Facts
The Complaint alleged that the WorldCom Retirement Plan administrators were WorldCom insiders who knew or had reason to know that the price of WorldCom stock was artificially high because public statements concerning the Company’s business and prospects were false or misleading to investors. When the facts became public, the stock plummeted.
- Problems With Remedies Under the Securities Law
The allegations of fraud and artificial inflation of WorldCom’s stock price formed the basis for a lawsuit brought by investors under the securities laws, but that suit offered inadequate chance for recovery for WorldCom employees who invested in company stock in their 401(k) plan. A common perception is that employees actually own stock in their companies when they invest in company stock funds in their retirement plan, typically the plan itself owns the stock.
The securities laws provide limited help in the case of 401(k) plans because investors can only recover for shares that they purchased during the period when the stock was artificially inflated by fraud; they cannot recover for losses to stocks that they purchased before the fraud began, but held during the period of artificial inflation. Moreover, suits on behalf of a retirement plan need only prove breach of fiduciary duty and are not required to meet the more difficult fraud standard.
- The Vivien Suit’s ERISA-Based Theory of Recovery
Because of the limitations outlined above, plaintiffs in the Vivien action sued under the Employee Retirement Income Security Act (ERISA) of 1974, a federal statute established to protect the rights of employee benefit plan participants.
ERISA requires that those who run employee welfare plans – including 401(k) retirement plans – have a duty to provide accurate information about the plans to participants, and to invest the assets of the plans prudently. These are “fiduciary duties” – the highest duties imposed by law.
The Vivien Complaint alleged that the Defendants breached their fiduciary duty of prudence under ERISA by continuing to invest plan assets in WorldCom stock when the stock was artificially inflated by the false and misleading statements of WorldCom’s senior management.
The Defendants moved to dismiss the complaint, arguing that it was "actually a securities-fraud action governed by the Private Securities Litigation Reform Act masquerading as an ERISA action." The Court disagreed.
Read more about this topic: Vivien V. Worldcom
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