Emerging Trends in Fiduciary Liability

Document Sample
Emerging Trends in Fiduciary Liability Powered By Docstoc
					Emerging Trends in
 Fiduciary Liability

 Carrie Brodzinski
    BEAZLEY GROUP
 Gregory C. Braden
    Alstin & Bird LLP
 Kristofor T. Henning
    Morgan, Lewis & Bockius LLP

 Larry Fine
    AIG
        ERISA Follow-on Claims:
       Action Bar Has Discovered
                 ERISA
 Over 100 employers hit with ERISA Class
  Action suits
 Most “follow” in the wake of a Securities
  Class Action
 Attempt to get around Private Securities
  Litigation Reform Act of 1995
     • Pleading Standards
     • Automatic Stay of Discovery – Motions to Dismiss
     • Lead Plaintiff/Counsel selection
 A new pot of gold – often a
  separate/additional policy or tower from the
  D&O policy/tower
        These materials are not intended to provide any legal advice or analysis. Please
        consult your own counsel for further information on the topics discussed herein.   2
         ERISA Follow-on Claims:
           What Plans Are The
                Targets?
 401(k) Plans – vast majority are self-
  directed
     • Matching contributions often “locked into” company
       stock
     • Company stock as an available investment option
 ESOPs (employee stock ownership plans) –
  more common among privately held
  companies
     • Employer contributions “locked into” company stock
     • Assets required to be primarily invested in company
       stock

         These materials are not intended to provide any legal advice or analysis. Please
         consult your own counsel for further information on the topics discussed herein.   3
         ERISA Follow-on Claims:
          Nature Of The Claims

 Parties –
     •   Plaintiff – any “participant” in 401k Plan or ESOP –
         current or former employee (with an account).
         Sometimes the U.S. Department of Labor.
     •   Defendants – “fiduciaries”
          • Committees/individuals responsible for plans/investments
          • Whoever appoints them – often the Board of Directors –
            inherits a fiduciary duty to monitor
          • Employees involved in communications related to
            employer stock
          • “Directed” Trustees


           These materials are not intended to provide any legal advice or analysis. Please
           consult your own counsel for further information on the topics discussed herein.   4
         ERISA Follow-on Claims:
         Nature Of The Claims (cont)

 Breach of Fiduciary Duty – both Loyalty and
  Prudence
     •   Employer stock is an imprudent investment option
         • Never should have been selected
         • Should have been removed before the stock dropped
     •   Communications – affirmative misrepresentations and
         failures to disclose
         • Misrepresentations – you said the Company was doing
           fine and it wasn’t
         • Duty to disclose – you should have told me the Company
           was failing instead of remaining silent


          These materials are not intended to provide any legal advice or analysis. Please
          consult your own counsel for further information on the topics discussed herein.   5
         ERISA Follow-on Claims:
         Nature Of The Claims (cont)

 Relief Requested
     •   Harm to the Plan
          • Difference between stock performance and performance
            of other “prudent” investments – usually the best
            performing plan option during class period
          • Prejudgment Interest and Attorneys’ Fees
     •   Injunctive/Equitable relief
          • Removal of fiduciaries – appointment of “independent”
            fiduciaries
          • Removal of trading restrictions
          • Education/Communication



           These materials are not intended to provide any legal advice or analysis. Please
           consult your own counsel for further information on the topics discussed herein.   6
          ERISA Follow-on Claims:
            Key Issues/Trends
 Motions to Dismiss – The trend favors Plaintiffs
      •   Fiduciary status
      •   Presumption of Prudence
      •   Duty to Disclose/Standing Milofsky / Schering-Plough, TXU
 Class Certification – A mixed bag
      •   Communications Claims v. Prudence Claims EDS, JP Morgan
      •   502(a)(2) v. 502(a)(3)
      •   Releases
 Summary Judgment – The trend favors Defendants
  – Kuper presumption
      •   WorldCom and DeFelice (US Airways) – directed
          trustees/independent fiduciary
      •   Syncor
      •   Reliant


            These materials are not intended to provide any legal advice or analysis. Please
            consult your own counsel for further information on the topics discussed herein.   7
                      ERISA Follow-on Claims:
                     Some Recent Settlements
               CASE NAME                                 JURISDICTION                % OF CO. STOCK HELD IN PLAN*               SETTLEMENT
                                                                                                                                  AMOUNT

In re WorldCom Inc. ERISA, No.                   SDNY                               Not Available                     $51 million
1:02cv4816
___________________________________              ________________________           _______________________________   ____________________________
In re Enron Corp., ERISA Litigation, No. H-      SD Tex.                            Not Available                     $85 million
01-3913
___________________________________              ________________________           _______________________________   ____________________________
Lucent Technologies                              USDC N.J.                          Not Available                     $69 Million
___________________________________              ________________________           _______________________________   ____________________________
Summers, et al. v. UAL Corp. Empl. Stock,        USDC N.D. Ill.                     Not Available                     $5.25 million
et al.;
Case No.: 03-cv-01537

In re HealthSouth ERISA Lit.,                    USDC ND AL                         Not Available                     $25 million
Case No.: 03-1700


Huntsman v. CIGNA Corp., et al.                  USDC E.D. PA                       Not Available                     $950,000 Legal Fees
Case No.: 03-cv-714                                                                                                   $4,000 for Plaintiffs
                                                                                                                      Eliminating Transfer Restriction of
                                                                                                                      Assets

Lancaster v. Royal Dutch Petroleum Co.           USDC of NJ                         18%                               $90 million
(SHELL),
Case No.: 04-cv-1398

In re Williams Cos. ERISA Litigation,            USDC of OK ND                      69%                               $55 million
Case No.: 02-CV-153, 8/19/05


Furstenau v. AT&T Corporation, et al.,           USDC New Jersey                    Not Available                     $29 million
Case No.: 02-5409



                                These materials are not intended to provide any legal advice or analysis. Please
                                consult your own counsel for further information on the topics discussed herein.                                            8
                  ERISA Follow-on Claims:
                 Some Recent Settlements
Rankin v. Rots, et al.,                    USDC E.D. Mich                    Not Available                     $11.75 million
(“K-Mart”)                                                                                                     Waiting for approval by court
Case No.: 02-cv-71045

Langbecker, et al., v. Electronic Data     USDC E.D. Tex.                    Not Available                     Proposed $16.5 million
Sys., et al.,                                                                                                  Rejected by court
Case No.: 03-cv-00126

Providian Financial Corp                   N.D. Calif.                       Not Available                     $8.6 million
____________________________               _____________________             ____________________________      ________________________
In re Xcel Energy Inc. Securities,         USDC of MN                                                          $8 million
Derivative & ERISA Litigation,
Master File No.: 02-2677, MDL File:
1511
No. 03-2218 and 03-2219

Fescina v. CVS Corporation, et al.,        USDC Mass                         Not Available                     $3 million
Case No.: 04-cv-12309

Chang, et al., v. McKesson HBOC            USDC of CA ND                     75%                               $18.2 million
Inc., et al.,
Case No.: 00-cv-20030

Russell v. CONSECO Inc. et al.,            USDC of SD IN                     13%                               $10 million
Case No.: 02-cv-01639

In re Honeywell International ERISA        USDC of NJ                        43%                               $14 million
Litigation,
Case No.: 03-cv-1214



                            These materials are not intended to provide any legal advice or analysis. Please
                            consult your own counsel for further information on the topics discussed herein.                                   9
      ERISA Follow-on Claims:
         Strategic Issues

 Strategic Issues – Defense
     • How many defense firms
     • Coordination

 Strategic Issues – Settlement
     • DOL
     • Bar Orders
     • Independent Fiduciary




        These materials are not intended to provide any legal advice or analysis. Please
        consult your own counsel for further information on the topics discussed herein.   10
      ERISA Follow-on Claims:
      The Market’s Response

 Pricing: Significant premium increases over
  the past few years
     • Has stabilized somewhat over last 6± months

 Capacity: Restricting
     • Compare typical vs. maximum limits
     • Smaller number of primary and excess insurers than
       with D&O
     • Publicly-traded companies have fewer alternatives
     • Insurers often monitor the total limits offered on the
       D&O and fiduciary programs

         These materials are not intended to provide any legal advice or analysis. Please
         consult your own counsel for further information on the topics discussed herein.   11
      ERISA Follow-on Claims:
      The Market’s Response

 Terms & Conditions: Insurers may impose
  restrictions
     • Securities claim exclusions
     • Securities claim sublimits
     • Tying-in the Limits of the D&O and fiduciary policies
       with respect to securities claims
     • Tying-in the Limits of the D&O and fiduciary policies
       into a single aggregate Limit
     • Increased retentions




         These materials are not intended to provide any legal advice or analysis. Please
         consult your own counsel for further information on the topics discussed herein.   12
      ERISA Follow-on Claims:
        Underwriting Issues

 Plan Design
     • Does the Plan hold employer stock?
     • Does it require participants to hold stock?
     • Does it require Plan to offer stock?
     • Is the stock held in an ESOP within the 401k Plan?

 Appointing Process – Reporting Process
     • Is the Plan clear on who the fiduciaries are – what their
       role/responsibility is? Are they insiders?
     • Is it clear who appoints the fiduciaries? Are they
       insiders?
     • Is there a reporting/monitoring function in place?
         These materials are not intended to provide any legal advice or analysis. Please
         consult your own counsel for further information on the topics discussed herein.   13
      ERISA Follow-on Claims:
        Underwriting Issues

 Communications
     • Plan prospectus for Employer Stock – is it combined
       with the Summary Plan Description (SPD)?
     • Who is responsible for Plan communications?
     • Do they distinguish between communications to
       Participants vs. Employees?
 Conduct regular investment reviews
     • At least quarterly
     • Looked beyond simply performance
     • Made sure the reviewer was independent and a co-
       fiduciary
         These materials are not intended to provide any legal advice or analysis. Please
         consult your own counsel for further information on the topics discussed herein.   14
      ERISA Follow-on Claims:
        Underwriting Issues

 Operations
     • Is there a written Investment Policy in place to guide
       the fiduciaries?
         •   Enough detail to be a useful tool
         •   Not so much detail as to create a trip-wire
     • Do the fiduciaries review Employer Stock like all other
       investment options?
     • Have they kept good minutes/records of their
       monitoring activities?




         These materials are not intended to provide any legal advice or analysis. Please
         consult your own counsel for further information on the topics discussed herein.   15
       Retiree Medical Benefits:
           Typical Scenario

 Employer has historically paid 100% of
  retirees’ medical insurance
 In response to rising health care costs,
  employer either eliminates or decreases its
  contribution to retirees’ health insurance
 Plan has reservation of rights language
  permitting amendment


        These materials are not intended to provide any legal advice or analysis. Please
        consult your own counsel for further information on the topics discussed herein.   16
          Retiree Medical Benefits:
                Claims Issues

 Contract-based ERISA Claim
      •   SPD promises lifetime post-retirement benefits
 Equitable Estoppel
      •   Employer has promised fully funded health benefits
          for life and is precluded from decreasing or
          eliminating the benefit




          These materials are not intended to provide any legal advice or analysis. Please
          consult your own counsel for further information on the topics discussed herein.   17
          Retiree Medical Benefits:
                Claims Issues

 Misrepresentation / breach of fiduciary duty
      •   Employer has promised, either orally or in writing
          through SPD, to provide lifetime post-retirement
          benefits and employees have relied on this
          representation




          These materials are not intended to provide any legal advice or analysis. Please
          consult your own counsel for further information on the topics discussed herein.   18
          Retiree Medical Benefits:
             Class Certification

 Misrepresentation / breach of fiduciary duty
      •   Trend against class certification
           – Existence of misrepresentation
           – Total mix of information
           – Fiduciary status
           – Detrimental reliance




          These materials are not intended to provide any legal advice or analysis. Please
          consult your own counsel for further information on the topics discussed herein.   19
       Retiree Medical Benefits:
          Class Certification

 In re Unisys Corp. Retiree Medical Benefits
  Litig. (E.D. Pa.)
 Leutherner v. Blue Cross of Northeastern
  Pennsylvania (M.D. Pa.)
 In re Sears Retiree Group Life Ins. Litig.
  (N.D. Ill.)
 Rivera v. American Home Products Corp.
  (D.P.R.)

        These materials are not intended to provide any legal advice or analysis. Please
        consult your own counsel for further information on the topics discussed herein.   20
          Retiree Medical Benefits:
            Underwriting Issues

 Recent or planned modification of retiree
  benefits
      •   Mergers and Acquisitions
 Consistent disclosure of right to amend
 Implementation of procedures regarding:
      •   Training
      •   Communications
      •   Records Maintenance



          These materials are not intended to provide any legal advice or analysis. Please
          consult your own counsel for further information on the topics discussed herein.   21
                  Cash Balance/Defined
                        Benefit:
                   Plans Under Attack
 Cash Balance Plan “ WHIPSAW” Claims:
  Xerox -- $239 Million
 Cash Balance Plan Age Discrimination
  Claims: IBM -- $330 Million - $1.4 Billion
 Pre-retirement Mortality Claims:
  Xerox -- $36 mm (estimated) Crosby



        These materials are not intended to provide any legal advice or analysis. Please
        consult your own counsel for further information on the topics discussed herein.   22
                    Cash Balance/Defined
                          Benefit:
                     Plans Under Attack
                                         WHIPSAW


 IRS Notice 96-8; Treas. Reg. 1.411(a)-11(a)
      •   Lump sum payment from a cash balance plan
          requires project forward reduce back calculation.
      •   Non-“safe harbor” interest crediting rate can create
          volatile unpredictable liabilities far exceeding the
          stated account balance.


          These materials are not intended to provide any legal advice or analysis. Please
          consult your own counsel for further information on the topics discussed herein.   23
       Cash Balance/Defined
             Benefit:
        Plans Under Attack

      Whipsaw as Percent of Account Balance
            Interest Rate = 7% Discount Rate = 4%


     140%
     120%
     100%
       80%
       60%
       40%
       20%
         0%
                   35        40        45        50        55        60       65
                                               Age




These materials are not intended to provide any legal advice or analysis. Please
consult your own counsel for further information on the topics discussed herein.   24
                  Cash Balance/Defined
                        Benefit:
                   Plans Under Attack
   “IBM” AGE DISCRIMINATION THEORY
 ERISA § 204(b)(1)(H): The plan cannot reduce the
  rate of benefit accrual “because of the attainment of
  any age.”
 Plaintiffs’ Theory: To Determine The Rate Of
  Benefit Accruals You Convert Each Year’s Pay
  Credits Into A Normal Retirement Annuity
       •   Project forward to normal retirement age
       •   Convert to annuity


           These materials are not intended to provide any legal advice or analysis. Please
           consult your own counsel for further information on the topics discussed herein.   25
                  Cash Balance/Defined
                        Benefit:
                   Plans Under Attack
   “IBM” AGE DISCRIMINATION THEORY
 Employee A, age 35, employed as staff attorney, earns
  $100,000 and participates in employer’s cash balance plan
  providing 5% pay credit. Annual pay credit = $5,000, annuity
  equivalent at age 65 = $152.69/mo. Immediate annuity =
  $23/mo (assuming 5% interest credits)
 Employee B, age 55, employed as staff attorney, earns
  $100,000 and participates in employer’s cash balance plan
  providing 5% pay credit. Annual pay credit = $5,000, annuity
  equivalent at age 65 = $57.55/mo. Immediate annuity =
  $29/mo (assuming 5% interest credits)

           These materials are not intended to provide any legal advice or analysis. Please
           consult your own counsel for further information on the topics discussed herein.   26
                  Cash Balance/Defined
                        Benefit:
                   Plans Under Attack
                   AGE DISCRIMINATION
 ERISA § 204(b)(1)(H) is “the rate of benefit accrual
  reduced because of the attainment of any age?”
       •   Cash balance plans don’t reduce pay credits or
           interest due to attainment of “any” age.
       •   The rate of benefit accrual should be based on pay
           credits, not normal retirement annuity “equivalents.”
           Eaton v. Onan Corp.; Tootle v. ARINC Inc.; Godinez
           v. CBS Corp.; Campbell v. Bank Boston (dicta);
           Register v. PNC Bank; Hurlic v. Southern Cal. Gas
           Co.; Proposed IRS Regs.

           These materials are not intended to provide any legal advice or analysis. Please
           consult your own counsel for further information on the topics discussed herein.   27
                Cash Balance/Defined
                      Benefit:
                 Plans Under Attack
               MORTALITY DISCOUNT
 In determining D.B. lump sums, actuaries “discount”
  for the probability of pre-retirement death because
  the “accrued benefit” is forfeited on death.
 Xerox: Seventh Circuit held that pre-retirement
  mortality discounts could not be applied in
  determining cash balance plan lump sums because
  the hypothetical account is paid to the survivor.
  See also Crosby v. Bowater Retirement Plan, etc.


         These materials are not intended to provide any legal advice or analysis. Please
         consult your own counsel for further information on the topics discussed herein.   28
                    Cash Balance/Defined
                          Benefit:
                     Plans Under Attack
                   MORTALITY DISCOUNT
 All defined benefit plans pay death benefits (they are required
  to) and most pay lump sums of at least $5,000. If the Seventh
  Circuit is right, all D.B. plans have underpaid lump sums.
 Why they’re wrong:
         •   Treas. Reg. 1.411(a) – 7(a)(1): the “accrued benefit” does
             not include “incidental death benefits.”
         •   Incidental death benefits are defined by IRS as having a
             value less than 25% of the accrued benefit.
         •   The actuarial value of the death benefit (discounted for
             probability of payment) is always less than 25% of the
             accrued benefit.

             These materials are not intended to provide any legal advice or analysis. Please
             consult your own counsel for further information on the topics discussed herein.   29
                   Cash Balance/Defined
                         Benefit:
                    Plans Under Attack
                    AGE DISCRIMINATION
 The Solution? Treasury Regulations Clarifying That The
  Principal Difference Between DC And DB Plans Is Not A
  Normal Retirement Annuity, It Is Who Bears the Investment
  Risk.
 Will It Come? Not Anytime Soon.
        •   Treasury withdrew age regulations. Declined to issue
            whipsaw regulations.
        •   Punting to Congress – Non-retroactive legislation.
        •   Regulation by litigation.



            These materials are not intended to provide any legal advice or analysis. Please
            consult your own counsel for further information on the topics discussed herein.   30
                 Cash Balance/Defined
                       Benefit:
                  Plans Under Attack
  UNDERWRITING CLAIM MANAGEMENT
               ISSUES
 These are usually claims for underpayment of benefits
  or actions to reform the plan and pay benefits
 Amounts involved are staggering, complicating
  settlement
 Fiduciary misrepresentation claims often thrown in for
  good measure
 New or established Plan vs. conversion of Defined
  Benefit Plan

          These materials are not intended to provide any legal advice or analysis. Please
          consult your own counsel for further information on the topics discussed herein.   31