A U.S. judge yesterday dismissed claims against Merrill Lynch & Co. by WorldCom Inc. employees who say the firm oversaw their pension funds and bought stock in the failing long-distance company, causing hundreds of millions of dollars in losses.
The WorldCom workers sought $100 million from Merrill, the largest securities firm by capital, accusing it of violating its duties as trustee for their pension funds by investing 401(k) money in company stock, lawyers said. U.S. District Judge Denise L. Cote in New York dismissed the claims against Merrill after finding that the firm, as a "directed trustee," was required to follow WorldCom's investment orders.
The ruling upholds a "Labor Department position that a directed trustee would not ordinarily be liable for inclusion of company stock in a 401(k) plan unless the trustee had nonpublic knowledge regarding the company's situation," Merrill lawyer William J. Kilberg said in an interview.
The suit was brought under the federal Employee Retirement Income Security Act (ERISA). The employees claimed Merrill bankers and WorldCom executives responsible for guiding the company's 401(k) investments left 46 million shares of company stock in the fund even as analysts issued negative reports about the collapsing telecommunications company in the spring of 2002.
WorldCom filed the largest bankruptcy in U.S. history in July 2002 after an $11 billion accounting fraud left the company unable to pay its debts. It emerged from bankruptcy protection in April as Ashburn-based MCI Inc.
Lawyers for Merrill Lynch argued it was unfair to hold the firm accountable for pension fund investment decisions when it was required to follow the instructions of WorldCom executives who oversaw the fund's allocations.
Directed trustees take orders from the company and its employees on how to invest, Kilberg said. Non-directed trustees have discretion over investment decisions.
Cote agreed, finding that directed trustees should not be held liable unless they had nonpublic information indicating that a stock would be a bad investment or knew company executives overseeing the pension plan were not carrying out their legal duties.
Current and former WorldCom employees lost $150 million to $600 million, Cote said earlier in the case.
Lawyers for the WorldCom employees said they were unsure whether they would appeal Cote's ruling.
Among those who have previously settled the ERISA case is former WorldCom chief executive Bernard J. Ebbers, who is on trial battling criminal fraud charges. Former WorldCom chief financial officer Scott D. Sullivan, the government's star witness in the criminal case, remains a defendant in the ERISA suit.
