The opinion of the court was delivered by: Denise Cote, District Judge.
The collapse of WorldCom, Inc. ("WorldCom") 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").
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.*fn1
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.
This action is brought by and on behalf of participants in the WorldCom 401(k) Salary Savings Plan ("Plan").*fn2 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.*fn3 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.
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 "[p]repare 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 Chief Executive Officer; Scott D. Sullivan,*fn5
the Chief Financial Officer; Bert C. Roberts, a corporate officer; John W. Sidgmore, a corporate officer; and Dennis W. Sickle, WorldCom's Senior Vice President, Human Resources (together "Officer Defendants"). §§ 12-16. Ebbers and Sullivan exercised discretionary authority or discretionary control regarding management of the Plan, management or disposition of the Plan's assets, and the administration of the Plan.
WorldCom's directors authored and/or signed communications on behalf of WorldCom, including the prospectus included in WorldCom's Form S-8 registration statements which pertained to the Plan. Ebbers, Sullivan, Roberts, Sidgmore, James C. Allen, Judith Areen, Carl J. Aycock, Max E. Bobbitt, Francesco Galesi, Stiles A. Kellett, Jr., Gordon S. Macklin, Clifford L. Alexander, John A. Porter, and Lawrence C. Tucker were WorldCom directors during the relevant time period (together, except for Ebbers, "Director Defendants"). As members of WorldCom's board of directors, the Director Defendants had a duty to monitor the activities of the corporation and its management.
Four WorldCom employees were involved in the administration of the Plan. In her capacity as WorldCom's Employee Benefits Director, Dona Miller exercised day-to-day authority with respect to the Plan and exercised discretionary authority or control regarding management of the Plan, management or disposition of the Plan's assets, and administration of the Plan. Miller also gave directions to the Plan's Trustee, Merrill Lynch.
WorldCom's Employee Benefits Manager, Tracy McAden; Director, Taxation and Cash Management, Ron Levitt; and Manager, Taxation and Cash Management, Margaret Barry, were authorized to transact business on behalf of the Plan. Together, Miller, McAden, Levitt and Barry constitute the WorldCom employees charged with having fiduciary obligations with respect to the Plan ("Employee Defendants").
Andersen, a firm of certified public accountants, audited the year-end financial statements for WorldCom. Andersen also audited the Plan for 1999, 2000 and 2001 and delivered a "clean" audit opinion for the Plan each of those years. As the auditor for the Plan, Andersen valued WorldCom stock according to its publicly traded stock price. As the auditor for WorldCom, Andersen knew or should have known that WorldCom was employing improper accounting practices and had materially misstated its financial results during the years in which Andersen audited the company. Consequently, when Andersen audited the Plan it knew or should have known that WorldCom's public stock price did not accurately reflect the value of the company.
Merrill Lynch was named as the Plan Trustee, as defined in ERISA Section 403(a), 29 U.S.C. § 1103(a), in a trust agreement entered into by WorldCom and Merrill Lynch on October 10, 1994 ("Trust Agreement"). The Trust Agreement provided that
Except as required by ERISA, the Trustee shall invest
the Trust Fund as directed by the Named Investment
Fiduciary, an Investment Manager or a Plan
participant or beneficiary, as the case may be, and
the Trustee shall have no discretionary control over,
nor any other discretion regarding, the investment or
reinvestment of any asset of the Trust
Trust Agreement § 5.01. The Plan provided that "[c]ontributions will be invested by the Trustee pursuant to written direction from Participants, each of whom has the right to choose among the investment alternatives selected by the Investment Fiduciary." § 9.02. Merrill Lynch independently analyzed the Plan's investment in WorldCom stock, and knew that WorldCom securities were a "potentially" imprudent investment. Merrill Lynch exercised authority or control respecting management or disposition of Plan assets, and rendered investment advice "for a fee or other compensation" regarding WorldCom stock and other Plan assets or had the authority or responsibility to render such advice. As an investment advisor, Merrill Lynch was asked to advise Plan fiduciaries and did advise them regarding Plan investments. Merrill Lynch did not, however, advise Plan fiduciaries to investigate the prudence of continuing to offer WorldCom stock as a Plan investment and itself failed to investigate the prudence of investing WorldCom stock.
WorldCom is named as a defendant in this action and is alleged to have breached its fiduciary duties as Plan Administrator and Investment Fiduciary. WorldCom filed for bankruptcy on July 21, 2002, and is protected from litigation by the automatic stay provisions of the Bankruptcy Code.
All defendants except WorldCom and Sullivan have moved to dismiss the Complaint. The moving defendants seek dismissal of ...