WorldCom, Tyco Sued Over 401(k) Losses

July 24, 2002
By Dan Christensen
Miami Daily Business Review

Several South Florida lawyers are catching a rising national wave of litigation against scandal-plagued corporations by filing shareholder class-action lawsuits here against WorldCom Inc. and Tyco International Ltd.

The twist is that the plaintiffs named in the half-dozen lawsuits filed in U.S. District Court in South Florida aren’t ordinary shareholders who suffered enormous losses caused by alleged corporate or accounting misdeeds and who are filing standard fraud actions.

Instead, the plaintiffs in these new suits are current and former WorldCom and Tyco employees whose 401(k) retirement savings plans have been crushed by collapsing company stock prices. The employees claim that company officials violated various provisions of the Employee Retirement Income Security Act (ERISA) by manipulating and deceiving them about the holdings in their 401(k) plans.

Since June 28, three civil enforcement actions against WorldCom, former CEO Bernard J. Ebbers and other company officers and directors have been filed in U.S. District Court in South Florida. Judge Daniel T.K. Hurley in West Palm Beach has drawn two of those cases; one is assigned to Judge William P. Dimitrouleas in Fort Lauderdale.

The plaintiffs are current and former employees of Clinton, Miss.-based WorldCom who reside out-of-state. Attorney Steven M. Katzman of Boca Raton says he and his co-counsel filed the two suits in South Florida because WorldCom administers its self-directed 401(k) accounts out of an office in West Palm Beach. Coral Gables solo practitioner Robert C. Gilbert has filed a similar lawsuit against WorldCom. He was unavailable for comment.

In nearly identical language, the three complaints allege that WorldCom and its officers and directors exerted “undue influence” over employees to encourage them to invest in the company’s stock. WorldCom also restricted the ability of participants to freely sell those shares, the complaints allege.

In addition, the WorldCom suits allege that the company breached its fiduciary duty to the 401(k) participants and violated the provisions of ERISA by failing to provide accurate information about the company’s financial condition, then allowing those employees to concentrate too much money in WorldCom stock.

“The company had a duty to protect them at the same time the company was playing fast and loose with its financial reporting,” says Katzman, a partner at Katzman Wasserman & Bennardini. “WorldCom was more interested in meeting the [stock] analysts’ numbers and maintaining a high share price than they were in using numbers with integrity. The end result was when the truth came out, the employees’ retirements were destroyed.”

The complaints seek class certification, restitution, interest and attorney fees. Spokesmen for WorldCom did not return telephone calls seeking comment.

The employee lawsuits against Tyco make similar allegations.

The $63 billion implosion of Enron Corp. last year threw a national spotlight on corporate liability regarding employee retirement plans. But even before that attention, the number of ERISA suits involving retirement plan losses filed nationwide climbed 12 percent last year to 10,292 cases, according to statistics compiled by the Administrative Office of the U.S. Courts.

Still, the court’s statistics show, ERISA lawsuits remain rare in federal court in South Florida. No cases categorized as ERISA lawsuits have been pending in court here since at least 1997. ERISA claims, however, are sometimes included in other types of cases.

“It’s a pretty small fraternity of lawyers who do these cases, but I think it’s about to grow a lot,” says Joseph Whatley Jr., a partner at Whatley Drake in Birmingham, Ala., who is co-counsel in one of the WorldCom suits.

“There are so many more cases out there now. This is a relatively new area of litigation. I think none of us realized the amount of wholesale corporate fraud going on in the U.S. in company after company.”

Assets available

Even before WorldCom’s $107 billion bankruptcy filing Sunday, many of the long-distance and data-service company’s 17,000 employees had been hit hard. Two years ago, before WorldCom disclosed it had improperly booked $3.8 billion in operating expenses as capital expenditures, the company’s stock was trading at $56 a share. By late Monday, a share of WorldCom cost 14 cents.

The total loss to WorldCom’s 401(k) participants – whose plan was 62 percent invested in WorldCom stock, according to court papers – is estimated to be $800 million.

In contrast, when he quit in April, Ebbers received a $1.5 million annual pension, a $750,000 annual pension for his wife, free medical and life insurance benefits for life and the part-time use of WorldCom’s corporate jets.

WorldCom’s filing for Chapter 11 bankruptcy protection drains away lots of money that could have been recovered for the 401(k) participants. But a large pool of cash and assets remains, Whatley says.

“We’re also suing individuals, and there is a lot there, and, if that’s not nearly enough, there’s always the insurance policies,” he adds. The policies include those that cover WorldCom’s directors and officers, and any ERISA fiduciary policies. Still, “there won’t be enough to cover all the losses,” Whatley says.

About 10 similar cases seeking class-action status have been filed in federal courts elsewhere; steps are being taken to consolidate the cases, Katzman says. Where that will be, and which lawyers will get the lucrative job of leading the WorldCom 401(k) litigation, has yet to be decided, he says.

First Tyco suits

Besides his work on the WorldCom case, Whatley is co-counsel with Lee & Amtzis in Deerfield Beach in one of three ERISA class-action lawsuits that seek to represent all of Tyco’s 401(k) plan participants.

The three Tyco ERISA suits have been filed since July 3 in U.S. District Court in South Florida. They are apparently the first of their kind in the nation against Tyco, says Lee & Amtzis partner Eric Lee. The defendants are Tyco and its directors and officers, including its recently departed and indicted CEO L. Dennis Kozlowski.

George Barrett, a partner at Barrett Johnston & Parsley in Nashville, Tenn., is co-counsel with Lee & Amtzis on another Tyco 401(k) lawsuit and with Gilbert on a WorldCom case. The allegations in those suits track the allegations in the other 401(k) cases.

Investors have punished Tyco’s stock this year amid questions about its accounting practices and business plan, particularly since Kozlowski’s indictment for tax evasion last month. In January, the stock traded around $58 a share. Today, a share is worth about $11.

“This is similar to the Enron situation, in which people lost their life savings,” Lee says. “Tyco had a fiduciary obligation to these people.”

Like the named WorldCom plaintiffs, the Tyco plaintiffs identified in the lawsuits don’t live in South Florida. But the suits were filed here because the Bermuda-based conglomerate’s huge fire and security business, including Sensormatic and ADT, is headquartered in Boca Raton.

Two Tyco cases are assigned to Senior U.S. District Judge Kenneth L. Ryskamp, with another case assigned to Judge Hurley.

Tyco spokesman Gary Holmes declined comment because the litigation is pending.

Claims against brokerages

Lawsuits aren’t the only way that battered employee-stockholders are fighting back. Some are pursuing securities arbitration claims with the nation’s stock exchanges against brokerage houses.

For example, Klayman & Toskes in Boca Raton represents about 70 WorldCom employees who participate in the company’s Employee Stock Option Plan (ESOP). Those employees have lost more than $50 million, says partner Lawrence L. Klayman.

WorldCom employees now have claims pending against Salomon Smith Barney, Morgan Stanley and Merrill Lynch.

“The suits allege that the firms failed to recommend to WorldCom ESOP participants hedging strategies to protect their concentrated position in WorldCom as a result of the exercise of their stock options through the use of margin,” says a notice the firm issued to WorldCom employees late last month.

“The recent events surrounding WorldCom’s disclosure of accounting irregularities points out the fallacy behind any advice given to clients to concentrate all of their assets in a single stock without any protection,” says the notice.

The brokerage firms have denied any improper conduct.

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