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Legal     1 - Duke Energy Employee Advocate

Legal - Page 15

Corporations Feel ‘Payback Time’

New York Law Journal – by Tamara Loomis – October 18, 2002

(10/17/02) - A study of juror attitudes in the post-Enron era shows that companies across the board will be paying the price in the courtroom for the corporate misdeeds that have dominated this year's headlines.

The study was conducted by the Minority Corporate Counsel Association, in partnership with the Los Angeles jury consulting firm DecisionQuest. Their goal was to gain insight into why jurors in states like California, Texas and Louisiana are so much more willing to beat up on big companies than jurors in states like Kansas and Delaware.

To test their theories, the groups ran mock-jury-type focus groups in seven such locations this summer, coupled with a nationwide telephone survey.

What they found was that anti-business sentiment is higher than ever, and it not only transcends geography, but in many instances, race, gender and class.

"The scandals that have rocked a relatively small number of companies are having a huge spillover impact on how all corporations are being judged," said Veta Richardson, executive director of the MCCA, a Washington, D.C., nonprofit group that promotes the hiring and advancement of minority and women lawyers. "People are much less inclined than before to give corporations the benefit of the doubt."

Of course, business has weathered crises of confidence in the past, such as the savings and loan debacle and insider trading scandals of the 1980s. But according to Arthur Patterson, a psychologist with DecisionQuest, this crisis is different, in a way that could affect jury verdicts across an unprecedented swath of issues and industries.

"For the first time, jurors feel that they have been touched personally by the actions of the Enrons and WorldComs," Patterson said. "They have seen their 401(k) plans devastated and they attribute it to bad actions by corporate America."

This new guilty-until-proven-innocent attitude shows up in some alarming ways. For instance, the study found that educated white males feel especially betrayed by the recent rash of scandals. As a result, what historically has been the biggest support base of large corporations has eroded dramatically.

As one such juror told a researcher in a Baton Rouge, La., focus group, "You can steal an apple and go to jail for 20 years but [a corporate executive] can steal a million dollars" and get off scot free.

"The man with the money and the power gets a free ride," another juror agreed.


Such hostility toward corporate management is not limited to the companies in the news either. More than 80 percent of those polled agreed that "the events of Enron and WorldCom are just the tip of the iceberg."

"The typical juror today is not willing to accept that there are only a few bad apples," Patterson said. "The good companies, not the bad ones, are considered the exception."

He said the recent wave of billion-dollar jury verdicts is a reflection of this absolute distrust of executives, not only in what they say but in what they do. "To punish them, jurors believe it takes billions with a 'B.' "

Many of the study's subjects also expressed skepticism that the government is able to keep corporations in line.

"If a company is big enough, it can circumvent the government agencies with the right lawyers and money," read one typical juror comment.

In fact, in the minds of many jurors, corporations seem to have become the equivalent of Big Brother, the all-powerful, all-knowing political party of George Orwell's novel "1984." Jurors not only believe that corporate executives wield tremendous power, but also that they know everything that happens on every loading dock, factory and warehouse.

In such an environment, "no comment" is the worst thing a company can say, Richardson said. "People think that they're hiding something."

And contrary to what many businesses may think, jurors in communities with a significant corporate presence, such as in the South and the Northeast, are actually the most hostile to corporations.

Companies may provide jobs, but they also pollute, subjects said. Community outreach was viewed as a public relations gambit or tax write-off.


This anti-business attitude spills over into how jurors view claims of employment discrimination, environmental racism and even class action litigation.

Many white jurors today, the study found, are more willing to support discrimination claims, in part, because they do not want to be perceived of as racist, but also because they have more of an "us-versus-them" mentality, Patterson said. "They don't want to break solidarity with the employee."

Jurors also empathized with the plight of the employee who experiences racism or sexism in the workplace. As one juror put it, "If you go over your boss' head [with a complaint], you're permanently on his shit list."

Yet subjects did not buy the standard corporate defense that senior management was unaware of the problem. Jurors assume that they know -- and control -- everything, Patterson said.

On the plus side, jurors apparently do like to see that there are women and minorities among the senior executives.

"It has absolutely nothing to do with a discrimination case legally," Patterson said. "But it makes jurors think you're OK."

Jurors are more inclined to give credence to a claim of environmental racism, in which a company is charged with locating its plants and other potentially polluting facilities in poorer ethnic areas. Although historically plaintiffs have had a tough time proving such cases, fully a third of the subjects polled said they thought such practices existed.

The shift in juror outlook hurts corporations facing class action litigation as well. Jurors do not feel particularly well-disposed toward plaintiffs' lawyers, who "make all the money while the plaintiffs get nothing." But that does not necessarily translate into a dim view toward the merits of the case itself. Instead, jurors award more money to make up for the cut the lawyers will get.

What such findings dictate is that corporate litigators would be smart to rethink their current strategies, Richardson said. "They can't just choose white male jurors anymore, nor can they rely on so many of the myths that have determined jury selection in the past."

Patterson agreed: "Corporations need to be aware that juries are predisposed not to believe what they tell them."

This new-found antipathy, he added, "is going to be around for a while."

"For years, our jury research has shown an increasing distrust of corporate America," he said. "Now jurors have validation for their distrust."

Juries React to Corporate Misconduct

76% Are angry with corporate America

88% Think senior executives are overpaid

76% Think the way executives are paid promotes corruption

73% Believe auditors do what their clients tell them, even if it is dishonest

71% Believe upper level employees are more prone to lie on the witness stand

78% Believe many companies destroy documents to avoid getting in trouble

85% Think large corporations hide the truth about the dangers of their products

SOURCE: Minority Corporate Counsel Association and DecisionQuest

At-Will Employee Is Viewed as 'Under Contract'

The Legal Intelligencer – by Shannon P. Duffy – October 16, 2002

Federal judge: civil rights not limited by 'vagaries' of state employment law

(10/15/02) - Even if state law would not recognize any contract in an at-will employee's relationship with his employer, such a worker may nonetheless sue for race discrimination under § 1981 because the relationship is "sufficiently contractual in nature" to meet the federal law's standing requirements, U.S. District Judge Stewart Dalzell has ruled.

"We would subvert Congress's aims in enacting and amending Section 1981 if we insisted that the scope of employee's civil rights depends on the vagaries of state employment law," Dalzell, of the Eastern District of Pennsylvania, wrote in McClease v. R.R. Donnelley & Sons Inc.

Since state law does not control the question, Dalzell said, the scope of § 1981 turns solely on whether federal law would hold that the relationship between an employer and an at-will employee is contractual.

On that point, Dalzell found that Congress "casually but clearly assumed that all employment relations are contractual in nature."

Significantly, Dalzell also green-lighted Anthony McClease's state law claim of intentional infliction of emotional distress, saying he should be given the opportunity to develop a record to show that the racial harassment and epithets he suffered amounted to "extreme and outrageous conduct."

According to court papers, McClease was hired as a temporary worker in a parcel distribution facility in Levittown, Pa., that was owned by Donnelley and operated by Genco Corp.

The suit says Genco had contracted with Source One, a temporary employment agency, to provide workers for the facility. McClease was one of those workers.

Within a week of his hiring, McClease claims, Genco hired a racist and put him in charge.

The suit alleges that Mike Michniewski began to subject minority employees to an unceasing stream of racial epithets and openly expressed his desire to eliminate blacks from the facility.

According to the complaint, Michniewski incessantly referred to black employees as "f---ing monkeys" and called them a "basketball team."

At one point, the suit says, Michniewski stated that he wanted to "get a bunch of Orientals. I know they stink, but they piss on themselves instead of going to the bathroom, just to get the job done."

After Asian workers were hired, Michniewski allegedly told McClease: "There are so many gooks in here we could make a war movie."

The suit alleges that another manager also made racist comments and colluded with Michniewski in eliminating black employees.

McClease was ultimately fired from his post in April 2001.

In a motion to dismiss, defense lawyers argued that McClease's claim under § 1981 was fatally flawed since he was an at-will employee and therefore could not meet the law's requirement of showing a contract.

Dalzell found that § 1981 does not define the term "contract" and that state courts have adopted a variety of views on whether employment at will is contractual in nature.

"While some state courts view employment at-will as a contractual relationship terminable by either party, other state courts draw an implicit distinction between contractual and at-will employment," Dalzell wrote.

Although the 3rd U.S. Circuit Court of Appeals has never addressed the issue, Dalzell found that five circuits have tackled the question and that all five -- despite taking different routes -- concluded that at-will employment constitutes a "contract" within the meaning of § 1981.

Dalzell predicted that the 3rd Circuit would follow suit § 1981's scope "should not be dependent on state law" and because Congress intended § 1981 to cover employment at will.

"The legislative history of this statute points away from deference to state law," Dalzell wrote.

"Congress initially enacted Section 1981 to protect former slaves from discriminatory state laws, and Congress amended Section 1981 in 1991 with the awareness that the statute had emerged in the 1970s as an important source of civil rights protection in employment."

Having concluded that the federal courts need not defer to state law in defining the term "contract," Dalzell turned to the purely legal question of whether, as a matter of statutory interpretation, employment at will is "sufficiently contractual to come within the scope of this statute."

Dalzell found that the best source for an answer to that question was Congress itself.

"Rather than pick and choose among [treatises, Restatements of Law, and common law decisions], we turn to the legislative history of Section 1981 to determine what meanings Congress attached to the term 'contract' when it amended the statute in 1991," Dalzell wrote.

Dalzell concluded that Congress intended the term "contract" to encompass at-will employment.

In a House committee report, Dalzell said, the lawmakers declared that § 1981 "would restore protection under federal law against harassment and other forms of intentional discrimination in the terms and conditions of employment for the more than 11 million employees in firms that are not covered by Title VII."

"This statement," Dalzell said, "draws no distinction between workers who are employees at-will and those with employment contracts."

Dalzell also rejected a defense argument that McClease failed to allege a valid claim of intentional infliction of emotional distress since he didn't allege any physical harm.

The defense lawyers, Dalzell said, "seem to have overlooked Pennsylvania cases that have held that physical harm includes 'ongoing mental ... and emotional harm.'"

McClease's case met the test, Dalzell said, since he claims he has suffered "serious emotional harm, psychological distress and damage."

Likewise, Dalzell rejected the argument that racial harassment and epithets cannot constitute "extreme and outrageous conduct."

"We hesitate to predict that the Pennsylvania Supreme Court would hold that racial epithets and harassment can never be the basis of an IIED claim under Pennsylvania law. The Pennsylvania Supreme Court has never examined this question, and in fact only one published lower court decision has considered whether racial slurs constitute extreme and outrageous conduct," Dalzell wrote.

"Before we can determine whether the defendants' alleged conduct is extreme and outrageous, McClease should have the chance to develop the factual record of his case," Dalzell wrote.

Courts Get Wise to Secret Settlements

Texas Lawyer – by Charles Noteboom – October 11, 2002

Can you keep a secret? Do you promise not to tell? Plaintiff sues defendant. Parties settle for an undisclosed amount. Parties seal the court record and retreat to their corners, their secret settlements approved by judges and sealed in specially marked envelopes tucked away in courthouses' private vaults.

But consider this: Under secret settlement agreements, Ford was allowed to keep putting allegedly defective Firestone tires on its SUVs. People died. Under secret settlements, thousands of consumer complaints against Metabolife were suppressed. People died. Under secret settlements, drug companies made billions while hiding research data. People died.

Federal judges in South Carolina recently have decided to put a stop to this madness. Recognizing that secret settlements ultimately hurt the public, the judges voted in July to amend their local court rules to impose a blanket prohibition against court-sanctioned secret settlements. The judges have solicited public comment on the proposal, and the final rule is pending.

Until the move by the South Carolina judges, the Eastern District of Michigan was the only other federal district to address the problem head-on. There, the court can grant an order to seal the record, but the order automatically dissolves two years later.

Now momentum seems to be building. Federal judges in Florida met in early September to come up with their own plan of attack against the indiscriminate use of secrecy agreements. In state courts, the chief justice of the South Carolina Supreme Court has vowed to examine the way their courts handle requests to seal the record.

In 1990, a far-sighted Texas Supreme Court promulgated Rule 76a, becoming the first state to adopt comprehensive reforms to improve access and ensure greater openness in the judicial process. Texas' precedent-setting rule addressed a serious problem. For example, more than 200 sealing orders were entered in Dallas County alone on nonchild-related cases between 1980 and 1987. Some of these cases concerned fatally defective products, environmental contamination and professionals who shouldn't be professionals.

Rule 76a creates a presumption that all "court records" are public, and only can be sealed upon a showing of a "specific, serious, and substantial interest which clearly outweighs this presumption of openness" as well as any probable adverse effect upon the general public health or welfare that cannot be protected by less restrictive means. Presumptive public "court records" include "settlement agreements not filed of record, excluding all reference to any monetary consideration, that seek to restrict disclosure of information concerning matters that have a probable adverse effect upon the general pubic health or safety, or the administration of public office, or the operation of government."

Before court records are sealed, Rule 76a requires public notice and a hearing at which third parties may intervene. How many of these hearings have you heard about?

Detailed provisions for enforcement and appeal are also included. While the party seeking to seal public records has the burden of proof, the party seeking to avoid sealing them has the burden to prove they are "court records."

Sealing settlements once found favor on all sides of the bar and judicial system. Some plaintiffs liked the option of downplaying their newly acquired wealth, and some attorneys found they could exact bigger settlements by caving in on confidentiality. Corporate defendants, their lawyers and their insurers liked sealed settlements because they protected their tangible trade secrets (such as how much they pay to employees' widows) and their intangible corporate reputations. Judges even liked them and rarely turned down a joint request to seal a settlement because it meant one more case removed from their overburdened docket.

Consumer groups and most plaintiffs' lawyers never have liked sealed settlements. Valuable health and safety facts are removed from the public eye and from plaintiffs' arsenals. The public is forbidden from seeing the documents underlying the case, which sometimes reveal reprehensible conduct. And because gag orders also are routinely included within the settlement terms, the plaintiff can't tell similar plaintiffs or the public about his experience.

Now judges are falling out of love with court-approved secret settlements because of public safety issues.

Defendants have said that without the protection a confidentiality agreement affords, they will be less likely to settle cases at all. Their objection rings hollow because if they are trying to avoid publicity, a settlement is still preferable to a public trial.

Insurers are actually concerned that disclosing what they paid one plaintiff will provide a benchmark for others. They feel this is unfair because it does not allow them to take advantage of inexperienced lawyers with whom they can settle cheaply.

Also, the trade secret argument is almost always misapplied. A legitimate "trade secret" requires much more than merely showing information was generated in the course of trade or commerce. Instead, courts determine whether a secret with significant value to its owner truly exists. Still, it sounds important to claim a trade secret. It's kind of like sending in a team of lawyers to investigate, then artfully hide, all the facts before claiming an attorney-client privilege.

Defendants need to protect legitimate trade secrets, just as plaintiffs should be able to keep sensitive personal matters away from public consumption. The South Carolina proposed rule still allows parties to agree privately to keep settlement terms secret; a violation would be enforced through standard breach of contract litigation. The judges understand, however, that courts no longer can be passive in the attempt to close the public out of traditionally open proceedings or to shield them from important health and safety information.

If there is anything good to come out of the Enron and Arthur Andersen scandals, the WorldCom debacle and the sexual abuse cases against the clergy, it is this: The judiciary is taking the lead in advancing the notion that secrecy hurts society, and secret settlements hurt people.

Charles Noteboom is with the firm of Noteboom & Parker, based in Hurst, Texas.

Williams Cos. Employee Lawsuit

Tulsa World – by Russell Ray - October 9, 2002

(10/8/02) -Former employees of the Energy Marketing and Trading unit at Williams Cos. Inc. claim the operation inflated the value of transactions and the profits it generated, a lawsuit filed Monday in U.S. District Court in Tulsa shows. Employees who stepped forward to question the practice were demoted by the company, according to Thomas Seymour, a Tulsa attorney who filed the amended class-action complaint on behalf of Williams shareholders.

Among other things, Williams manipulated the data used to determine the value of long-term energy contracts, Seymour contends.

Bill Hobbs, chief executive officer of energy trading, played "the key role in manipulating EM&T's reported financial results at the end of each quarter and year," the lawsuit states. To project the value of long-term energy contracts, Williams uses "forward curves" to determine future energy prices and other market conditions. The data is entered into a complex quantitative model that determines the mark-to-market value of the long-term transaction.

But the forward curves established by executives were unrealistic and inflated the mark-to-market value of Williams' trading portfolio, the lawsuit states.

"The forward curves consistently reflected a significant swing upward at the end of the valuation period," the lawsuit states. "The shape of these curves had a material impact on reported profits" by the company.

The use of unrealistic curves inflated the trading unit's profits by $150 million in 2000, claims one unidentified employee who performed a detailed analysis of the company's forward curves.

"He determined that there was an unjustifiable inflation of the forward curves throughout 2000," the lawsuit states. "The manipulation of the forward curves continued in 2001 and resulted in the inflation of EM&T profit by approximately $100 million."

In one instance, a Williams trading executive altered projections to inflate the value of a long-term deal with five electric co-ops in Georgia, a former employee claims.

The deal was originally projected to produce $400 million to $450 million. The new projections, however, boosted the deal's value to between $550 million and $600 million.

"The sole purpose of the `rerun' with new `parameters' was to inflate revenue and profits," the shareholder suit states.

Bill Koures, a senior quantitative analyst for Williams, developed a new set of forward curves and presented them to company officials in March 2001. But the new curves would have reduced the value of Williams' long-term contracts and were thus rejected, the lawsuit states. Koures was demoted and later left the company.

Other employees confronted executives about the alleged impropriety, including Rabinder Koul and Pui Tak Khan. Koul was demoted and Khan left the company earlier this year because of the alleged manipulation, the lawsuit states.

Zahid Ullah, a consultant hired in the fall of 2000, told Hobbs and other trading executives that the company was improperly inflating its assets, revenue and profits by $500 million, the lawsuit states. Ullah's services were subsequently terminated by the company.

The charges resemble allegations contained in a New York Times story that quoted a former Williams employee who accused the company of inflating the value of its energy trading contracts. Williams vehemently denied the allegations.

"This is a recycling of worn-out, outdated, incorrect information," Jim Gipson, a company spokesman, said of the claims in the amended lawsuit.

"We haven't seen the filing yet, but if it's anything like the original suit, it will be entirely without merit." The new allegations of the amended complaint are based in part on interviews with former EM&T employees, who were not identified in the suit.

Williams' energy trading unit, which accounted for half of the company's operating profit in 2000 and 2001, lost $497.5 million in the second quarter. The loss reflected a "significant decline in the forward mark-to-market value"of long-term energy contracts, the company said.

Mark-to-market accounting is a controversial procedure that has been heavily scrutinized since the collapse of Enron Corp., a former peer of Williams. Under mark-to-market accounting, the expected profits from multiyear contracts are booked immediately, even though it will take years to collect those profits.

The accounting technique is problematic because it could result in artificially inflated profits, analysts say. The amended complaint was filed on behalf of Williams shareholders who purchased company stock between July 24, 2000, and July 22, 2002.

The lawsuit also claims that Williams misled shareholders about the potential liability associated with Williams Communications Group Inc., a former unit of Williams. Williams guaranteed more than $2 billion of WCG debt. The WCG exposure was not properly accounted for, the lawsuit contends. Williams was forced to fulfill its WCG obligations after WCG declared bankruptcy.

NY Attorney General Fights Fraud

New York Law Journal – by Tamara Loomis – October 8, 2002

(10/1/02) - New York state Attorney General Eliot Spitzer is suing former WorldCom Inc. Chief Executive Bernard Ebbers and four other executives of telecommunications firms for allegedly taking millions in profits from initial public offerings in exchange for steering banking business to Citigroup subsidiary Salomon Smith Barney Inc.

In addition to Ebbers, Spitzer has alleged that Qwest Communications International Inc. board member Philip Anschutz and former Qwest Chairman Joseph Nacchio; Metromedia Fiber Network Inc. Chairman Stephen Garofalo; and Clark McLeod, former chief executive of local telephone company McLeodUSA Inc., all directed lucrative investment banking deals of their respective companies to Salomon.

In a practice known as "spinning," Salomon in return allocated the executives shares of hot IPOs, which they typically sold within days, reaping millions of dollars in profits, Spitzer said.

These executives were "personally bought off by being given IPO allocations," Spitzer said at a news conference Monday.

The attorney general said the arrangement also presupposed that Salomon's star research telecommunications analyst, Jack Grubman, would give the company's stock a favorable rating.

"The spinning of hot IPO shares was not a harmless corporate perk," Spitzer said. "Instead, it was an integral part of a fraudulent scheme to win new investment banking business."

Spitzer said that his investigation revealed that Ebbers made more than $11 million from spinning IPO shares. Anschutz and Nacchio of Quest made $5 million and more than $1 million, respectively. McLeod pulled in more than $9 million, and Garofolo netted more than $1.5 million, according to the complaint filed in Manhattan Supreme Court Monday.

In addition, the defendants each earned between $16 million and $1.4 billion by selling their own companies' shares, including those received in stock options. Salomon kept artificially high ratings on the stocks so the executives could sell at high prices, Spitzer alleged.

He is seeking disgorgement of the profits earned in the transactions, which total some $1.5 billion, he said.

In return for its alleged largess, Salomon reaped some $240 million in underwriting and fees for banking deals it handled for the companies.

Spitzer said, however, that Salomon and Grubman, who recently left the firm, are not named in the complaint because the state is in settlement talks with both parties.


In his campaign against Wall Street wrongdoers, the attorney general is well armed with the Martin Act, a New York state law that is frequently described as the toughest securities law in the country.

Not only does the act give Spitzer the unusual authority to prosecute fraud without having to prove intent, but it also provides for steep civil and criminal penalties, including jail terms.

The use to which Spitzer is putting the 80-year-old law, however, is entirely novel.

"We are witnessing history here," said David J. Kaufmann, an expert on the Martin Act and senior partner at Kaufmann, Feiner, Yamin, Gildin & Robbins. "What [Spitzer] is doing is brand-new, fascinating and compelling.

"He is using the fraud provision of the Martin Act to go after executives who defrauded their companies' shareholders by suggesting that they were steering the bank business for all the right reasons, when in fact it was for all the wrong reasons," Kaufmann explained.

Even Spitzer described his evocation of the Martin Act as "a first-of-its-kind legal action."

Yet Kaufmann, who co-authors a commentary on the act in McKinney's Consolidated Laws of New York, said he was "very confident that if the attorney general is able to sustain the allegations, then Martin Act liability will surely follow."

"Corporate officers are supposed to act in the best interest of the shareholders," he said, "not in the best interest of their personal pocketbooks."

Spitzer has evoked the Martin Act before in his ongoing crusade against dubious Wall Street practices.

In April, he accused Merrill Lynch & Co. of pressuring its research analysts to tout the stocks of companies that were clients of its investment banking division. Merrill, which did not admit wrongdoing, nonetheless settled with Spitzer in May for a $100 million fine and a pledge that it would sever the tie between banking and analyst compensation.

The lawsuit against Merrill is part of a much wider investigation of the connections between investment banking and research on Wall Street, one that Spitzer had initiated as long ago as last summer.

And as is evident from Monday's lawsuit, the attorney general is still hot on Wall Street's trail. He made clear Monday that other analysts, executives and brokerage firms were still under investigation.

"We believe the practice of spinning is widespread," he said, describing the case against Ebbers and the others as "illustrative."

Nonetheless, Spitzer said, he thought "substantial progress" has been made. "There is a world of difference between April 8 [the day he filed the Merrill lawsuit] and today."

For their part, most of the defendants appeared to be trying to keep a low profile. Lawyers for Ebbers, Anschutz Garofalo and Grubman did not return calls seeking comment. Salomon also declined to return a call seeking comment.

One defense attorney did address the charges. The lawyer for Quest's Nacchio, Charles Stillman of New York's Stillman & Friedman, said that the claim against his client is "totally false."

"In fact, in the most important transaction in Mr. Nacchio's business life, the acquisition by Qwest of US West, Salomon lined up against Quest and represented Global Crossing," he said. "Once all the facts are known, we are confident that Mr. Nacchio will be completely vindicated."

Ebbers is being represented by Reid H. Weingarten of Steptoe & Johnson; Garofolo by Barry Bohrer of Morvillo, Abramowitz, Grand, Iason & Silberberg; Grubman by Lee S. Richard of Richard, Spears, Kibbe & Orbe. Counsel for McLeod could not be determined by press time.

Additional reporting was provided by Sam Roseme.

Does a Mole Head the SEC?

Xerox Employees Win Pension Case

Wall Street Journal – by James Bandler - October 6, 2002

(10/4/02) - Xerox Corp.'s pension plan was ordered by a federal judge to pay $284 million to former workers as compensation for underpayment of retirement benefits.

The ruling hits the company at a time when it is still straining under a heavy debt load and fierce competition in its core copying and printing markets. In addition, federal criminal investigators are examining past accounting practices at Xerox, and the company faces potentially costly suits from shareholders.

Last spring the Securities and Exchange Commission fined Xerox $10 million after the company, neither admitting nor denying wrongdoing, agreed to settle civil charges that it had engaged in widespread accounting fraud.

The pension ruling stems from a case in which former Xerox employees claimed the company had incorrectly calculated lump-sum retirements given departing employees, resulting in lower payments than the workers were due under federal pension-benefits rules.

Last year, Judge David R. Herndon of the U.S. District Court for the Southern District of Illinois found in favor of the workers but didn't assess damages.

In the ruling earlier this week, Judge Herndon sided with the workers' methodology for calculating damages, ruling that the Xerox pension plan must repay the lump sum amounts plus interest.

Xerox said the pension plan, which is a separate legal entity, would appeal the ruling on both liability and damages.

The company said any final judgment would be paid for by the pension plan, but said Xerox might have to make additional payments to the plan to compensate.

Christa Carone, a Xerox spokeswoman, said she didn't expect the company would need to post a bond to cover potential damages.

The size of the class that will benefit from the ruling hasn't been determined. Lawyers for the plaintiffs say their case covers at least 13,000 former Xerox workers who elected to receive their pension benefits in a single payment rather than monthly checks. Peter Ausnit, an analyst with Deutsche Bank Securities Inc., called the ruling a "disappointment" for Xerox investors but said he didn't think the company faced any near-term liquidity risks.

Xerox has nearly $7 billion in debt obligations coming due through the end of 2004, Mr. Ausnit said. "Every dollar counts," he said. Xerox "will need to execute competitively in the marketplace and wring cash from operations."

The suit is the latest of several federal cases involving pension plans that underpaid the lump sums payments to departing employees because of improper calculations. In two similar cases, two different U.S. Circuit Courts of Appeals decided in favor of employees and against Georgia-Pacific Corp. and BankBoston Corp., now part of FleetBoston Financial Corp…

A $2 Billion Mistake – Make That Over $6 Billion

Fired Employee Awarded $8.5 Million

The National Law Journal – by Margaret Cronin Fisk - October 5, 2002

(10/4/02) - A Mississippi jury has ordered Wal-Mart Stores Inc. to pay $8.5 million to a former employee who was fired after being accused of shoplifting chewing tobacco.

Plaintiff Lamon Griggs charged Wal-Mart with defamation, asserting that store personnel had falsely accused him of theft and spread those allegations.

Griggs also claimed wrongful termination, but that count was dismissed before verdict, as Mississippi Circuit Court Judge Andrew Howarth found that state law precluded such a claim because Griggs was an at-will employee.

Griggs was working as a truck driver for Wal-Mart in Hammond, La., in 1997, "when he picked up some chewing tobacco to purchase, then remembered he had to call in to his supervisor," said plaintiff's attorney Luke Fisher of Tupelo, Miss.'s Waide & Associates.

As Griggs left the store looking for a phone, he informed the "greeter" at the door that he had the tobacco but had to step out, Fisher added.

Before he could come back in the store, Fisher said, "the store's loss prevention people stopped him."

Griggs gave a written statement to his supervisor that he had never intended to take the tobacco, said plaintiff's attorney Jim Waide of Tupelo. But Griggs was fired, per Wal-Mart policy on dismissing employees caught taking merchandise from the store, Waide said.

"The other drivers revolted," said Fisher. "They all knew he didn't do it." The Wal-Mart supervisor, "in order to put down the rebellion, claimed Lamon was an habitual thief." The supervisor told the plaintiff's co-workers that "Wal-Mart had a videotape of Lamon stealing and that they suspected him of other thefts," Fisher said. There was no videotape and no other allegations or suspicions of wrongdoing, said Waide.

Wal-Mart denied spreading false accusations and contended that Griggs had admitted the theft in his statement to the supervisor immediately following the incident.

"In Griggs' own statement to his supervisor, he begged for forgiveness," said defense attorney William Luckett of Clarksdale, Miss.

There was no admission of guilt, Waide said. In this initial statement, Griggs "was saying he was sorry about the policy, not that he had stolen the tobacco." To counter the contention that Griggs was a thief, said Waide, the plaintiff's attorneys called character witnesses who testified that "Griggs would never steal."

Even the Wal-Mart supervisor, said Fisher, had agreed that Griggs was an honest employee.

At the time of the firing, Waide said, Griggs was earning $70,000 a year. Afterward he was unable to find another trucking job and is now working part time with the Chickasaw County sheriff's department in Mississippi.

Prior to trial, Luckett noted, the defense had unsuccessfully sought a change of venue from the plaintiff's hometown, Houston, Miss.

The jury awarded Griggs $1.5 million in actual damages and $7 million in punitives. Prior to trial, the defense had offered $30,000 to settle.

"We countered with $1.2 million, but I told Mr. Luckett I would go to $750,000," Waide said.

Wal-Mart will file post-trial motions to set aside or reverse the verdict. If these fail, an appeal is expected. Griggs v. Wal-Mart Stores Inc., No. H 98-145 (Chickasaw Co., Miss., Cir. Ct.).

Enron Criminal Complaint

Washington Post – October 4, 2002

Thursday, October 3, 2002; Page E01

The criminal complaint filed yesterday against Andrew S. Fastow focuses on his role as the architect of the financial engineering that led to the failure of Enron Corp. But the details of the charges also aim the investigation at other key figures atop the corporate hierarchy.

Fastow, the Houston energy company's former chief financial officer, was charged with fraud and conspiracy for his role in concealing Enron's ballooning debt in the LJM partnerships he ran. The complaint also for the first time cites by title, though not by name, several other key figures in the case -- including the former chief accounting officer, Richard A. Causey, and two former treasurers, Jeffrey McMahon and Ben Glisan Jr.

Legal experts said yesterday that the government's expanded allegations -- based in part on testimony from Michael J. Kopper, a former close associate of Fastow's who pleaded guilty to fraud charges in August -- also set a foundation for a potential case against Kenneth L. Lay, Enron founder and former chairman and chief executive, and Jeffrey K. Skilling, his successor as CEO.

Causey, like Fastow, reported directly to Skilling. Both were part of the team Skilling assembled when he took over day-to-day control of the company as chief operating officer in 1997.

According to the complaint, Enron's chief accounting officer had an undisclosed agreement with Fastow when the off-the-books LJM partnerships were set up in 1999. The two allegedly agreed that Enron would protect LJM investors from any losses -- a promise that would invalidate Enron's use of the partnership to hide its debt.

Causey was the chief accounting officer at the time. Reid Weingarten, Causey's attorney, declined to comment yesterday. Weingarten has said previously that Causey's actions complied fully with accounting rules.

The Fastow complaint refers to both McMahon and Glisan in describing what it called a "sham transaction" Enron made in late 1999 with a financial institution identified in Senate hearings as Merrill Lynch & Co. The charges say Enron's then-treasurer -- McMahon -- and Fastow contacted the bank "to pressure it to buy" a $28 million interest in the project, a group of power-generating barges in Nigeria. The sale enabled Enron to move the troubled assets off its books before the end of the year, but Enron had secretly agreed to buy them back. That would have nullified Enron's accounting maneuver.

William D. Dolan III, an attorney for McMahon, declined to comment.

A May 11, 2000, e-mail from an Enron employee who later became treasurer -- Glisan -- said that Enron was obligated to get Merrill out of the deal before June 30, 2000.

Merrill has said it was unaware of any buyback agreement.

Glisan was fired by Enron when it learned he had made about $1 million in one of Fastow's LJM deals. McMahon, who became CEO of Enron briefly, resigned earlier this year under pressure from creditors in Enron's bankruptcy case.

Yesterday's complaint didn't claim that either Skilling or Lay was aware of the secret agreement between Fastow and Causey over Enron's LJM deals.

But the charges did state that Enron's chief executive, together with Fastow, Causey and other executives, misled Enron's board of directors about the purpose of the LJM partnerships that Fastow created. Lay was CEO at that time, although the complaint filed yesterday does not name him.

The complaint also cites a memo, written by an unnamed lawyer at Credit Suisse First Boston, concerning what top Enron executives knew about a Fastow transaction code-named Southampton that he and others allegedly used to cheat Enron out of $13.3 million in 2000.

According to the memo, Causey told CSFB that Enron's CEO -- Lay, at that time -- knew of and approved the sale of LJM assets to a partnership set up by Enron employees. The description would fit the Southampton deal. Lay told investigators for Enron's board that he was unaware of such investments by Enron employees.

Lay's attorney, Michael Ramsey, said last night that Lay didn't mislead the board and didn't know about Southampton until it was disclosed this year. "There are no directors that say Ken Lay misled them about LJM," he said.

Skilling, Enron's CEO in the first half of 2001 and its president before that, testified before Congress that he knew nothing about accounting violations or false financial statements.

If financial fraud by Enron executives can be proven, then the question is whether Lay and Skilling were aware of it or saw warnings of misconduct that they did not pursue, said former U.S. attorney Dan Hedges, a Houston lawyer. "Was the fraud of such an obvious nature that they should have recognized it?" he said.

"If there were red flags all over the place, and you decide you don't want to know about that, I don't think you are insulated," said Robert Prentice, a University of Texas professor. "Then I think you have criminal liability."

The Justice Department had previously alleged that Fastow used LJM deals to enrich himself and associates. But prosecutors now contend that Fastow -- joined by Causey and others -- arranged to sell troubled Enron assets to LJM to hide problems from investors and meet profit targets expected by Wall Street.

Enron, which is reorganizing its operations, could still face criminal or civil charges based on the allegedly illegal activities of its officers. An attorney for the company said yesterday that the firm should not be punished for the actions of a few rogue executives.

"It is clear from both the criminal complaint and the civil SEC filing that Enron was a victim," said lawyer Robert S. Bennett. "Its board was deceived and its code of ethics was violated. The company is continuing its full cooperation with the government."

$500,000 FMLA Award

Employee Advocate – – October 3, 2002

The Connecticut Law Tribune reports that a Cendant Corp. executive has won the largest Family Medical Leave Act (FMLA) award in Connecticut history - $500,000. The September 18, 2002 executive ruling may be the largest FMLA award in the nation.

Kim Persky had her job eliminated while she was on FMLA leave, and only lesser positions were offered to her.

CEO's Can be Liable for 401(k) losses

USA Today – by Christine Dugas – September 30, 2002

In an action that could prompt companies to beef up oversight of 401(k) plans, the federal government issued a court brief this month that sides with Enron workers. It said former chief executive officer Ken Lay and other top executives could be personally liable for millions of dollars in retirement plan losses.

The Department of Labor document is significant because it spells out the agency's position on an employer's duty to 401(k) plans and potential liability if there are losses. It could benefit a lawsuit by Enron workers and many other 401(k) lawsuits that have proliferated as accounting scandals take a toll on retirement plans loaded with employer stock.

Although the judge in the Enron 401(k) lawsuit is under no obligation to accept the agency's view, it should be influential because the Labor Department interprets and enforces pension law.

"It's a very significant position that will help participants in a lot of situations if it's upheld by the courts," says Norman Stein, a University of Alabama law professor who specializes in pension issues.

Though the policy it describes is not new, the brief represents the agency's most detailed clarification of many legal issues relating to retirement plans. Directors and executives often haven't understood their legal obligations.

If the courts agree, the Labor Department's position could have more impact than pension reforms being considered by Congress, says Fred Reish, a Los Angeles pension lawyer. "It will provide a clearer road map for all employers," Reish says. He also says it will mean that executives' own "bank accounts and investments are on the hook."

Labor Department officials would not comment beyond the brief itself. Among other things, Labor Department lawyers say in the brief that if Enron executives were aware that workers were misinformed about the stability of Enron stock, they were obligated to protect them. According to the brief, remedies available to Enron included notifying all investors of the risk, freezing the investments or removing Enron stock as an investment option and as the company matching contribution.

The duty to protect workers doesn't rest only on the trustees who directly oversee a 401(k) plan, the Labor Department says. Any top executives or directors who appoint the trustees are responsible for monitoring the plan and are liable for breaches in fiduciary duty, the brief says.

Enron workers have claimed that they continued to accumulate Enron stock — about 60% of the 401(k) plan was in the stock — because executives said it would rebound. Last year, Enron's stock price plummeted from about $83 to below $1. Some workers lost virtually all their retirement savings.

The company and its executives are under investigation for accounting irregularities. The government's voluntary court brief was written in opposition to motions by Lay and others to dismiss the workers' 401(k) lawsuit, still in its early stages.

The brief has nothing to do with whether Enron executives misled workers about the financial condition of the company. That is up to a court to determine. But if guilty, Lay and others could be held personally liable for the plan losses, the brief says.

Secret Energy Meetings Now in Court

Reuters – by Susan Cornwell – September 30, 2002

WASHINGTON, Sept 27 - Lawyers for Vice President Dick Cheney on Friday pressed his case to keep energy policy documents secret from the investigative arm of Congress and a federal judge said he would rule on the matter as soon as possible.

In an unprecedented courtroom clash between the executive and legislative branches of government, attorneys for Congress' General Accounting Office argued the White House should not be making the "breathtaking assertion" that it was exempt from congressional oversight.

Comptroller General David Walker, the head of the GAO, filed suit in February demanding that Cheney hand over a list of executives from Enron Corp and other companies who were consulted as a task force headed by Cheney drafted the Bush administration's energy policy last year.

Deputy Solicitor General Paul Clement, arguing Cheney's case, called the lawsuit "incredibly intrusive" into the work of the government's executive branch.

He warned that if the courts tried to settle such disputes, there would be no end to them.

"No court has ever done it before," Clement declared. "No court has ever ordered the executive branch to turn over a document to a congressional agency."

But Carter Phillips argued for the GAO there was no case law that said "that the president and vice president are utterly protected from the oversight responsibilities of Congress."

"I will consider this as quickly as I can," U.S. District Court Judge John Bates said after hearing over two hours of argument in a federal courthouse near the Capitol.


Phillips said the information the GAO sought was mundane: a list of energy industry executives the administration consulted as it formulated its energy policy, as well as the subjects of the meetings, when they took place and the cost involved.

"It's difficult for me to imagine," Phillips said, that for the White House to hand over the information "is going to bring the republic to its knees."

But not to force the White House to release it could put the GAO out of business, Phillips argued, saying it was the agency's job to "look over the shoulder" of the executive branch to make sure it was spending taxpayers money properly.

He suggested the White House might have avoided a courtroom confrontation if it had formally asserted executive privilege for the papers.

Clement argued the GAO had no more right to the information than if it had asked who the president consulted before making a judicial nomination. Even if the GAO's request was legitimate, Congress had other ways to get the information -- such as through a congressional committee subpoena, he added.

But the lawmakers who asked the GAO to investigate the energy task, Reps. Henry Waxman of California and John Dingell of Michigan, are both Democrats in the Republican-run House of Representatives. This would have made it difficult for them to get support to subpoena the Republican White House.

Some information about White House contacts with failed energy-trader Enron has been released under subpoenas to a committee of the Senate, where Democrats have a majority. Cheney has also acknowledged meeting former Enron president Kenneth Lay in April 2001, while the energy policy was being drafted and California was in the throes of an energy crisis.

Dingell and Waxman asked the GAO to investigate after environmentalists complained they had been largely left out of the consultations that produced the White House energy policy announced in May 2001 and sent to Congress.

The plan called for more oil and gas drilling and a revived nuclear power program, but it has stalled on Capitol Hill.

Walker's pursuit of the task force documents gained momentum after Enron, which had numerous links to the Bush administration, went bankrupt in December 2001.

A series of other lawsuits by environmental and citizens' legal groups have already compelled the release of many task force papers from some departments, but not the White House.

The documents that have been released showed many administration meetings with top executives from energy firms like Duke Energy Corp., UtiliCorp United and Exelon Corp., as well as industry groups such as the Nuclear Energy Institute and the National Association of Manufacturers.

More on the secret energy meetings:

Secret Energy Meetings to be Exposed

Legal - Page 14