “wash” transactions, involve the simultaneous buying and trading of power in the same price and same amount. The Company had engaged in approximately $1 billion of “round-trip” energy trades, which provided no economic benefit for the Company. The alleged “results” of these “round-trip” trades were communicated to Plan participants by Defendants, which communications were materially false and misleading as a result. These communications came in various forms, including filings with the SEC which were incorporated by reference in one or more prospectuses provided to Plan participants.
- In response to the subsequent disclosure of its misconduct, Duke’s stock fell, and financial commentators severely criticized the lack of credibility of Duke’s management.
- In short, by no later than the beginning of the Class Period, Duke and the Individual Defendants knew, or should have known, of numerous questionable practices that made Duke’s stock a highly inappropriate investment for a long-term retirement savings plan such as the Plan. Despite this, Defendants continued to offer Duke’s stock as a Plan investment alternative, continued to cause Duke matching contributions to be invested in Duke stock, and failed to correct the materially misleading statements that had been made to Plan participants.
VIII. CLAIMS FOR RELIEF
- ERISA § 404(a)(1)(A) (29 U.S.C. § 1104(a)(1)(A)) imposes on a plan fiduciary a duty of loyalty – that is, a duty to “discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of . . . providing benefits to participants and its beneficiaries . . . .” Section 404(a)(1)(B) (29 U.S.C. § 1104(a)(1)(B)) also imposes on a plan fiduciary a duty of prudence – that is, a duty to “discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man, acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims . . . .”
- A plan fiduciary’s duties of loyalty and prudence include a duty to disclose and inform. This duty entails: (1) a negative duty not to misinform; (2) an affirmative duty to inform when the fiduciary knows or should know that silence might be harmful; and (3) a duty to convey complete and accurate information material to the circumstances of participants and beneficiaries. This duty to disclose and inform recognizes the disparity that may exist, and in this case did exist, between the training and knowledge of the fiduciaries, on the one hand, and the participants and beneficiaries, on the other. In a plan with various funds available for investment, this duty to inform and disclose also includes: (1) the duty to impart to plan participants material information of which the fiduciary has or should have knowledge that is sufficient to apprise the average plan participant of the risks associated with investing in any particular fund; and (2) the duty not to make material misrepresentations.
- By no later than the commencement of the Class Period, Defendants breached their fiduciary duties to disclose and inform with respect to the Plan’s use of employer stock as a plan investment. During the Class Period, and before, any investment in employer stock in the Plan was an undiversified investment in a single company’s stock. As a result, any such investment carried with it an inherently high degree of risk. These inherent risks made Defendants’ duty to provide complete and accurate information about investing in company stock even more important than would otherwise be the case. Rather than providing complete and accurate information to the Plan’s participants and beneficiaries regarding the risks of investing in company stock in the Plan, Defendants did the opposite: they withheld and concealed material information during the Class Period and before, and instead actively misled the participants and beneficiaries of the Plan about the appropriateness of investing in company stock and about Defendants’ earnings prospects and business condition, thereby encouraging participants and beneficiaries of the Plan to continue to make and to maintain substantial investments in company stock in the Plan.
- A fiduciary’s duties of loyalty and prudence also entail a duty to conduct an independent investigation into, and continually to monitor, the merits of all the investment alternatives in the Plan, including employer securities, to ensure that each investment is a suitable option for the Plan. Defendants breached this duty of investigation and monitoring with respect to company stock. By no later than the beginning of the Class Period, Defendants could not have reasonably made a determination that company stock was a suitable investment for the Plan, either for a participant’s discretionary account or for the match. In fact, by the beginning of the Class Period, if not before, company stock was plainly an unsuitable investment option for the Plan.
- The fiduciary duty of loyalty also entails a duty to avoid conflicts of interest and to resolve them promptly when they occur. A fiduciary must always administer a plan with an “eye single” to the interests of the participants and beneficiaries, regardless of the interests of the fiduciaries themselves or the plan sponsor.
- Defendants breached their duty to avoid conflicts of interest and to promptly resolve them when they occur by continuing to allow company stock as a Plan investment during the Class Period, by failing to engage independent fiduciaries who could make independent judgments concerning the Plan’s investment in company stock and the information provided to participants and beneficiaries concerning it, and, generally, by failing to take whatever steps were necessary to ensure that the fiduciary of the Plan did not suffer from a conflict of interest, including the notification of the Department of Labor of the questionable transactions which made employer stock an unsuitable investment for the Plan.
- A fiduciary may not avoid his fiduciary responsibilities by relying solely on the language of the plan documents. While the basic structure of a plan may be specified, within limits, by the plan sponsor, the fiduciary, including a plan sponsor-fiduciary, may not blindly follow the plan document if to do so leads to an imprudent result. ERISA § 404(a)(1)(d) (29 U.S.C. § 1104(a)(1)(D)).
- To the extent that Defendants followed the direction of the Plan documents, for example, in continuing to place the match in company stock during the Class Period, beginning no later than the matches of January 1, 2000, they further breached their fiduciary duties.
- The Plan suffered a loss, and Plaintiff and the other Class members were damaged, because substantial assets in the Plan were invested in company stock during the Class Period in violation of Defendants’ fiduciary duties. As of December 31, 2001, over $1.85 billion of $2.6 billion, or approximately 71% of the assets of the Plan, were in company stock.
- As fiduciaries, Defendants were responsible for the prudence of investments in the Plan during the Class Period unless participants in the Plan themselves exercised effective and informed control over the assets in the Plan in its individual accounts pursuant to ERISA § 404(c) and the regulations promulgated under it. Those provisions were not complied with here; instead of taking the necessary steps to ensure effective participant control by complete and accurate disclosure and regulatory compliance, Defendants did exactly the opposite. As a consequence, participants in the Plan did not control the Plan assets that were invested in company stock, and Defendants remained entirely responsible for ensuring that such investments were and remained prudent. Defendants’ liability to the Plan for damages stemming from imprudent Plan investments in company stock is therefore established upon proof that such investments were or became imprudent and resulted in losses in the value of the assets in the Plan during the Class Period, without regard to whether or not the participants relied upon Defendants’ statements, acts, or omissions.
- The Plan also suffered a loss, and Plaintiff and the other Class members were damaged, by Defendants’ above-described conduct during the Class Period and before, because Defendants’ materially deceptive statements, acts, and omissions were fundamentally designed to deceive Plaintiff and the other Class members about the prudence of making and maintaining investments in company stock. Where a breach of fiduciary duty consists of, or includes, misrepresentations and omissions material to a decision by a reasonable participant that results in harm to the participant, the participant is presumed as a matter of law to have relied upon such misrepresentations and omissions to his or her detriment. Here, Defendants’ above-described statements, acts, and omissions constituted misrepresentations and omissions that were fundamentally deceptive concerning the prudence of investments in company stock and were material to any reasonable person’s decision about whether or not to invest or maintain any part of its plan assets in company stock during the Class Period. Plaintiff and the other Class members are therefore presumed to have relied to their detriment on Defendants’ deceptive statements, acts, and omissions.
- Plaintiff further contends that the Plan suffered losses, and Plaintiff and the other Class members were damaged, by Defendants’ above-described conduct during the Class Period and before, because that conduct fundamentally deceived Plaintiff and the other Class members about the prudence of making and maintaining investments in company stock, and that, in making and maintaining investments in company stock, Plaintiff and the other Class members relied to their detriment upon Defendants’ materially deceptive statements, acts, and omissions.
X. REMEDY FOR BREACHES OF FIDUCIARY DUTY
- ERISA § 502(a)(2) (29 U.S.C. § 1132(a)(2)) authorizes a plan participant to bring a civil action for appropriate relief under section 409 (29 U.S.C. § 1109). Section 409 requires “any person who is a fiduciary . . . who breaches any of the . . . duties imposed upon fiduciaries . . . to make good to such plan any losses to the plan . . . .” Section 409 also authorizes “such other equitable or remedial relief as the court may deem appropriate . . . .”
- With respect to the calculation of the losses to a plan, breaches of fiduciary duty result in a presumption that, but for the breaches of fiduciary duty, the participants and beneficiaries in the plan would not have made or maintained its investments in the challenged investment and, where alternative investments were available, that the investments made or maintained in the challenged investment would have instead been made in the most profitable alternative investment available. In this way, the remedy restores the values of the plan’s assets to what they would have been if the plan had been properly administered.
- Plaintiff and the Class are therefore entitled to relief from Defendants in the form of: (1) a monetary payment to the Plan to make good to the Plan the losses to the Plan resulting from the breaches of fiduciary duties alleged above in an amount to be proven at trial based on the principles described above, as required by ERISA § 409(a) (29 U.S.C. § 1109(a)); (2) injunctive and other appropriate equitable relief to remedy the breaches alleged above, as provided by ERISA §§ 409(a) and 502(a)(2)&(3) (29 U.S.C. §§ 1109(a) and 1132(a)(2)&(3)); (3) reasonable attorney fees and expenses as provided by ERISA § 502(g) (29 U.S.C. § 1132(g)), the common fund doctrine, and other applicable law; (4) taxable costs; and (5) interest on some or all of these amounts as provided by law.
In view of all of this, Plaintiff and the Class pray for judgment against Defendants for a monetary payment to the Plan, injunctive and other appropriate equitable relief, reasonable attorney fees and expenses, taxable costs, interest, and any other relief the Court deems just.
DATED this 16th day of July, 2002.
Respectfully Submitted By
Geraldine Sumter, N.C. Bar: 11107
Ferguson, Stein, Chambers Wallas, Adkins, Gresham & Sumter, P.A.
741 Kenilworth Ave., Ste. 300
Charlotte, NC 28204-2828
Lynn Lincoln Sarko
Derek W. Loeser
Erin M. Riley
Keller Rohrback, LLP
1201 Third Ave., Ste. 3200
Seattle, WA 98101
Dalton, Gotto, Samson & Kilgard P.L.C.
National Bank Plaza
3101 N. Central Ave., Ste. 900
Phoenix, AZ 85012
Howard T. Longman
Edwin J. Mills
Stull, Stull & Brody
6 East 45th St., Ste. 500
New York, NY 10017
Attorneys for Plaintiff
Update: This lawsuit was dismissed in 2003:
Duke Dodges Another Bullet
Cheney Sued for Fraud
Bloomberg News – by William McQuillen – July 14, 2002
(7/11/02) - DALLAS - U.S. Vice President Richard Cheney and Halliburton Co., the company he once ran, are being sued by a watchdog group that claims shareholders were defrauded by faulty accounting practices.
Judicial Watch, a group that brought numerous lawsuits against former President Bill Clinton's administration, filed a lawsuit in federal court in Dallas claiming the company issued "materially false" financial statements that inflated its share price from 1998 through 2001.
Spokesmen for Cheney and President George W. Bush said the suit is without merit.
The Securities and Exchange Commission is investigating whether Halliburton, the world's second-largest oilfield services provider, improperly accelerated the booking of revenue from construction work starting in 1998. Cheney served as the company's chief executive officer from 1995 to 2000.
"Halliburton's change in accounting principle was not disclosed or justified in its financial statements, and the effect of the change on net income was not specifically disclosed," the suit claims.
Halliburton said in a statement that it followed Generally Accepted Accounting Principles and SEC accounting guidelines.
"The claims in this lawsuit are untrue, unsupported and unfounded," said Doug Foshee, chief financial officer of the Dallas-based company. "We are working diligently with the SEC to resolve its questions regarding the company's accounting procedures."
Foshee is listed among the defendants in the suit.
"To look the other way for the vice president would be to set a precedent that the Washington elite are above the law," said Larry Klayman, Judicial Watch's chairman and general counsel. "This cannot be permitted if our democracy is to survive."
Cheney earned more than $11 million in salary during his tenure as Halliburton chief and gained $22 million by exercising stock options in 2000.
Judicial Watch's lawsuit on behalf of Halliburton shareholders comes a day after Bush proposed doubling the prison time for executives convicted of fraud following the collapse of Enron Corp. and WorldCom Inc.
Klayman said Bush's rush to propose new legislation is an effort to divert attention from his business practices and those of Cheney. Washington-based Judicial Watch, which says its mission is "to promote a return to ethics and morality in our nation's public life," had earlier sued for release of documents compiled by an energy policy task force that Cheney led.
Bush has come under renewed scrutiny about his delay in reporting a sale of stock in Harken Energy Corp. in 1990, while he was a company director. Two months after his sale, the company posted a loss of $25 million and its shares plummeted.
Halliburton shares fell 57 cents, or more than 4 percent, to $13.55 today. The company traded as high as $54.69 in September 2000. Company shares have fallen more than 57 percent in the past year, mostly on concerns about asbestos litigation liability. New York-based Schlumberger Ltd. is the world's biggest oilfield services company.
The suit also names Halliburton directors, including former U.S. Secretary of State Lawrence Eagleburger, as defendants, as well as Arthur Andersen LLP, which served as the company's accountants.
Until 1998, Halliburton bid for projects under so-called cost-plus contracts. Under these policies, the company was able to recover from customers the cost of a project plus a certain percentage profit from gas-processing plants or pipelines.
The company changed these practices in 1998 and started using fixed price, or lump sum, contracts. Halliburton changed its accounting methods to reflect revenue from construction projects where it had incurred cost overruns before those additional costs were billed to customers.
Cheney Sings the Praises of Anderson
Bush’s Disturbing View of Executive Privilege
Associated Press – July 14, 2002
WASHINGTON, D.C. -- A federal judge says the Bush administration has a disturbingly broad legal view of confidential advice to the president that would keep a huge amount of government information secret.
U.S. District Judge Emmet Sullivan also accused the Bush administration of making purposefully misleading arguments in defending Vice President Dick Cheney's energy task force against two lawsuits.
The Sierra Club environmental organization and Judicial Watch, a conservative watchdog group, are seeking records about how the Cheney task force was influenced by industry executives and lobbyists in formulating national energy policy.
Sullivan criticized the Bush administration's position that applying the Federal Advisory Committee Act to the Cheney task force encroaches on the president's right to receive confidential advice necessary to carry out his duties.
The judge said the government's position implies that "any action by Congress or the judiciary that intrudes on the president's ability to recommend legislation to Congress or get advice from Cabinet members in any way would necessarily violate the Constitution."
"Such a ruling would eviscerate the understanding of checks and balances between the three branches of government on which our constitutional order depends," said the judge, who was appointed to the bench by former President Bill Clinton.
The judge said the proper approach is to examine whether disclosure would prevent the executive branch from carrying out any constitutionally assigned function.
Sullivan's opinion details his legal reasoning for his May decision to reject the Bush administration's motion to dismiss the cases.
Sullivan said Justice Department lawyers had mischaracterized a minority opinion in a Supreme Court case as if it were controlling legal authority that should result in dismissal of the lawsuits.
"One or two isolated mis-citations or misleading interpretations of precedent are forgivable mistakes of busy counsel, but a consistent pattern of misconstruing precedent presents a much more serious concern," Sullivan wrote.
Justice Department spokeswoman Barbara Comstock noted that the judge granted the Bush administration's motion to dismiss Judicial Watch's claims based on the Freedom of Information Act, and the judge agreed that FOIA does not apply to the vice president.
"To the extent that he denied our motions to dismiss the lawsuits, he has indicated he will go forward with discovery, and he is allowing limited discovery to determine whether our legal defenses have merit," Comstock said.
Two Faces of Bush
IndianTrust.com – Press Release – July 12, 2002
(7/11/02) - In stark contrast to President Bush's urgent call for "corporate
responsibility," and to stop the scandals rocking Wall Street, The White
House along with Secretary of the Interior and the Attorney General are
seeking legislation to obstruct the ability of the United States District
Court in the landmark Indian trust lawsuit, Cobell v. Norton, to uncover the
full scope of malfeasance in the government's mismanagement of billions of
dollars of assets held in trust for 500,000 individual Indian trust
Specifically, the White House has asked Congress to appropriate millions of
dollars in tax revenue to hire private attorneys to protect government
officials who have breached their fiduciary responsibilities and have
covered-up their misconduct by destroying tens of thousands of boxes of
documents and electronic trust records throughout the six-year case. Worse
still, the government deliberately has failed to provide adequate information
technology (IT) security for individual Indian trust funds, exposing billions
of dollars of trust monies to theft, loss, and misappropriation.
At the same time, the White House has requested that Congress cut off funds
for judicial officers who have begun to expose the nature and scope of this
massive government financial scandal and has asked Congress to cut off funds
for the full accounting ordered by United States District Court Judge Royce
C. Lamberth and the United States Court of Appeals for the D.C. Circuit.
The malfeasance committed by the government exceeds in aggregate the
financial losses and document destruction that have been reported for Enron,
Global Crossing and MCI-WorldCom.
Lead plaintiff Elouise Cobell expressed anger and frustration in this
unprecedented effort to protect administration officials who deliberately
violate the law and breach their trust duties:
"It is very strange that the President acts aggressively to prosecute chief
executive officers of public companies for their corrupt activities at the
same time the President attempts to protect government officials who engage
in precisely the same misconduct. If the President is correct that this
behavior is criminal and must be stopped now, and he is, why is cooking the
books and cover-up acceptable when done by officials in his Administration?
Congress should send a clear message to the White House that this will not be
tolerated. And, the public should be outraged by this naked abuse of power."
U.S. Is Penalized by Judge
Legal - Page 11