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October 03, 2003

Ken Lay et al Liable to Former Employees

A federal district court in Texas ruled on Wednesday that Ken Lay and other Enron executives are liable to former employees for concealing the collapsing financial situation of Enron, and encouraging employees to keep their 401(k) savings in the stock-- a breach of the fiduciary duties owed to those employees under the federal benefits law, ERISA.

Lay and other execs had been grasping for a loophole to escape this liability and had seized on the idea that disclosing information to employees would have encouraged "insider trading", so -- to serve the public of course -- they had concealed information from everyone.

The court had a simple answer to that defense.

The company should have disclosed the collapsing finances to the public as well. (Summary from BNA Daily Labor Report but full court decision here):

The court, adopting the view asserted by the U.S. Department of Labor in its friend-of-the-court brief in the case, found that the executives' ERISA duties coexisted with the executives' securities law responsibilities.

"As a matter of public policy, the statutes should be interpreted to require that persons follow the laws, not undermine them," the court wrote. "They should be construed not to cancel out the disclosure obligations under both statutes or to mandate concealment, which would only serve to make the harm more widespread; the statutes should be construed to require, as they do, disclosure by Enron officials and plan fiduciaries of Enron's concealed, material financial status to the investing public generally, including plan participants, whether 'impractical' or not, because continued silence and deceit would only encourage the alleged fraud and increase the extent of injury."

Bad news for former partners at the accounting firm Arthur Anderson-- the judge found them "partners in interest" with Enron and on the hook for liability as well.

So good news for former employees at Enron-- they will hopefully be able to get some of their lost retirment money back and take it out of the hide of the Enron execs like Ken Lay.

GOP Trying to Help Enrons of Future Avoid Liability: A proposal to exempt employers from liability for investment advice provided to employees by the same company that administers the employer's 401(k) retirement plan, approved by the House three times in as many years, was introduced for the first time in the Senate the same day as the Texas court decision.

The bill (S. 1698), introduced by Sens. Mike Enzi (R-Wyo.), Kit Bond (R-Mo.), Rick Santorum (R-Pa.), and Health, Education, Labor, and Pensions Committee Chairman Judd Gregg (R-N.H.), provides the exemption if potential conflicts of interest are disclosed to employees.

So under the Senate bill, if Ken Lay had issued boilerplate language saying he was conflicted, he'd have likely been off-the-hook for lying to employees.

Posted by Nathan at October 3, 2003 09:16 AM