Department of Labor Sues Enron Fiduciaries

The Department of Labor has sued the fiduciaries of Enron's 401(k) plan and ESOP for improperly encouraging employees to invest in Enron stock and for continuing to hold Enron shares in the plan when there were reasons to believe that was not prudent. Enron's 401(k) plan was primarily invested in Enron shares and the ESOP was essentially entirely invested in the stock. The two plans owned over 25 million shares in 2001. Charged as fiduciaries are the plans' Administrative Committees, Enron Corporation, Kenneth Lay and Jeffrey Skilling (the former CEO and CFO of the company), Enron's board, and the plans themselves. The suit alleges the Administrative Committees, despite numerous signs of problems, never monitored plan holdings of Enron shares, never question or slowed investment in these shares, never considered the prudence of concentrating assets in Enron shares, and never considered freezing or removing Enron shares as an investment option for employees. Two of the members of the Committee, the DOL alleges, had specific information that accounting and financial irregularities were about to cause serious problems. Enron, although not a named fiduciary, never sought to monitor the committee, remove its members, or correct misstatement by Kenneth Lay regarding Enron's financial condition. Lay and Skilling also never monitored the committee, never supplied them with adverse information they had about the company, and Lay misled participants about the company's financial condition, even encouraging them to buy shares when he knew that problems were forthcoming. The Board is accused of failing to appoint a trustee to manage the ESOP's holding of shares, and never performing that duty itself.

While the egregious facts in the Enron case set it apart form other ERISA cases, the case could provide guidelines on when ESOP and 401(k) plan trustees should act to diversify plan assets.

For a copy of the complaint, go here. For a detailed discussion of ESOP fiduciary obligations, see attorney David Ackerman's 99-page article on the topic, which appeared in the Winter 2001 issue of our Journal of Employee Ownership Law and Finance. [As of 2008, this article has now been expanded into a book we publish, Questions and Answers on the Duties of ESOP Fiduciaries.]