Ruling Lets Enron Workers Sue Lay,
Northern Trust Over Lost Savings

A federal judge in Texas ruled that former Enron Corp. Chairman Kenneth Lay and Northern Trust Corp., trustee of Enron's 401(k) retirement plan, can be sued under federal pension law for allegedly failing to protect Enron employees.

The ruling could lead to greater protections for workers with employer stock in their 401(k) and other retirement programs. Companies using their own stock in employee-retirement plans, a widespread practice, came under increased scrutiny from Congress and government regulators after Enron's stock collapse devastated its employees' retirement savings.

The wide-ranging, 329-page ruling by U.S. District Judge Melinda Harmon in Houston came in response to motions brought in lawsuits by former employees of Enron, which filed for bankruptcy-court protection in late 2001. The ruling said Mr. Lay and Northern Trust -- along with others who oversaw Enron's retirement programs -- had a responsibility to ensure that the plans' investments were prudent. This responsibility extended to decisions about how much Enron stock employees held in their retirement accounts, the judge said.

More than 60% of Enron's $2.1 billion in 401(k) assets were invested in the company's own shares at the end of 2000. The plan covered about 20,000 Enron employees, retirees and their beneficiaries. Enron stock, which peaked at about $90 a share in 2000, currently trades for less than 10 cents a share in over-the-counter trading.

Tamar Frankel, a Boston University law professor, said she expects the ruling will put executives at other companies and financial firms on notice that they could be held accountable for decisions they make about retirement plans. That's bound to give employees an additional measure of protection, she said. "It will affect behavior," at least for a time, she said.

The ruling is the latest to underscore executives' responsibilities for their companies' retirement plans. In July, a federal judge in Oklahoma allowed employee claims to proceed against a range of defendants who made decisions about retirement plans at Williams Cos., a Tulsa, Okla., natural-gas pipeline company. In June, a U.S. District Court judge in Manhattan allowed claims to proceed in a similar case involving telecommunications company WorldCom Inc., which is reorganizing under bankruptcy-court protection and has been renamed MCI.

But benefits lawyers said rulings in some other court cases have set narrower limits on the range of company officials who employees could sue alleging breach of fiduciary duty in the administration of retirement plans.

The Enron lawsuits, which have been consolidated, accuse the company, Mr. Lay, other Enron executives, the retirement plans' administrators, Northern Trust and others of misleading company employees by encouraging and in some cases requiring them to hold Enron stock in their retirement accounts, at a time when the stock price plummeted from an artificially inflated level. Several former Enron executives have been charged with manipulating the company's financial results, ultimately driving the company into bankruptcy.

Enron contributed its own shares to employee retirement accounts and placed restrictions on when these assets could be moved to other investments.

Judge Harmon's ruling addressed motions from defendants, including Mr. Lay and Northern Trust, to have certain claims against them dismissed. The judge dismissed racketeering claims related to the retirement plans against Enron, company executives, and a series of outside groups, including a number of large investment banks and Enron's outside law firm. But she let stand the complaints of alleged breach of fiduciary duty. The ruling doesn't establish wrongdoing on the part of any individual or company.

Enron declined to comment Wednesday afternoon, saying attorneys were still reading the ruling. An attorney and a spokeswoman for Mr. Lay couldn't be reached for comment.

In a statement, Chicago-based Northern Trust said it "fulfilled all of our obligations to the participants in the Enron benefit plan and have acted in accordance with all applicable laws." The company didn't respond to requests for additional comment.

Lawyers familiar with the case said Northern Trust argued that its obligation was to follow instructions from Enron officials who set policy for the retirement plan.

But Lynn Sarko, a lead plaintiffs' attorney in the case, challenged that premise. "Following orders is no defense," he said.

Martha Hutzelman, a benefits attorney and senior counsel with the Ice Miller law firm in Washington, which generally represents employers, said the Enron ruling and those in similar cases could scare away companies and individuals who otherwise might be willing to help run retirement plans. "It will make anyone who has any fiduciary responsibility toward a [retirement] plan at all very cautious," she said.

At the heart of the ruling is the question of who counts as a fiduciary for retirement plans and in what circumstances -- in other words, who has a duty to act in the best interests of plan participants, rather than their own or their company's best interest.

Ms. Hutzelman said that many of those involved in running a retirement plan have assumed that only those explicitly named as fiduciaries have general responsibility to see that the plan is run well, while others have only a limited fiduciary obligation. Instead, she said, recent court rulings suggest the scope of executive and corporate responsibility could be "far more expansive than what has ever been understood before."

Write to Theo Francis at theo.francis@wsj.com¹

Updated October 2, 2003