Human Capital & Careers

‘Directed Trustee’ Cleared in Stock Drop

Merrill Lynch is awarded summary judgment in a class action brought by WorldCom employees whose 401(k) plans suffered along with the company.
Stephen TaubFebruary 2, 2005

A federal judge Tuesday ruled that WorldCom Inc. employees who pumped a big chunk of their 401(k) assets into their company’s stock during the market’s 1990s bubble, then saw the shares plummet in value, can’t blame the plan’s trustee for that investment decision.

Employees of the company now known as MCI Inc. had sued Merrill Lynch, the trustee, for not advising them to sell their company’s stock from the retirement plans before the stock collapsed. However, Judge Denise Cote of the U.S. District Court in New York granted summary judgment to Merrill, saying that the firm wasn’t liable, according to wire-service reports.

The brokerage firm did not have nonpublic information about the company’s stock that would have warranted such an “extraordinary action,” the judge ruled, and it was not the fiduciary making investment decisions for the plan. “We are pleased that the court recognized there was no merit to this claim,” said Merrill spokesman Mark Herr.

“We are obviously disappointed,” said Lynn L. Sarko, a lawyer at Keller, Rohrback LLP in Seattle who represented tens of thousands of employees in the class-action suit. He has not yet decided whether to appeal.

The case could have wide implications, since it was the first time employees tried to hold a “directed trustee” responsible for investments that lost value in the plans, according to Sarko.

The attorney added that this was also the first case in which the judge relied on a recent Department of Labor bulletin that addressed how much discretion trustees have over retirement plan investments. “As a directed trustee, Merrill Lynch was under no duty, of course, to investigate the manner in which WorldCom administered the plan, and had no duty to inquire whether WorldCom was undertaking prudence reviews of the plan’s holdings,” Judge Cote reportedly wrote.

Later this month the judge will preside over a civil trial against several Wall Street firms sold WorldCom securities to investors.