Merrill, Ebbers Must Face Lawsuit Over Pension Plans

Merrill Lynch & Co. and WorldCom Inc. former Chief Executive Bernard J. Ebbers failed in their bid to dismiss a suit filed by employees of the long-distance company whose pension plans suffered after its stock collapsed last year.

Ebbers and the brokerage must stand trial to defend their administration of the pension plans, U.S. District Judge Denise Cote in New York ruled this week.

The employees charge that Merrill did not urge them to sell WorldCom stock held in their plans even though the brokerage should have known the shares were overvalued.

Ebbers and Merrill may be more likely to settle the case now that they face the expense of continued litigation and pretrial evidence gathering, Robert A. Mintz, a former federal prosecutor, said.

“This should mark the end of an era when companies believed they could hang their own employees out to dry,” said Lynn Sarko, a Seattle lawyer representing WorldCom employees. “Fiduciaries cannot on the one hand know that the company is engaged in unlawful practices that render the stock an imprudent investment, and yet, on the other, continue to allow the plan to offer the stock as an investment option.”

Merrill and Ebbers may have violated their fiduciary duty to employees by keeping WorldCom shares in company pension plans as the stock plunged, Cote said. WorldCom last July filed for bankruptcy protection after revealing massive accounting irregularities.

Employees did not specify in their suit, filed last year, how much they seek in damages. WorldCom lost $183 billion in market value from its stock peak in 1999 to its bankruptcy filing.

“The judge’s ruling makes clear that if Merrill Lynch knew the stock was unsuitable because of large-scale corporate wrongdoing, or for any other reason, they had a fiduciary duty to act responsibly,” Sarko said.

WorldCom employees should have the opportunity to prove their allegation that Merrill was wrong to follow investment instructions from Ebbers or other company executives even though it knew that doing so might damage the financial interests of employees, Cote said.

Merrill “retained the discretion, and indeed the obligation” to follow only proper directions of company advisors, the judge wrote in her 49-page ruling.

Merrill spokesman Mark Herr in New York declined to comment. Ebbers’ lawyer Reid Weingarten did not return calls seeking comment.

Cote also ruled that WorldCom’s plan administrator, Dona Miller, must stand trial to defend allegations that she violated her fiduciary duty.

Miller could not be reached for comment.

But Cote dismissed Arthur Andersen, the plan’s auditor, and 16 WorldCom executives and employees from the suit.

Merrill shares fell $1.10 to $47.80 on the New York Stock Exchange, amid a broad decline in brokerage issues.