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CEO Gets Jail Time Over Pension FundsEBIA Weekly December 12, 2001
In this case, the former CEO of a company had embezzled funds from the company's defined benefit and defined contribution plans to pay off creditors--his own and those of the company. In total, the wayward CEO used nearly $2 million of plan funds in prohibited transactions. In addition, he created false 401(k) statements for distribution to plan participants. He was convicted of, among other things, embezzlement, money laundering and falsifying ERISA documents. He received a six-year prison sentence, which he subsequently appealed, arguing that the crimes of money laundering and embezzlement should have been grouped together for sentencing purposes (thus resulting in a lower sentence) because they were part of a common scheme or plan. The court disagreed, stating that the crimes had separate victims: plan participants in connection with the embezzlement, society at large in connection with the money laundering.
EBIA Comment: The criminal statute applied in this case applies equally to welfare plan assets. As cited by the court in this case, Section 664 of the criminal law (18 U.S.C. Section 664) applies to "any person who embezzles, steals, or unlawfully and willfully abstracts or converts to his own use or to the use of another, any of the moneys, funds, securities, premiums, credits, property, or other assets of any employee welfare benefit plan or employee pension benefit plan, or of any fund connected therewith."
Contributing Editor(s): EBIA Staff.
$5.75 Million Payout in Shareholder SuitThe Legal Intelligencer by Shannon P. Duffy December 12, 2001
A federal judge last week approved a $5.75 million settlement in a shareholders' suit against Unisys Corp. and awarded the plaintiffs' lawyers one-third of the fund, or nearly $1.9 million.
Senior federal Judge Clarence C. Newcomer of the U.S. District Court for the Eastern District of Pennsylvania also awarded the plaintiffs' team in In Re: Unisys Corp. Securities Litigation more than $572,000 in costs.
The suit was filed by Philadelphia-based attorneys Sherrie R. Savett and Arthur Stock of Berger & Montague and Robert M. Roseman and Beth M. Rosenthal of Spector & Roseman on behalf of anyone who purchased Unisys common stock between May 4, 1999, and Oct. 14, 1999.
The suit accused Blue Bell, Pa.-based Unisys and several of its top executives -- Larry Weinbach, its chairman and chief executive officer; Jack McHale, the vice president in charge of investor relations; and Gerald Gagliardi, the executive vice president -- of issuing misleading statements about the expected profits from long-term contracts with British Telecom that falsely inflated the stock price
Freightliner Employee Wins $200,000 LawsuitThe Charlotte Observer by Sharon E. White December 10, 2001
GASTONIA -- A Kings Mountain woman who successfully sued Freightliner for failing to stop a co-worker from sexually harassing her returned to her welding job at the company's Gastonia parts plant last week.
Rebekah Homesley said the $200,000 judgment a federal jury in Charlotte awarded her in damages was fair and just, and she only hopes "my work environment continues to improve."
Homesley, a 36-year-old wife and the mother of a 10-year-old son, took a couple of days off after the trial ended Nov. 30.
Back on the job Wednesday, she said: "Things went really, really well. I think everybody that talked to me was real receptive."
It wasn't always that way.
Freightliner hired Homesley as a shipping clerk in April 1987, and she later became a welder. In February 1997, Homesley said, a male team leader began sexually harassing her. She complained to higher-ups, she said, but the harassment continued. In 1998, she sued.
In the lawsuit, Homesley claimed that Robert "Butch" Yarbrough sexually harassed her with a variety of lewd actions, including touching her breasts.
She also complained that Yarbrough kept bothering her even after she complained to Freightliner management. Contacted last week, Yarbrough, who no longer works at Freightliner, had no comment.
The case was heard the week of Nov. 26 in U.S. District Court in Charlotte. Attorneys Anna Daly and her father, George Daly, represented Homesley.
"We felt all along that our client was sexually harassed at work and Freightliner did not respond appropriately to her complaints," Anna Daly said.
Freightliner argued in court documents that it had taken action to stop any harassment and Homesley failed to take advantage of "preventive or corrective opportunities" the company made available to her.
A spokesman for Portland, Ore.-based Freightliner LLC said the company will appeal the verdict. "We have not had a verdict against the company in a sexual harassment case as long as any of our current legal personnel can recollect - and that goes back at least 20 years," said spokesman Chris Brandt.
But Freightliner has settled at least one sexual harassment case involving male supervisors and female employees, according to the U.S. Equal Employment Opportunity Commission. The EEOC's Charlotte District Office filed a sexual harassment lawsuit against Freightliner in June 1999.
According to the complaint, male employees, including supervisors, sexually harassed four female employees with sexual innuendo, touching and insults at the Cleveland, N.C., manufacturing plant. The complaint also alleged that Freightliner retaliated against one of the women by reassigning her to a more difficult job.
The case was resolved Dec. 19, 2000, and the four women shared $170,000 in back pay, according to the EEOC. Lawyers and the EEOC say the majority of sexual harassment complaints against corporations never make it to the settlement stage, let alone to trial. Sometimes the complainants don't follow through. Also, EEOC investigations find some complaints are without merit, said spokeswoman Jennifer Kaplan.
Of the complaints that do have merit, far more are settled than go to trial, lawyers say. "I think each side weighs the risks and benefits and wants a sure thing rather than the uncertainty of a trial," said Julie Fosbinder, a Charlotte lawyer.
N.C. cases in which judgments have been entered against employers include:
Hogan vs. Forsyth Country Club Co. In 1986, a jury awarded $900,000 in the case that involved mistreatment of three women who worked at the country club, one of whom was sexually harassed by a male co-worker.
Sargent vs. Murray Savings Association. In 1988, a Wake County jury awarded $3.85 million to five women who said they were sexually harassed by a male co-worker.
Sarah Joan Watson vs. Bobby Dixon and Duke University. In 1997, a Durham County jury awarded (and the N.C. Court of Appeals later upheld) $605,100 to a woman who claimed a male co-worker sexually harassed her at Duke University Hospital, and that management did nothing, despite her complaints.
Cases that draw substantial jury verdicts are usually those in which someone with authority over the victim or the employer has failed to take corrective measures, said Stewart Fisher, the Durham lawyer who represented the plaintiff in the Duke case. He and other lawyers agree that Homesley's $200,000 judgment is sizeable.
The jury of 10 women and two men in the Homesley case took about two hours to render a verdict, attorney Anna Daly said.
Jane Burts, a 64-year-old community organizer who sat on the jury, said she sees the case as a victory for women's rights.
"I do not think there is any more reason for a woman to be subjected to harassment, belittlement and discrimination in the workplace than there is for an African American, an Arab American or anybody else," Burts said.
Enron Reveals 401 (k) FlawsThe Charlotte Observer by Glenn Burkins December 10, 2001
For too many Americans, the notion of a benevolent employer is as outdated as the concept of lifelong employment or a guaranteed pension.
The Enron debacle has done little to sway such skeptics.
When all is said and done, thousands of Enron workers may find themselves ruined because they held too much Enron stock in their 401(k) retirement plans. In part, they have no one to blame but themselves, having failed to properly diversify.
But the story doesn't end there.
Like countless U.S. corporations, Enron offered its workers a flawed choice for investing some of their 401(k) money. And it was precisely that choice - or no choice at all, some critics now say - that caused Enron workers to lose big when the company's stock began to plunge last month following a slew of crippling financial news and a failed merger attempt with Dynegy Inc.
To understand what happened, a bit of background may be needed.
Typically in a 401(k) plan, workers invest a set percentage of their pay in an employer-sponsored retirement plan. The plans typically include a choice of mutual funds and money market accounts, but some also include the employer's stock as another investment option. In many cases, the employer matches a percentage of each worker's contributions - sometimes in cash, but frequently in its own stock. In return for the match, the employer receives a tax deduction.
In Enron's case, the match was paid in Enron stock. So if Enron workers wanted to receive the matching funds, they had no choice but to accept the Enron shares, which most gladly did, since the stock had gone nowhere but up. This is not where Enron failed its workers. No employer is required to provide a match, so those who do - be it in cash or company stock - should be commended, not castigated.
But Enron went further. It prohibited workers who received the matching stock from selling those shares or trading them for other 401(k) investments until age 50. The effect was that workers who took the match found themselves tied long-term to Enron's Wall Street fortunes.
The result of that union is well known by now.
After soaring to a high of $90 in 2000, Enron shares closed Friday at 75 cents.
Further adding to the carnage, when the Enron shares began to plummet, workers found themselves unable to trade any of their 401(k) holdings - even the assets bought with their own money - because the company had frozen all accounts while it changed administrators for its 401(k) plan.
For those heavily invested in Enron shares, the outcome was disastrous.
After watching their retirement savings evaporate, some angry workers rushed to file lawsuits seeking class-action status, alleging that Enron breached its fiduciary duty to reasonably protect its 401(k) investors. According to The Washington Post, one Enron retiree whose 401(k) holdings consisted entirely of Enron stock saw a $2 million portfolio reduced to $10,000.
"It's pretty devastating," the man was quoted as saying from his suburban home in Minneapolis.
On Wednesday, the U.S. Labor Department said it would investigate Enron's role in the 401(k) wipeout. In announcing the move, Labor Secretary Elaine Chao said Enron workers had "gotten the short end of the stick in the sudden collapse of this company."
The Labor Department's moves seem altogether appropriate, but let's hope it doesn't end there.
Like Enron, countless other big companies also have rules that restrict workers from selling company shares held in 401(k) plans. Such companies are as notable as International Paper, Coca-Cola and Knight Ridder Inc., parent company of The Charlotte Observer.
In most cases, the restriction applies only to matching shares given to employees. And while such restrictions are legal, they hardly seem fair.
In recent years, big corporations have made no secret of their desire to wean U.S. workers from the notion that they are anything more than, well, workers - here today but possibly gone tomorrow.
Part of that weaning has involved making workers take greater responsibility for their own retirement planning. Gone are the days when workers could depend on an employer to provide a guaranteed pension. The advent of the 401(k) was part of that process.
But for workers to thrive in this new order, they cannot be shackled by rules that prohibit them from selling the company stock they hold for retirement.
When asked why employers impose such restrictions, several employee-benefits experts said it was typically done to keep as many shares as possible in friendly hands. In other words, shares that are restricted can't be sold, which could drive down a company's stock price. In addition, many workers remain loyal to their bosses, electing to hold company shares for emotional reasons as well as for expected financial gain.
As the dust settles on the Enron disaster, lawyers and disgruntled workers will find plenty of blame to spread around. One of the lessons learned should be that workers, no matter how much they like their high-flying company stock, are best served with a 401(k) that is prudently diversified.
At the same time, it would be good to see employers push home that message by removing unnecessary restrictions that keep 401(k) participants tied to company shares. Failing such a move, the government should act on workers' behalf.
Polaroid, in Chap 11, Seeks Exec BonusesReuters - by Tim McLaughlin December 7, 2001
Polaroid Corp., which slashed jobs and retiree benefits before filing for bankruptcy protection in October, wants to reward top executives with up to $19 million in bonuses and incentives as it dismantles the instant camera and film maker to pay off creditors.
Lawyers for the Cambridge, Massachusetts, company will argue for the payments on behalf of about 45 executives during a Dec. 11 hearing in Delaware's U.S. Bankruptcy Court, court papers show. The group also would stand to collect 5 percent to 6 percent of the proceeds from Polaroid asset sales.
``Because it is unlikely that (Polaroid) would be able to attract new employees, (Polaroid's) current key employees are truly irreplaceable,'' according to a motion filed with the bankruptcy court.
Such payments, though not uncommon in bankruptcy proceedings, incensed Dan O'Neill, 61, a Polaroid veteran who lost his job and a 31-week severance package when the company filed Chapter 11 as creditors sought nearly $1 billion in payments.
``It's a total disgrace,'' O'Neill told Reuters. ``It shows how much they really cared about the people. The executives are just taking care of themselves.''
The company employed 8,865 people at the beginning of the year, but job cuts have reduced that number by about 3,000. Polaroid also dropped retiree health care benefits to save money.
Polaroid wants U.S. Bankruptcy Judge Peter Walsh to approve $5 million in guaranteed retention bonuses next year for about 45 Polaroid executives. In addition, proceeds from $200 million to $275 million in asset sales would generate up to $13.75 million, or 5 percent, for a key employee incentive pool, according to the company's plan. Total proceeds above $275 million would contribute 6 percent to the incentive pool. The targets seem achievable for a company whose sales were nearly $1.9 billion last year.
CHAIRMAN WOULD BENEFIT MOST
Polaroid Chairman Gary DiCamillo stands to collect the largest amount of bonus pay because it is based on a percentage of an executive's base salary. DiCamillo made $838,950 last year, not including $107,232 in retention pay.
The exact amount he and other executives would receive, however, is being kept secret unless interested parties sign a confidentiality agreement, court papers show.
Under DiCamillo's leadership in the past six years, Polaroid's core photography business steadily deteriorated amid stiffer competition from one-hour photo shops and digital cameras, a market the company was late in entering. Lawyers for Polaroid said the bonuses and incentives are essential for preventing low morale and resignations within the executive ranks. Defections could hurt asset sales.
Other companies in bankruptcy proceedings have distributed incentive payments to a wider base of employees than the Polaroid plan would.
In 1997, for example, the Delaware bankruptcy court approved $100 million in key employee payments at Montgomery Ward Holding Corp., which included 786 lower-level employees, according to legal precedents cited by Polaroid lawyers.
In a more recent case, collapsed energy trader Enron Corp. paid $55 million in bonuses to about 500 employees, days before it filed for bankruptcy and laid off 4,000 workers, sources told Reuters. The bonuses were given out to entice certain employees to stay on after the filing.
When Polaroid filed for bankruptcy protection, it agreed with lenders to accelerate its efforts to sell part or all of the company.
Earlier this week, Digimarc Corp. said it agreed to buy Polaroid's identification card-making business for $56.5 million in cash, plus the assumption of liabilities and expenses as part of an auction approved by the court.
Amalgamated Bank Sues Enron ExecsReuters December 6, 2001
NEW YORK - Amalgamated Bank, a guardian of worker retirement funds, said on Wednesday it filed a lawsuit seeking to freeze the bank accounts of senior executives at Enron Corp., alleging they reaped huge profits by artificially inflating the stock price of the once mighty energy trader.
In the suit filed in U.S. District Court in Houston, the bank said Enron insiders gained about $1.1 billion from the sale of more than 17.3 million shares of stock over the past three years.
The lawsuit seeks an immediate injunction to freeze the accounts of 29 Enron officers and directors, accusing them of selling the stock while falsifying the company's financial condition.
The lawsuit marks an increase in the number of accused and the benefits they reaped from about a dozen lawsuits that have already been filed against Enron and its officers.
``Based on our own ongoing investigation, we believe the chicanery and financial manipulations at Enron were far more widespread than the company has admitted,'' said Bill Lerach, lead attorney for the case at law firm Milberg Weiss Bershad Hynes & Lerach LLP. ``This appears to be one of the worst instances of illegal insider trading we've ever encountered.''
Investigation Finds 'Cronyism' AboundsNew York Law Journal - Daniel Wise December 6, 2001
A two-year investigation by a special inspector general appointed by Chief Judge Judith S. Kaye of the New York Court of Appeals has concluded, after auditing about 2,500 court files, that the most lucrative court appointments often go to a select group of well-connected individuals, who are often lawyers.
Inspector General Sherrill R. Spatz has referred cases involving about 10 lawyers and 10 judges to professional disciplinary authorities for further inquiry, according to a source close to investigation.
Commenting upon the report released Monday, Chief Administrative Judge Jonathan Lippman said he was "distressed and surprised" that the report uncovered instances in which "cronyism, politics and nepotism" had played a role in the appointment process. "It's not a pretty picture," he added, but the report should create the foundation for "serious, significant reform."
Proposals by a panel appointed by Chief Judge Kaye to remedy the situation are expected later this week. The panel is headed by Sheila L. Birnbaum of Skadden, Arps, Slate, Meagher & Flom in New York.
Chief Judge Kaye appointed Spatz and created Birnbaum's panel, the Commission on Judiciary Appointment, in January 2000, following publication of a letter written by Democratic party officials in Brooklyn that provided a rare glimpse into the connection between politics and court appointments. The two party officials, Arnold J. Ludwig and Thomas J. Garry, had complained in a letter, which ultimately was reported in newspapers, that they were being frozen out of appointments despite their "unquestioned" loyalty to the party.
In its other major findings, the report cited instances in which nonlegal work was billed at expensive hourly rates, and times when lawyers were hired when none were needed. It also found spotty compliance with Office of Court Administration filing requirements.
With respect to guardianship cases, the report asserted that many of the recipients of "multiple and lucrative" appointments had "connections to judges, political parties or court-system personnel."
Spatz, and her team of two lawyers and 10 auditors, concentrated their review of guardianship cases in State Supreme Court in Manhattan, where they uncovered cases of well-connected lawyers winning appointments.
In one case, a lawyer who had "regularly" been a special master for a judge was appointed by that judge as a guardian in 10 cases and earned $275,000 despite an apparent lack of qualifications.
The report noted, for instance, that the lawyer, who had claimed 15 years of experience in elder law, admitted when interviewed by the inspector general's staff that his experience was limited to the representation of elderly relatives.
In another case, two attorneys, both counsel to a county political leader, received more than 110 appointments in guardianship and receiver matters. They were paid about $400,000 for that work, the report stated. Similarly, an attorney who was married to a high-level managerial employee of the court system received appointments in 120 guardianship and receiver cases and was paid a total of about $360,000.
The report cited a judge having appointed "a high-ranking local bar association official with whom the judge was friendly" as counsel to an alleged incompetent person. It did not specify names or identify individual cases, but the reference was to Michael Miller, the president-elect of the New York County Lawyers' Association, who was appointed by Acting Justice Diane S. Lebedeff in Matter of Gerald J. Friedman, 50064/99 (NYLJ, Nov. 30).
Neither Miller nor Justice Lebedeff's attorney, Ben Rubinowitz of Gair, Gair & Conason in New York, responded to a request for comment.
In their examination of 417 receivership cases in Brooklyn over five years, the auditors discovered that Ludwig & Garry, whose two principals wrote the letter that touched off the inquiry, was hired as counsel by the receiver in a disproportionate number of cases. The firm was hired as counsel in 189 cases, most of them mortgage foreclosure proceedings, or 74 percent of the cases in Brooklyn where a lawyer was retained by the receiver. The firm was awarded fees of $464,554 for this work, or 78 percent of the total approved by Brooklyn judges to counsel for receivers for the five years ending Dec. 31, 1999.
Neither Garry nor Ludwig had any comment, according to their attorney.
The report noted that in receivership matters requiring little expertise, Brooklyn receivers who were "recognized experts" nonetheless hired counsel. The report suggested that there was a "financial" motive, because receivers are paid on a percentage basis, which might not amount to much money. But, the report pointed out, counsel to the receiver is paid on an hourly basis.
The report also noted that even though counsel are often retained in mortgage foreclosure cases, most "routine" cases "do not necessarily require the appointment of counsel." It also found instances in which a paralegal who was appointed a receiver hired his own firm for counsel, and "a few" cases in which the receiver hired either himself or his firm as counsel.
The report also uncovered a case in Nassau County that reflected how "court appointees in Nassau Surrogates Court frequently have ties to the court and each other." The report referred to a case where a retired Nassau County Court judge was appointed as guardian ad litem and a retired surrogate was appointed as special referee to oversee discovery.
The retired County Court judge, according to the report, in turn hired as his counsel both his daughter and the Nassau County deputy public administrator. All told, about $1.5 million was paid in handling the estate, which was valued at $80 million. The former County Court judge was paid $424,500; his daughter, $44,000; the former surrogate, $192,500; and the deputy public administrator, $215,000, the report said.
The report cited several examples of fiduciaries billing at hourly legal rates for pedestrian tasks. One guardian and an employee of a guardian's law firm billed $850 for a visit to a nursing home to celebrate their ward's birthday. Another guardian received over $65,000, billing at hourly rates for visiting an eyeglass store, attending a holiday party and inventorying the incompetent person's wardrobe.
Compliance with OCA's reporting requirement varied. In Brooklyn, the auditors found that only 20 percent of the time did receivers file certifications that they were not closely related to any judge, and that they did not have other appointments which might yield more than $5,000 compensation within one year.
The auditors also reported that they did not find any reports by judges regarding fee awards they approve, which are required by OCA rules.
In Manhattan, guardians filed forms making the required disclosures in 59 percent of the cases audited. And judges filed reports of their fee approvals in 76 percent of the cases.