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IN RE WORLDCOM

February 1, 2005.

IN RE WORLDCOM, INC. ERISA LITIGATION. This Document Relates to: ALL ACTIONS.


The opinion of the court was delivered by: DENISE COTE, District Judge

OPINION & ORDER Page 2

This Opinion addresses the circumstances in which a directed trustee of a 401(k) plan may be liable under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. § 1001 et seq., for its failure to refuse on its own initiative to invest employee funds in the company's stock. Because plaintiffs have not shown that the trustee had non-public information regarding the company's stock that would warrant the trustee taking such an extraordinary action, and because the plaintiffs have not shown that the unusual circumstances that would otherwise require that action existed, the trustee's motion for summary judgment is granted.

BACKGROUND

  Following the collapse of WorldCom, Inc. ("WorldCom"), this consolidated class action was brought by WorldCom employees who invested in WorldCom stock through the WorldCom 401(k) Salary Savings Plan (the "Plan").*fn1 Litigation in the aftermath of WorldCom's collapse revolves around accusations that the company disseminated materially false and misleading information about the company's financial health, using illegitimate accounting techniques in order to hide expenses and inflate reported earnings to meet increasingly unrealistic earnings projections. Page 3 On June 25, 2002, WorldCom admitted that it had improperly treated over $3.8 billion in ordinary costs as capital expenditures, and consequently would have to restate its publicly-reported financial results for 2001 and the first quarter of 2002. WorldCom filed for bankruptcy on July 21, 2002. Criminal and civil litigation proliferated, with guilty pleas by WorldCom executives to violations of the securities laws, state government and congressional investigations, and numerous lawsuits against WorldCom officers, directors, its auditor, underwriting syndicates, and principal outside analyst.*fn2

  The Judicial Panel on Multi-District Litigation has transferred the civil litigation concerning WorldCom pending in federal court to this Court. An Order of September 18, 2002 consolidated two actions brought pursuant to ERISA under the caption In re WorldCom, Inc. ERISA Litigation ("ERISA Litigation"). Steven Vivien, Gail M. Grenier, and John T. Alexander were appointed lead plaintiffs, and Keller Rohrback, Page 4 L.L.P. was appointed as Lead Counsel for the ERISA Litigation by Order dated November 18.

  On December 20, plaintiffs filed the Consolidated Class Action Complaint, and later an Amended Class Action Complaint ("Complaint"). The Complaint was brought on behalf of participants in the Plan and certain predecessor plans of companies that merged with WorldCom for whose accounts the plans held shares of WorldCom stock at any time from "no later than" September 14, 1998 to the present. On June 17, 2003, the motions to dismiss filed against the Complaint were granted in part. As to Merrill Lynch Trust Company FSB ("Merrill Lynch"), the trustee for the Plan, the Complaint's allegations were found to be sufficient to plead a breach of Merrill Lynch's fiduciary duty as a trustee, but not to plead that it was a fiduciary because it acted as an investment advisor. In re WorldCom, Inc. ERISA Litig., 263 F. Supp. 2d 745, 761-63 (S.D.N.Y. 2003).

  On July 25 and September 12, plaintiffs filed a second and then a third amended consolidated class action complaint ("Amended Complaint") which added additional defendants and reasserted claims against certain previously dismissed defendants. The Amended Complaint seeks recovery for WorldCom employees who invested in WorldCom stock through the Plan and the several predecessor plans that the Plan had absorbed and alleges three claims pursuant to ERISA §§ 404(a)(1), 409, and 502(a)(2) & (3), 29 U.S.C. §§ 1104(a)(1), 1109, 1132(a)(2) & (3), for alleged breaches of fiduciary duty. The Amended Complaint asserts that Page 5 Bernard J. Ebbers ("Ebbers"), Scott D. Sullivan ("Sullivan"), and Dennis W. Sickle ("Sickle") (collectively, the "Officer Defendants"); Dona Miller ("Miller"), Pamela Titus ("Titus"), Ray Helms ("Helms"), Stephanie Scott ("Scott"), and Sandra Faircloth ("Faircloth") (collectively, the "Employee Defendants"); Bert C. Roberts, John W. 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 (collectively, the "Director Defendants"); and Merrill Lynch, breached the duty of prudence in ERISA § 404(a) by continuing to offer WorldCom stock as an investment alternative within the Plan when they knew or should have known that such an investment was imprudent. The Amended Complaint also asserts that Ebbers, Sullivan, and the Director Defendants failed to monitor the fiduciary performance by ERISA plan fiduciaries appointed by those directors. Finally, the Amended Complaint claims that WorldCom, Merrill Lynch, the Officer Defendants, and the Employee Defendants failed to provide ERISA plan participants with complete and accurate information regarding WorldCom stock.

  Fact discovery in the Securities Litigation and the ERISA Litigation were coordinated. Document discovery was substantially completed in the Fall of 2003. Fact discovery in the ERISA Litigation closed on July 23, 2004. Meanwhile, on April 20, 2004, WorldCom emerged from bankruptcy as MCI, Inc. ("MCI"). Page 6

  An ERISA class was certified under Rule 23(b)(1)(B), Fed.R.Civ.P., on October 4, 2004. In re WorldCom, Inc. ERISA Litigation, No. 02 Civ. 4816 (DLC), 2004 WL 2211664 (S.D.N.Y. Oct. 4, 2004). The Opinion certifying the class resolved the sole challenge to certification, rejecting Merrill Lynch's attack on the definition of the class. Id. at *3.

  On June 30, 2004, the named plaintiffs in the ERISA Litigation and all of the defendants except Merrill Lynch and Sullivan (the "Settling Defendants" and "Non-Settling Defendants," respectively) as well as the issuers of certain WorldCom insurance policies executed a Settlement Agreement that, inter alia, established a settlement fund of $47.15 million and contained a bar order preventing the Non-Settling Defendants from bringing claims for contribution and indemnification against the Settling Defendants while providing the Non-Settling Defendants a right to a reduction in the amount of any judgment entered against them. A fairness hearing was held on October 15. The Settlement Agreement was approved in an Opinion dated October 18. In re WorldCom, Inc. ERISA Litigation, No. 02 Civ. 4816 (DLC), 2004 WL 2338151 (S.D.N.Y. Oct. 18, 2004). The trial of the ERISA claim against Merrill Lynch is scheduled to begin on May 2, 2005.

  The competing summary judgment motions address, inter alia, the following arguments by the parties. The plaintiffs contend that Merrill Lynch violated the fiduciary duty of prudence contained in Section 404(a) of ERISA, 29 U.S.C. § 1104(a). They seek to prove that Merrill Lynch was not a directed trustee, but Page 7 owed a general duty of prudence with respect to Plan investments. In the alternative, they contend that as a directed trustee, Merrill Lynch breached its more limited fiduciary duty when it failed, based on publicly available information about WorldCom's financial difficulties, and its intimate knowledge of WorldCom's administration of the Plan, to suspend the acquisition of WorldCom common stock through the Plan by at least March 13, 2002, and failed to begin a liquidation of WorldCom holdings in the Plan by April 24, 2002.

  Merrill Lynch argues that it was only a directed trustee, and as such, that it owed no fiduciary duty of prudence with respect to Plan investments. It posits that a directed trustee only has statutory duties and must always follow the investment instructions of plan participants and the administrator, except for limited circumstances not at issue here.

  The following facts are undisputed or as shown by the plaintiffs unless otherwise noted. Following a description of the relevant provisions in the Plan and the Agreement, this Opinion describes the individuals at WorldCom and Merrill Lynch who held important responsibilities with respect to the Plan, and how Merrill Lynch executed its role on a day-to-day basis. This Opinion then details the public information about WorldCom that accompanied its rise and fall during the Class Period. Page 8

  The Plan

  As noted, this action is brought by and on behalf of participants in the Plan.*fn3 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 gave participants the opportunity to choose to invest their account balances in a number of different funds, including a collective trust, a mortgage-backed securities fund, a bond fund, various equity funds, and one or more funds invested in WorldCom stock.*fn4 Under the terms of the Plan, "[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." Plan § 9.02 (emphasis supplied). The Plan was funded by payroll contributions from employees and matching contributions from WorldCom in the form of cash. Page 9 Participants were told through the Plan's Summary Plan Descriptions that investment decisions were up to them, and encouraged them to "learn as much as [they] can about the investment choices and consult [their] professional advisors, such as [their] accountant, financial consultant or attorney." Enrollment brochures accompanying the Plan nevertheless dispensed basic investment advice, such as the suggestion that "[o]ne way to balance risk and reward is to diversify your funds, or allocate your assets."

  WorldCom was the sponsor of the Plan, the Plan Administrator,*fn5 and the Investment Fiduciary. Plan §§ 1.02 & 1.32. Because the Plan designated the Plan Administrator and the Investment Fiduciary as "named fiduciaries,"*fn6 see Plan § 14.01, WorldCom could give directions to a directed trustee under ERISA.*fn7 While WorldCom had the power to appoint others to carry out the roles of Administrator and Investment Fiduciary, it never did so.

  As the named fiduciary, WorldCom had the authority to delegate its fiduciary responsibilities and to rely upon information or analysis provided by persons performing ministerial functions under the Plan. Plan § 14.01. It was WorldCom's responsibility to choose the menu of investment Page 10 options available for its employees' investments in the Plan. The Plan provides that the Investment Fiduciary's duties and powers 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 no less often than annually; and
(c) Appoint, retain or remove one or more investment managers who shall have the power to manage, acquire or dispose of assets of the Fund. An investment manager so appointed must acknowledge in writing that he is a Fiduciary with respect to the Plan. . . .
Plan § 14.05 (emphasis supplied). The Plan obligates the Investment Fiduciary to develop an investment policy, stating: "[t]he persons designated to act on behalf of the Investment Fiduciary shall develop an investment policy for Plan assets." Plan § 14.05. It was also WorldCom's obligation to provide information to employees about the Plan. Among the Administrator's listed powers was the power to "[p]repare and distribute to Participants, in whatever manner the administrator determines to be appropriate, information explaining the Plan." Plan § 14.03(j).

  Under the Plan, WorldCom had the power and discretion to "[a]ppoint, retain or remove the Trustee." Plan § 14.02(b). The Plan defines the Trustee as "the person or persons acting as trustee or trustees at any time or from time to time under the Trust Agreement." Plan § 1.62. Page 11

  The Trust Agreement

  On October 10, 1994, Merrill Lynch and LDDS Communications, Inc., which later became WorldCom, executed a Trust Agreement ("Agreement") in order to implement a 401(k) Salary Savings Plan. The Agreement provides that the "Named Investment Fiduciary" and the "Named Administrative Fiduciary" are the same as those identified in the Plan, i.e., WorldCom. The Agreement provides that the Named Investment Fiduciary shall manage the investment of the trust fund except to the extent that such authority is delegated to a designated Investment Manager, or that the Plan provides for participant or beneficiary direction of the investment of assets. WorldCom never appointed an Investment Manager, although the Plan did provide for participant direction of the investment of the participant's assets, and required Merrill Lynch to follow those directions. In this context, the Agreement states:
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. The Trustee may limit the categories of assets in which the Trust Fund may be invested.
(Emphasis supplied).
  The Agreement also explicitly limits the liability of Merrill Lynch as Trustee, for instance, but excluding liability for following directions and for failing to act "in the absence Page 12 of" directions. It also relieved Merrill Lynch of any obligation to review the investments. It provides:
Directions for the investment or reinvestment of Trust assets . . . from the Employer, the Named Investment Fiduciary, an Investment Manager or a Plan participant or beneficiary, as the case may be, shall . . . be communicated to and implemented by . . . the Trustee. . . . The Trustee shall have no liability for its or any other person's following such directions or failing to act in the absence of such directions. The Trustee shall have no liability for the acts or omissions of any person directing the investment or reinvestment of Trust Fund assets or making or failing to make any direction [regarding voting rights]. Neither shall the Trustee have any duty or obligation to review any such investment or other direction, act or omission or, except upon receipt of a proper direction, to invest or otherwise manage any asset of the Trust which is subject to the control of any such person. . . .
(Emphasis supplied). The Agreement provides that Merrill Lynch "acknowledges its status as a `fiduciary' of the Plan within the meaning of ERISA," and that each fiduciary of the Plan and the Trust "shall be solely responsible for its own acts or omissions." Accordingly, Merrill Lynch "shall have no duty to question any other Plan fiduciary's performance of fiduciary duties allocated to such other fiduciary pursuant to the Plan," and is not responsible "for the breach of responsibility by any other Plan fiduciary except as provided for in ERISA."

  The Agreement also provides direction regarding Merrill Lynch's duties in carrying out its responsibilities as Trustee:

  The Trustee shall have no duty to inquire whether directions by the Employer, the Named Administrative Fiduciary, the Named Investment Fiduciary or any other person conform to the Plan, and the Trustee shall be fully protected in relying on any such direction communicated in accordance with procedures acceptable to the Trustee from any person who the Trustee Page 13 reasonably believes is a proper person to give the direction. The Trustee shall have no liability to any participant, any beneficiary or any other person for payments made, any failure to make payments, or any discontinuance of payments, on direction of the Named Administrative Fiduciary, the Named Investment Fiduciary or any designee of either of them or for any failure to make payments in the absence of directions from the Named Administrative Fiduciary or any person responsible for or purporting to be responsible for directing the investment of Trust assets. The Trustee shall have no obligation to request proper directions from any person. The Trustee may request instructions from the Named Administrative Fiduciary or the Named Investment Fiduciary and shall have no duty to act or liability for failure to act if such instructions are not forthcoming. The Trustee shall have no responsibility to determine whether the Trust Fund is sufficient to meet the liabilities under the Plan, and shall not be liable for payments or Plan liabilities in excess of the Trust Fund.

 (Emphasis supplied).

  The Agreement enumerates a number of "Nondiscretionary Investment Powers" of the Trustee that may be exercised provided the Trustee has received an appropriate direction to do so,*fn8 and provides for additional powers that the Trustee may exercise to the extent necessary to exercise its nondiscretionary powers or "otherwise to fulfill any of its duties and responsibilities as trustee." These additional powers included the power to register securities in the name of any nominee, to delegate its powers and responsibilities as needed, to execute legal documents as needed to carry out its powers as listed in the Agreement, and Page 14 "generally to do all other acts which the Trustee deems necessary or appropriate for the protection of the Trust Fund."

  Finally, the Agreement provides that it was intended as the governing document for the Trustee's responsibilities, and is controlling in the event of a conflict with the Plan:
The rights, duties, responsibilities, obligations and liabilities of the Trustee are as set forth in this Trust Agreement, and no provision of the Plan or any other document shall be deemed to affect such rights, duties, responsibilities, obligations and liabilities. If there is a conflict between provisions of the Plan and this Trust Agreement with respect to any subject involving the Trustee, including but not limited to the responsibility, authority or powers of the Trustee, the provisions of this Trust Agreement shall be controlling.
WorldCom as Plan Administrator and Investment Fiduciary

  As already described, WorldCom was the Plan Administrator and Investment Fiduciary. At least four WorldCom employees*fn9 played important roles in the administration of the Plan. In her capacity as WorldCom's Employee Benefits Director, Miller exercised day-to-day authority with respect to the Plan and gave directions to the Plan's Trustee, Merrill Lynch. As Senior Manager for Strategic Benefits, Titus assisted Miller and also worked with the Plan on a daily basis. Sickle, WorldCom's Senior Vice President for Human Resources, oversaw the Plan in addition Page 15 to most other employee-related aspects of the WorldCom corporation. He sometimes attended meetings between Merrill Lynch representatives and Plan officials, and was involved in important Plan decisions, but did not work with the Plan on a day-to-day basis. Sullivan, WorldCom's Chief Financial Officer and a director, was, according to Sickle, responsible for making the final decisions regarding changes in the range of investment options offered in the Plan, although whether he in fact always made such decisions is unclear.

  Merrill Lynch

  As directed trustee for the Plan, Merrill Lynch staffed its client engagement with a financial advisor, a client relationship manager, a client service manager, and an investment strategist. Although the individuals fulfilling these roles changed over time, the client relationship manager for most of the Class Period was Thomas Eckert ("Eckert"), and the financial advisor was ...


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