In re Worldcom, Inc.
| Decision Date | 17 June 2003 |
| Docket Number | No. 02 Civ.4816 DLC.,02 Civ.4816 DLC. |
| Citation | 263 F.Supp.2d 745 |
| Parties | IN RE WORLDCOM, INC. Erisa Litigation This Document Relates to: All Actions |
| Court | U.S. District Court — Southern District of New York |
Lynn Lincoln Sarko, Gary A. Gotto, Erin M. Riley, Seattle, WA, for Plaintiffs.
George M. Newcombe, Patrick E. King, Simpson Thacher & Bartlett, Palo Alto, CA, Paul Curnin, Simpson Thacher & Bartlett, New York, NY, for Director Defendants.
David Wertheimer, Lyndon Tretter, Hogan & Hartson L.L.P., New York, NY, Evan Miller, Hogan & Hartson L.L.P., Washington, DC, for Bernard J. Ebbers: R. David Kaufman, M. Patrick McDowell, Brunini Grantham Grower & Hewes, PLLC, Jackson, MS, of counsel.
Juliet Rotenberg, Arnold & Porter, Washington, DC, for Defendant Scott Sullivan.
Eliot Lauer, Curtis Mallot Prevost Colt & Mosley, New York, NY, for Defendant Arthur Andersen LLP.
William J. Kilberg, Paul Blankenstein, Gibson, Dunn & Crutcher LLP, Washington, DC, for Defendant Merrill Lynch Trust Co. of America.
The collapse of WorldCom, Inc. ("World-Com") has led to a plethora of litigation. This consolidated class action seeks recovery for WorldCom employees who invested in WorldCom stock through the company's 401(k) plan. It is premised on violations of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. § 1001 et seq., and names as defendants certain officers, directors and employees of WorldCom, as well as Merrill Lynch Trust Company of America ("Merrill Lynch"), the trustee for the 401 (k) plan, and Arthur Andersen LLP ("Andersen"), the accounting firm that audited the WorldCom financials and the 401 (k) plan. Litigation brought under the federal securities laws is also before this Court, including a class action that seeks recovery for anyone who traded WorldCom securities during the class period, consolidated under the caption In re WorldCom, Inc. Securities Litigation ("Securities Litigation").
At the heart of the WorldCom litigation are allegations that WorldCom and those associated with it disseminated materially false and misleading information in analyst reports, press releases, public statements, and filings with the Securities and Exchange Commission ("SEC"), including registration statements issued in conjunction with WorldCom's note offerings in May 2000 and May 2001. The allegations against WorldCom contend that the company engaged in a series of illegitimate accounting strategies in order to hide losses and inflate reported earnings to meet increasingly unrealistic earnings projections. WorldCom's accounting manipulations and dissemination of material misrepresentations are alleged to have affected the price of its securities and to have misled investors regarding the true value of the company.
On June 25, 2002, WorldCom announced that it had improperly treated more than $3.8 billion in ordinary costs as capital expenditures in violation of generally accepted accounting principles and would have to restate its publicly-reported financial results for 2001 and their first quarter of 2002. WorldCom later announced that its reported earnings for 1999 through the first quarter of 2002 had overstated earnings by $3.3 billion, and that it would likely write off goodwill of $50 billion. These disclosures had a catastrophic effect on the price of WorldCom shares and the value of WorldCom notes. WorldCom stock and bondholders, including state and private pension funds, lost hundreds of millions—if not billions—of dollars in investments.
On July 21, 2002, WorldCom filed for bankruptcy. WorldCom executives have pleaded guilty to violations of the securities laws, state governments and the United States Congress have investigated WorldCom's ascent and collapse, and WorldCom officers, directors, auditors, underwriting syndicates, and its most influential outside analyst have been sued in courts across the country.1
This Opinion addresses the motions to dismiss filed by most of the defendants named in the ERISA class action. Among other things, the defendants contend that WorldCom alone was the ERISA fiduciary for the 401(k) plan, and that the ERISA claims for breach of fiduciary duty can only be brought against WorldCom, which is in bankruptcy proceedings in this district. The defendants also contend that this action is seeking improperly to import the duties of disclosure created by the federal securities laws into the ERISA context, and that the claims against them must be dismissed for failure to state a claim under ERISA. For the following reasons, the motions to dismiss are granted in part and denied in part.
By Order dated September 18, 2002, two actions brought pursuant to ERISA pleading claims in connection with WorldCom's 401 (k) plan were consolidated under the caption In re Worldcom, Inc. Sec. Litigation ("ERISA Litigation"). Steven Vivien, Gail M. Grenier, and John T. Alexander were appointed lead plaintiffs, and Keller Rohrback, L.L.P. was appointed as Lead Counsel for the ERISA Litigation by Order dated November 18, 2002. The November 18 Order appointed Jeffrey Lewis of Lewis & Feinberg, P.C. and Elizabeth Cabraser of Lieff Cabraser Heimann & Bernstein, L.L.P. to serve as members of the plaintiffs' Steering Committee and Stull, Stull & Brody as local counsel. On December 20, 2002, plaintiffs filed the Consolidated Class Action Complaint ("Consolidated Complaint"). The director, officer, and employee defendants, including Bernard J. Ebbers, filed notice of their motions to dismiss the Consolidated Complaint on January 24, 2003. In the meantime, plaintiffs had served Andersen with an Amended Consolidated Class Action Complaint ("Amended Complaint"). Andersen filed notice of its motion to dismiss on January 25, 2003. On January 29, this Court granted plaintiffs' request for permission to file an Amended Consolidated Complaint. The Amended Complaint duplicates the Consolidated Complaint except for the allegations against Andersen. Unlike the Consolidated Complaint, the Amended Complaint does not include a claim against Andersen for knowing participation in breach of fiduciary duty under ERISA. For purposes of this Opinion, the Consolidated Complaint and the Amended Complaint will be referred to together as the "Complaint."
The descriptions that follow summarize the allegations in the Complaint that are most relevant to the motions to dismiss. The Plan
This action is brought by and on behalf of participants in the WorldCom 401 (k) Salary Savings Plan ("Plan").2 Beginning in 2000, the Plan absorbed several predecessor plans, including the MCI Plan, the IDB Communications Group, Inc. 401(k) Savings and Retirement Plan, the Western Union International, Inc. 401 (k) Plan for Collectively Bargained Employees, and the SkyTel Communications, Inc. Section 401(k) Employee Retirement Plan (together, the "Predecessor Plans").
The Plan provided a number of different funds in which participants could choose to invest their account balances, including a money market fund, a bond fund, various equity funds, and one or more funds invested in WorldCom stock.3 As described in the Summary Plan Descriptions ("SPD"), "[t]he purpose of the Plan is to encourage eligible employees to save on a regular basis, by salary deferral, and to provide [employees] an opportunity to become shareholders of the Company and thereby to furnish the incentives inherent in employee stock ownership." Under the Plan, participants had discretion to allocate their investments among the alternatives offered, and to reduce or eliminate their investments in WorldCom stock at any time. § 14.05.
WorldCom was the sponsor of the Plan and the administrator of the Plan. The Plan designated WorldCom as the Plan Administrator under ERISA § 3(16)(A), 29 U.S.C. § 1002(16)(A), and as the Investment Fiduciary.4 §§ 1.02 & 1.32. Although the Plan authorized WorldCom to appoint others to act as Administrator or Investment Fiduciary for the Plan, World-Com did not do so.
The Plan provides that the Investment Fiduciary's duties include without limitation, the power and discretion to:
(a) Establish and change the investment alternatives among which Participants may direct the investment of their accounts; and
(b) Review the status of the investment policy and the selection and performance of the investment alternatives offered under the Plan....
§ 14.05. Under the Plan, the Administrator had the power and authority to "[prepare and distribute to Participants, in whatever manner the administrator determines to be appropriate, information explaining the Plan." § 14.03(j). WorldCom had and exercised discretionary authority or discretionary control over the management of the Plan, the disposition of the Plan's assets, and the administration of the Plan.
Named Plaintiffs Stephen Vivien, Gail M. Grenier, and John T. Alexander are or were participants in the Plan. They bring this action on their own behalf and on behalf of all participants in and beneficiaries of the Plan whose individual accounts held shares of WorldCom stock from September 14, 1998, until the date of filing of the Complaint.
Pursuant to Section 14.02 of the Plan, any WorldCom officer had authority to perform WorldCom's functions as Plan Administrator and Investment Fiduciary. Section 14.02 provides, in pertinent part, that:
If WorldCom, Inc. does not appoint individuals to carry out the duties of the Administrator or Investment Fiduciary ... then any officer of WorldCom, Inc. shall have the authority to carry out, on behalf of WorldCom, Inc., the duties of the Administrator and the Investment Fiduciary.
(emphasis supplied). WorldCom's officers with fiduciary obligations for the Plan consist of Bernard J. Ebbers ("Ebbers"), WorldCom's President and...
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