by Alvin D. Lurie

A Shameful Burlesque: From Whence Relief for Enron's Pension Participants

If the performance of the chief two Enron executives testifying before a Congressional committee last Spring is any indication, it will take something like a bathysphere probing sunken sea wreckage to get to the bottom of the Enron crash. Former CEO Skilling, telling little more than a POW protected by the Geneva Convention, shed memory of the affair as shamelessly as a stripper sheds pasties, resorting to failed recollection to keep his interrogators at bay; while his mentor, Kenneth Lay, who both preceded and succeeded Skilling in the top job, no less shamelessly shed conscience in invoking constitutional cover (the Fifth Amendment) to the same end. These tactics can only further whip up the legislative feeding frenzy engulfing Capitol Hill and the White House, as they vie with each other to form new law for dealing with the myriad mischiefs that have been uncovered. Will any of this promised and proposed new legislation help the actual Enron pension participants? Is there no other balm for this grievously harmed group? To these questions, I submit, the answers are No and Yes.

The Good Book Says...
It is said in Ecclesiastes that there is nothing new under the sun. It is doubtless true that never before have so many pensioners lost so much so fast as Enron's 401(k) members -- $1.3 billion losses by 20,000 participants in less than a year, as the Enron stock, representing 60 percent of their plan holdings, sank steadily during most of the first nine months of the year from 80 to 30, then losing another two-thirds of its value during a "blackout" period in October when no stock transactions were permitted to plan members, before going into free fall in the frantic four weeks preceding the Company's filing for bankruptcy early December, leaving the stock at pennies and their pensions likewise.

Still, bearing out the wisdom of Ecclesiastes, it did all happen before, most notably some two score years before, when the bankruptcy of a major corporation was accompanied by massive pension losses for its employeees, most losing all but a fraction of their retirement funds. That was the case of the once mighty Studebaker auto company -- though lacking all the Enron elements of apparently questionable (or worse) business and oversight actions by accountants, lawyers, bankers and government regulators. The horrifically underfunded Studebaker plans, and the concomitant frustration of the retirement benefit expectations of the pension participants, brought much wringing of hands and expressions of shock in high places, leading to calls for wholesale legislative reform of pension regulation, that provided the congressional energy necessary to accomplish enactment of ERISA in 1974. Will Enron give us ERISA II?

New Law Coming
Few among the pension cognoscenti doubt that a major new pension reform law will emerge in the wake of the Enron debacle, but, it is to be expected, so long in the wake as to do little to ameliorate the suffering of Enron's 401(k) and other pension plan participants. More significantly, whatever its ultimate design, any such legislation presumably will only prevent future Enron-type melt-downs. The President intimated as much in his State of the Union address on January 29th, when he called for "new safeguards for 401(k) and pension plans." The Democratic "response" to the President, delivered by House Minority Leader Gephardt (D-MO), was even more pointed, citing the need to protect pensions "against the next Enron."

The President has said the government was going to take a "good hard look" at how to help Enron pensioners, expressing his "great concern" for shareholders who, because of "some rule or regulation, got trapped in this awful bankruptcy and lost their life savings". However, the evidence so far suggests the rhetoric will outdistance the legislation. The president, drawing on the recommendations of a cabinet-level working group he constituted, has proposed creative legislative solutions for addressing the Enron-type problems, like barring disparate restraints on corporate executives and plan participants in disposing of their shares during blackout periods, liberalized stock diversification opportunities, lessened immunization of management against liability for poor investment results during blackout periods, and more company-provided information concerning pension accounts.

Flight Of The (S.O.) Bees
The ability of executives and directors to dump millions of dollars worth of their Enron stock, while the rank-and-file were forced to retain their rapidly shriveling shares, particularly drew Mr. Bush's ire, and is, indeed, the most compelling evidence to have so far emerged of management self-agrandizement at the expense of its workers. However, the president's and conressmen's actual proposals, which speak well to the Enron-type problems, do not seem designed to alleviate the actual Enron-inflicted pain on its "trapped" workers.

I would say to the Enron participants, do not despair. If not another line of legislation is added to already overwordy ERISA or the Internal Revenue Code, there is language aplenty to redress the alleged misdeeds (if they can be proved) of a management bent more on protecting the company and their own skins than the best interests of the plan participants.

ERISA says right up front that it is designed for the express purpose of "protecting the interests of participants in employee benefit plans...by establishing standards of conduct, responsibility, and obligation of fiduciaries, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts". In great detail the statute mandates that benefit plan fiduciaries discharge their duties "solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits...with the care, skill, prudence and diligence" implicated under its so-called Prudent Expert rule. Further, a fiduciary is adjured against acting, whether "in his individual or any other capacity...in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries". If the necessary acts can be established, the assets of the fiduciaries (including the company) can be reached to make reswtitution.

A Case In Point
There is no shortage of case law developing these principles. Most apt is the Supreme Court's holding in Varity Corporation v. Howe, which found the requisite fiduciary misconduct on which to base an ERISA claim in the plan-sponsoring company's pursuit of its quite legitimate business objective of spinning off an unprofitable division into a separate corporation.

The company's misstep: in talking up the prospects of the new company, it discussed comparable plan benefits that would, it contended, be enjoyed by its employees whom it induced to accept reassignment to the new company. That seemingly peripheral relation of the company's actions, taken in advancement of its business goals, to the plan benefits of participants, however attenuated and incidental, was seen by the Supreme Court as an exercise of the company's fiduciary duties in relation to its benefits plan.

What the Company was obviously about was to move the employees of several unprofitable divisions, that were a drag on the company's assets and profits, and whose present and emerging liabilities were burdening its balance sheet, to accept reassignment to a new company where those negatives would no longer plague the old company. The problem was that, in pursuing this goal, the company engaged in some shameless puffery about the bright business prospects of the new company, which the company knew to be exaggerated, if not downright false, and even told its employees that their welfare benefits would remain as before, not troubling to point out that the new company was actually insolvent from Day One (inflated assets and undervalued liabilities), and that the paper similarity of benefits between the old and new company's plans would mean nothing if the new company went into receivership (as it did within two years after its formation). The trial court called this "a sucker punch (inflicted) on loyal employees who had given a lifetime of service." The Supreme Court obviously agreed.

In the key passage of the opinion the Court, accepting the trial court's finding that Varity "intentionally connected its statements about...the financial health (of the new company) to statements it made about the future of benefits, so that its intended communication about the security of benefits was rendered materially misleading", held that making "representations about the future of plan benefits in that context is an act of plan administration."

So, what we have is a company, wearing the two hats of businessman and fiduciary, and making misleading statements to its plan participants about its business, which led them to take actions that affected their plan benefits. Is that so far from a company telling its employees that its business prospects are rosy, and so inducing them to hold on to their company stock?

What Matters The Above?
What bearing does all this have on the Enron matter? It is not fair to say at this point, while the facts are still flying around like a swarm of bees that have just been dispossessed from their cosy hive. One can say, however, that the answer to the question of culpability of any of the suspects presently or hereafter to be identified will probably not lie in the 20 or more bills proposed in both houses of Congress, but doubtless already lies in ERISA.

More to the point in this venue, what bearing does the Enron case and any resultant legislative response have on small business plan sponsors? Of the approximately 290,000 small business K plans, maybe a dozen thousand hold employer stock, either by contribution of the sponsor or selection by the participant. So the lockdowns, and blackouts and other restrictions on employee freedom to diversify or completely extinguish their holdings of such stock are largely a non-problem in the small plan community.

Neverthless, legislation once let out of the box follows a course no less meandering than a cat let out of its house, often wandering far afield. So it is with much of the Enron-driven bills now pending, that cast a net far beyond their stated targets. If not nipped in the Congressional staff deliberations now ensuing, such legislation will confront small business, no less than big business, with costly new requirements, ranging from frequent financial reporting and educational materials for participants, to imposition of fiduciary liability for investment losses (not confined to employer stock) even where the investments were freely chosen by participants.

Moreover, the principles of the Varity case are not predicated on the holding of employer securities in the plan. The small business plan sponsor, when acting as a fiduciary (that is, usually a trustee or plan administrator), must always take care not to use his position to advance the interests of the company over protection of the interests of participants. A famous judge stated this unforgiving command for fiduciaries: "a punctillio of an honor the most sensitive". Even if those words are not found in company manuals or summary plan descriptions, let alone every day speech, you get the idea. No sucker punches welcome here.  So this stuff matters!

[Ed. note: The preceding article was adapted from and expands upon the author's article originally published in the June 2002 issue of Mergers and Acquisitions, pg.29 (Panel Publishers), under the title "Dance of the Ecdysiasts: What Balm for Enron's Pension Participants?"]