Vivien v. Worldcom
Encyclopedia
Vivien v. WorldCom, Inc., No. 02-01329 WHA (N.D. Cal.
July. 26, 2002) established a new legal theory permitting workers to recover for losses in their 401(k)
retirement plans caused by investment in their employers’ stock.
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.
, Reliant Energy
, Cardinal Health
, Tyco International
, Merck
, and Dell
. In the wake of these suits, many major companies have begun to restructure their 401(k) plans, eliminating the requirement to own company stock.
United States District Court for the Northern District of California
The United States District Court for the Northern District of California is the federal United States district court whose jurisdiction comprises following counties of California: Alameda, Contra Costa, Del Norte, Humboldt, Lake, Marin, Mendocino, Monterey, Napa, San Benito, San Francisco, San...
July. 26, 2002) established a new legal theory permitting workers to recover for losses in their 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
retirement plans caused by investment in their employers’ stock.
Facts
The Complaint alleged that the WorldCom Retirement Plan administrators were WorldComMCI Inc.
MCI, Inc. is an American telecommunications subsidiary of Verizon Communications that is headquartered in Ashburn, Virginia...
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
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
(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
Private Securities Litigation Reform Act
The United States Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109 Stat. 737 implemented several substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation, and...
masquerading as an ERISA action." The Court disagreed.
Judgment
Giving the judgment of the Court, Judge William Alsup held that the plaintiff’s complaint adequately alleged that the defendants acted in a fiduciary capacity and had breached that duty by their imprudent investment in company stock.Significance
The Vivien decision provided the legal framework for many similar suits filed by employees of companies such as AOL Time WarnerTime Warner
Time Warner is one of the world's largest media companies, headquartered in the Time Warner Center in New York City. Formerly two separate companies, Warner Communications, Inc...
, Reliant Energy
Reliant Energy
RRI Energy, Inc. , based in Houston, Texas, United States, was an energy company that provided electricity to wholesale customers in the United States. The company was one of the largest independent power producers in the nation with more than 14,000 megawatts of power generation capacity across...
, Cardinal Health
Cardinal Health
Cardinal Health, Inc., is a Fortune 500 health care services company based in Dublin, Ohio. Cardinal Health specializes in health care supply chain services, providing pharmaceuticals and medical products to more than 40,000 locations each day. The company is also a manufacturer of medical and...
, Tyco International
Tyco International
Tyco International Ltd. is a highly diversified global manufacturing company incorporated in Switzerland, with United States operational headquarters in Princeton, New Jersey...
, Merck
Merck & Co.
Merck & Co., Inc. , also known as Merck Sharp & Dohme or MSD outside the United States and Canada, is one of the largest pharmaceutical companies in the world. The Merck headquarters is located in Whitehouse Station, New Jersey, an unincorporated area in Readington Township...
, and Dell
Dell
Dell, Inc. is an American multinational information technology corporation based in 1 Dell Way, Round Rock, Texas, United States, that develops, sells and supports computers and related products and services. Bearing the name of its founder, Michael Dell, the company is one of the largest...
. In the wake of these suits, many major companies have begun to restructure their 401(k) plans, eliminating the requirement to own company stock.