Of the alleged misdeeds that former MassMutual CEO Robert J. O'Connell stands accused of, none has stirred as much outrage as his alleged abuse of a notional, or unfunded, account set up to track his deferred compensation. O'Connell, who was dismissed from MassMutual in June, is accused of improper trading in that account.
Critics have focused their attention not only on the trading, but also on how the account was set up in the first place. MassMutual offers top executives a way to "invest" the deferred funds without actually moving the funds into the investment vehicles, which would defeat the tax-friendly status of the accounts. Instead, hypothetical gains and losses are tracked and paid out to executives upon retirement. No real assets are kept in the account. Known as shadow or phantom accounts, they are actually a common tool for deferred compensation, and similar setups are available at many companies that offer such plans.
But most companies that provide this option limit the hypothetical trading to the same types of investments available in the rank-and-file 401(k) plans, namely mutual funds and money-market funds. Other companies tie returns to a set interest rate. O'Connell is accused of playing "fantasy" stock market, and making hypothetical trades in individual stocks and even IPOs. In one instance, he is charged with allotting to his account more shares of an IPO at the initial offering price than he could ever get in the real world. The gain on that stock, and others, helped his deferred-comp account grow 37 percent annually between 1998 and 2005. O'Connell has told the MassMutual board that he had permission to execute those trades.
The day trading of which O'Connell is accused is very rare. But it is not entirely unheard of for a company to allow executives to play the stock market, making daily, even hourly trades with their deferred-compensation notional account balances. Experts would not name these companies, "but they are out there," says Joe Hessenthaler, principal at HR consulting firm Towers Perrin.
While new rules were passed recently that make deferred-comp plans less flexible (see "The Danger of Deferrals," Newswatch, April), they don't address trading options. But for most companies that offer such plans, trading in individual stocks is difficult to administer and often too controversial to touch. Executive-compensation consultants who have marketed the plans have found it a tough sell. "The companies were telling us the plans didn't pass the smell test," says one consultant. — Kris Frieswick
Payback?
Talk about getting a dose of its own medicine. Milberg Weiss Bershad & Schulman LLP, the law firm that has profited handsomely from lawsuits against companies accused of securities fraud, is in some hot water of its own.
A former client of the firm was charged with taking as much as $2.4 million in illegal kickbacks to file lawsuits against publicly traded companies. Milberg Weiss, which is the target of a three-year federal probe, could be accused of paying those kickbacks.
The big question is whether Milberg Weiss will be indicted next, says Michael Gass, an attorney at Palmer & Dodge LLP. "Clearly [the prosecution] would like to get to the firm, since it would be the more culpable party if the allegations are true," says Gass. He adds that the firm could face conspiracy or fraud charges.
Nothing would please former targets more. "There is no shortage of people who want to see something stick against this firm," says Gass.
Others say it would be the first step toward cleaning up an area of law that is fraught with problems. Says Thomas Peisch of Conn Kavanaugh Rosenthal Peisch & Ford LLP: "The whole class-action landscape needs some fumigating."
— Joseph McCafferty
Targeting Underfunded Plans
With U.S. corporate pension plans facing a record $450 billion shortfall, legislation that would force firms to contribute more to those plans is steaming ahead this summer.
In January, President Bush proposed that sponsors fully fund current liabilities as early as 2006 and pay higher Pension Benefit Guaranty Corp. premiums, among other items. Rep. John Boehner (R-Ohio) introduced a similar bill in June, and senators Charles Grassley (R-Iowa) and Michael Enzi (R-Wyo.) have promised to take up the issue in the Senate.
Experts consider the Boehner approach a big improvement over the Bush proposal. Some of its major advantages: the plan preserves asset smoothing and the use of credit balances (but with restrictions on both) and simplifies the yield curve recommended by the Administration as the basis for calculating liabilities. The House bill also uses the plan's funded status, rather than the sponsor's credit rating, to determine whether the plan is at risk.
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