The Road To Fiduciary Responsibility Via Litigation

March 6, 2002
By Dr. Donald Moine

In America, class action lawsuits against big companies are often used as a means of reform. Tobacco is the perfect example. Judgments handed down against tobacco companies have led to the total restructuring of the advertising, sale, and public use of it in America. In California you cannot even smoke one cigarette in a bar. It is simply against the law and is not tolerated.

Now comes a set of lawsuits that may very well redefine the notion of fiduciary responsibility in American business. The outcome of these cases is likely to affect any employee and their families who own company stock — around 50 million Americans. Should the plaintiffs in these cases prevail, hundreds of billions of dollars in similar litigation could be filed in the near future.

Unlawful Conduct Against WorldCom Employees
Over the past year, the law firm of Klayman & Toskes filed numerous lawsuits on behalf of only stock option participants in the form of arbitration cases against Salomon Smith Barney, Inc., a unit of Citigroup, Inc. (Imagine if WorldCom employees who had WorldCom stock, unmanaged for risk, in their pension plans or 401(k) had filed suit.) Allegedly, Salomon Smith Barney did not fulfill their fiduciary duties and is accused of gross negligence in violation of the Securities and Exchange Act of 1934, the Virginia Securities Laws, common law fraud, and breach of contractual and fiduciary duties. In other words, brokers, among other reasons, did not use a protective strategy known as cashless collars (also known as zero cost collars).

According to Klayman and Toskes, the alleged unlawful conduct perpetrated by Solomon Smith Barney “reflects what appears to be a complete failure of supervision and compliance at the Salomon Smith Barney office” in Atlanta, Georgia. If a full service brokerage firm isn’t giving advice that protects assets when such protection is readily available, the courts may hold that firm and its brokers in breach of their fiduciary duties.

I have not yet been able to determine the amount of damages sought by the plaintiffs, but I do know that in just the past several months WorldCom employees and shareholders have lost several billion dollars and that over the past two years, they have lost tens of billions of dollars.

One can only wonder how Solomon Smith Barney will defend itself against these serious charges, given their gravity and the fact that cashless collars were indeed available to protect the WorldCom employees. I have many thoughts on what the defense could do in these landmark cases and what additional steps the plaintiffs could engage in to further their cases, but such analysis is well beyond the scope of this article.

The Power Of Cashless Collars
In March of 2001, I began writing about the necessity of using protective option strategies to defend the net worth of American workers. In my first article for TMC, “Protecting Your Net Worth From A Stock Options Meltdown,” I showed how by selling calls and using the premiums collected to buy protective puts, employees and executives could protect tens of thousands to billions of dollars of company stock at almost no cost. The technique of selling calls and using the funds received to put puts is a “cashless collar,” and it is this technique that is at the center of the landmark cases filed against Solomon Smith Barney on behalf of WorldCom employees.

Cashless collars can be used to protect a huge number and range of employees and investors. The number of potential users of cashless collars (and therefore plaintiffs in these cases) is easily well over 20 million people. Cashless collars can be used to protect company stock held in pension plans, individual brokerage accounts, 401(k)s, IRAs, Keoughs, and even vested employee stock options.

A company whose employees own corporate stock that is partially or completely protected by cashless collars has employees who are more loyal, less worried, and more productive. By teaching employees how to use cashless collars or by hiring advisors who know how to use cashless collars, a company can also save millions of dollars by avoiding litigation filed by employees who have suffered huge losses in company stock.

Cashless collars are one of the most powerful risk management techniques in existence for gaining upside in company stock while at the same time limiting downside risk. Best of all, if properly structured, all of this protection is free or nearly free. Cashless collars are thus a win-win strategy for both employees and corporate employers.

Over the past few years, the power of cashless collars was known primarily within an elite group of senior corporate executives in different companies. Had this knowledge been more widely disseminated to average employees, hundreds of billions of dollars in the net worth of American workers could have been preserved.

Defendants To Be Named In Future Lawsuits
One question that many people are now asking is, “Who will be sued next?” The aforementioned brokerage firms are certainly high on the list. I found it interesting that the WorldCom employees are only suing the Atlanta, GA branch office of Solomon Smith Barney. Presumably, almost every branch office of every full service broker in America could face similar litigation given that zero cost collars could have been used to protect stock holdings in thousands of American companies. As I am finishing this article in early March 2002, I have just learned that several other brokerage firms have been sued on similar grounds. Should the plaintiffs in these cases prevail, similar litigation could create a full employment act for securities and class action attorneys across the country.

Perhaps even easier targets are the companies themselves. Why didn’t WorldCom offer its employees any education in managing the risk of holding company stock? WorldCom, like most major corporations, probably spends millions of dollars designing and offering training programs in dozens of areas. Their employees have lost hundreds of billions of dollars in net worth because they did not possess this knowledge and now they could potentially be held responsible.

Moreover, if companies did not want to go to the trouble of educating employees on how to manage the risk of owning company stock, why didn’t they hire pension fund managers or 401(k) managers who would perform this risk management? On these grounds also, thousands of companies may be held liable for hiring money managers who did not fulfill their responsibilities and for not supervising those money managers.

Pension and 401(k) Managers: Managing hundreds of billions of dollars in assets, pension, and 401(k)s, managers cannot feign ignorance of zero cost collars and other risk management techniques. Why did they not actively use these powerful forms of portfolio insurance? Juries across America may soon be seeking answers to this question.

Money managers are some of the most highly paid people in our society. While their clients lost billions of dollars in unprotected positions in company stock, many money managers themselves took home paychecks of from $250,000 to well over $1 million per year. If held even partially responsible for not managing the company stock risk in their clients’ portfolios, they may be giving some of this money back.

Compensation Consultants: Having done some work in compensation consulting and compensation research myself, I have to admit compensation consultants may bear some of the blame for not helping their clients manage the risk of concentrated positions in company stock. After all, compensation consultants are the ones who design the programs that place so much company stock in retirement plans and employee stock ownership plans. They also design pay packages that can top $10 million per year for senior executives and pay plans, stock option plans, and retirement plans for all other levels of the organization.

Some compensation consultants have played an active role in helping senior executives use zero cost collars to protect millions of dollars of their net worth. Why didn’t they share these powerful asset protection techniques with lower level employees? All major companies and many smaller ones use compensation consultants. Due to their perceived expertise in all areas of pay, benefits, and retirement plans, it is likely that compensation consultants may be targeted in some litigation.

A Look Into The Future
When I began researching and writing about the importance of protecting employee investments in company stock, it was sometimes difficult to convince people of the need for education, guidance, and reform in this area. One of my associates contacted more than 100 major companies to interest them in educating their employees on risk management of company stock positions. Despite the oft-repeated cliché that “people are our most valuable asset,” not one company wanted to share this knowledge with average employees.

However, with the meltdown of Enron, Global Crossing, Kmart, and multi-billion dollars losses in the stock values of AT&T, Lucent, Cisco, Halliburton, and hundreds of other companies, interest in these techniques is finally developing. In a February 22, 2002 article in the Los Angeles Times, an executive at Gannett is quoted as saying, “The fact that employees were hurt so badly at Enron caused everyone to look up and say, ‘Gee, maybe we’d better fix this,’ Nobody really thought about it before. All of a sudden, it was just there.”

No one can predict the future price of a company’s stock and no one knows what will happen in these landmark cases of WorldCom employees suing Solomon Smith Barney for breach of fiduciary duty. There is no guarantee that WorldCom employees will even prevail. Much of the outcome of these cases will depend on how this lawsuit was drafted, the specific charges leveled against Solomon Smith Barney employees and their supervisors, what affirmative defenses Solomon Smith Barney uses, and the background and quality of the expert witnesses each side employs. The outcome will also depend on what evidence is deemed admissible, the depositions of the Solomon Smith Barney employees involved, and the staying power and resources of the law firms involved.

Given that these are individual arbitration cases brought by WorldCom employees and the facts of each individual case are different, I can see some individual cases being won, some being lost and some being settled.

No matter what the outcome of these first trailblazing cases, three things are certain: 1.) Many more cases of this type will be filed by employees who have lost billions of dollars of net worth held in company stock; 2.) A much wider net will be cast that could potentially make defendants out of senior corporate executives, pension and 401(k) managers, compensation consultants, and many different brokerage firms, and 3.) The outcome of these cases and similar cases is likely to affect more than 30 million Americans who own company stock

It is unfortunate that it sometimes takes massive amounts of litigation to spur reform in our society. In the end, I believe we will end up with some of the best retirement and company stock ownership plans in the world. These new risk managed plans will help millions of Americans to enjoy upside gain in the value of their company stock while at the same time avoiding or minimizing downside risk. These new risk managed plans will strengthen our nation and will help America preserve the strongest economy the world has ever seen.

Dr. Donald Moine is an industrial psychologist who has specialized in pension, 401(k) and stock option reform and the protection of company stock. Dr. Moine is one of the founders of the Association for Human Achievement, Inc. in Palos Verdes, California, and has served as an advisor to dozens of major corporations on four continents. Dr. Moine has served as an expert witness in a major $140 million stock options lawsuit. For information on his seminars, corporate training, consulting, and expert witness work, contact him at


Post Script:
Several hours after I submitted this article to, I learned that some of the cases brought by WorldCom employees had already been settled. It is incredible that the brokerage firms involved apparently did not even mount a defense, but instead opted to relatively quickly settle some of these cases. With such relatively easy victories in some of these first landmark cases, many more cases will undoubtedly follow.

Even more fascinating is the fact that two of the Solomon Smith Barney brokers, Phillip Spartis and Amy Elias, have just sued their previous employer, Solomon Smith Barney for settling some of these cases instead of defending them. Spartis and Elias claim that Solomon Smith Barney has destroyed their $2 billion book of business. If you have lost a significant amount of money in unprotected company stock, you may wish to contact a good securities lawyer to learn about your rights for recovery. If you are an executive at a publicly traded company, you should consider offering an educational course on how to protect company stock and you should consider hiring experts to help your employees manage the company stock they own.

Leave a Reply

Do you have a question or need more information? Get in touch with us