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Who's to blame?

When Enron Corp. failed spectacularly in December 2001, no one doubted that a rash of class-action lawsuits would follow its bankruptcy filing. And they did. Some 24,000 former employees are suing Enron and its senior management for causing the meltdown of the energy company's defined contributions programs. At the start of 2001, 60 percent of the plans' assets were held in Enron stock, and many employees incurred huge losses in their retirement savings as the shares collapsed.

That lawsuits would emerge under such circumstances is hardly a shock, but the direction of some of the legal finger-pointing has thrown the financial services industry for a loop.

A consolidated complaint has pulled together all the Enron-related lawsuits over the employees' retirement plans in a case known as Tittle v. Enron (former Enron worker Pamela Tittle is the lead plaintiff). Initially filed in April 2002, the case, currently in discovery, will eventually be tried in the U.S. District Court in Houston. The long list of defendants includes such expected targets as Enron executives and directors; accounting firm Arthur Andersen; investment bankers Citigroup, Credit Suisse First Boston and J.P. Morgan Chase & Co.; and law firm Vinson & Elkins. But in an unsettling development for the retirement industry, Tittle v. Enron also contends that the company's trustee bank for the retirement plans, Northern Trust Co., shares responsibility for the dramatic decline in the plans' assets.

This is not the first suit against a plan trustee -- in December 2001 Fidelity Investments was sued by a participant in the 401(k) of another bankrupt company, Harnischfeger Industries -- but it is now the most visible. For the 401(k) industry it raises the troubling specter that courts might rule that plan trustees have greater fiduciary obligations than once imagined. Traditionally, the basic functions of a trustee were to receive participant contributions, make distributions and process the securities trades in 401(k) accounts.

"The charges in this suit against Northern Trust could open a Pandora's box," says Stephen Saxon, a partner with Washington, D.C.­based Groom Law Group, which represents an industry association that includes plan trustees.

In hindsight, the Enron plans were clearly overloaded with company stock, and Tittle v. Enron not surprisingly resembles other employee suits involving employer stock in 401(k)s. In these cases, plaintiffs argue that companies withheld information about their sagging prospects from employees whose 401(k)s were full of the shares. Among the companies named in such suits: AOL Time Warner (in a suit filed last month), Global Crossing, Lucent Technologies, Providian Financial Corp., Williams Cos. and WorldCom.

Last summer the Department of Labor filed an unusually timed "friend of the court" brief on behalf of the Enron plaintiffs, raising the profile of the case. "It's not too common for the DoL to file a brief when a suit is still in trial court," explains Linda Shore, a Washington, D.C.­based attorney not party to the Enron suit, who specializes in fiduciary issues in employee benefit cases. Generally, she says, the regulators wait for an appellate or district court to provide an opinion. Regulators refuse to comment.

The central questions regarding Northern Trust: When does a trustee have an obligation to intervene in a 401(k) plan? When should a trustee raise a red flag to plan participants about the risks of the plan's investments or the lack of diversification? If a trustee is aware that the employer is facing business problems or that its shares may be overvalued, is it obligated to call this to the attention of the plan participants?

The parameters of a trustee's fiduciary liabilities and duties -- most notably, the circumstances under which it is obliged to intercede -- have not been established in court or by Congress, and they are clearly a central issue for 401(k) plans with lots of company stock.

By Shore's reading of the Labor Department amicus brief, the regulators would extend a recent U.S. Supreme Court ruling, Varity v. Howe, to clarify a fiduciary's obligation to alert participants when remaining silent could have disastrous consequences. The DoL brief encourages the court to examine this issue closely, while not taking a position on it.

"It's very ill-defined, this duty to inform," says Groom Law Group's Saxon, whose firm filed a reply to the DoL on behalf of the Society of Professional Administrators and Record Keepers, an association representing about 250 companies that provide these services to defined contribution plans. About 40 percent of the group's members also provide trustee services.

Among the largest trustees in the business are Bank of New York Co., Fidelity, J.P. Morgan Chase, Mellon Financial Corp., Merrill Lynch & Co., Northern Trust, Putnam Investments, State Street Corp. and Vanguard Group.

"Who has this duty to inform?" asks Saxon rhetorically. "How do you meet it? Anything I disclose will be insufficient." He is concerned that without a clear definition of the fiduciary's responsibilities, the trustee will be vulnerable to charges that it should have known the details of its client corporations' finances and then acted on that information.

"Between ERISA and these suits, there is plenty of confusion about who is responsible for what," says Grant Seeger, CEO of Security Trust Co., a Phoenix-based trustee with $12 billion in assets under administration.

Enron provided a 50 percent match in company stock of the first 6 percent of employees' wages that went into the 401(k) plan. Enron workers could not sell the company stock holdings in their accounts until they reached age 50. In the suit, the plaintiffs argue that Northern Trust should have been encouraging the over-50-year-olds to diversify by selling off their company stock holdings.

Enron's 401(k) gives the trustee some responsibility for diversification, says Ron Kilgard, a partner at Keller Rohrback, lead counsel for the plaintiffs. That, he notes, "was somewhat unusual" for a 401(k) and gives the employees an opportunity to press their claim.

In the other trustee-related charge in the suit, the plaintiffs contend that Northern Trust should have prevented the so-called blackout period that occurred in late October and early November of 2001. In all defined contribution plans, when a company moves from one trustee to another -- frequently part of a transition between recordkeepers -- the changeover puts the plan's assets out of reach of its participants for anywhere from one day to two months.

Enron executives had started to map out their plans' move from Northern Trust to Wilmington Trust Corp. in March 2000. The blackout period was initially slated to fall between September 14 and October 23, 2001, but, as frequently happens in these transitions, the move was delayed. It ultimately kicked in October 26 and ended November 14.

When did Enron employees learn of this schedule? The company's notice to participants was mailed on October 4. At the time there were no rules governing how far in advance a company had to alert its employees of an impending blackout period. Now, courtesy of the July 2002 Sarbanes-Oxley Act, the law requires a 30-day advance notice.

For Enron's employees, the timing of their plans' blackout periods could hardly have been worse. In January 2001 the stock sold for $83.13 a share. By August 14, 2001, when CEO Jeffrey Skilling resigned, the stock had fallen almost 50 percent, to $42.93. After several more damaging disclosures, on October 25, the last day that qualified Enron employees could trade before the blackout period began, the stock closed at $15.50.

By the time Enron employees regained access to the 401(k) accounts, on November 15, the stock had fallen a further 36 percent, to $9.91. Less than three weeks later, on December 2, 2001, the company filed for bankruptcy. In January 2002 the stock was delisted from the New York Stock Exchange; it recently traded on the Nasdaq over-the-counter market for $0.05 a share.

The plaintiffs contend that in agreeing to allow the blackout period to proceed when it did, Northern Trust effectively prevented Enron employees from selling their stock at a time when the price was collapsing. The plaintiffs suggest that the trustee should have acted to stop or delay the blackout period.

Not at all, insist the lawyers for Northern Trust. "These alleged duties of raising red flags are simply not there in ERISA or in the trust agreement," says attorney Linda Addison, a partner with Houston-based Fulbright & Jaworski, which is representing Northern Trust. What's more, Addison points out, "the timetable [for replacing a trustee and recordkeeper] is driven by the successor recordkeeper." In other words, it was not up to Northern Trust to help choose the investments or to protect Enron employees from their own choices. In addition, Northern Trust did not control the timing of the blackout, and so it cannot be held responsible for its effect.

Who, if anyone, bears that responsibility? That question will be answered in court, but, given the complexity of Tittle v. Enron, it won't be anytime soon.