November, 2000Stephen H. Cypen, Esq., Editor
1. PENSION BOARDS SHOULD CONSIDER "INVESTING IN LAWSUITS": From an editorial in the October 16, 2000 issue of Pensions & Investments: The newest "asset class" for pension funds may be class action lawsuits; that is, pension funds initiating or joining corporate securities litigation against companies in their investment portfolios, especially as lead plaintiffs. Pension fund involvement in securities litigation was the impetus for passage of the Private Securities Law Reform Act of 1995 (see C&C Newsletter for June, 1999, Item 3). And although progress has been slow, it's catching on: in 1998 cash settlements totaled $1.1 Billion; in 1999, $2.8 Billion; and so far, the Cendant Corp. settlement ($3.4 Billion) alone will surpass previous years. Could pension funds have a fiduciary duty to become lead plaintiffs? Well even if they don't, pension funds do have a duty to recover money lost in illegal corporate activity, and securities litigation may have been an overlooked area. Increased attention to class actions by pension funds is a good thing to the extent they gain better settlements to recover losses and deter other executives from fraudulent activities. And if a rise in activism in the area proceeds the way corporate government activism generally has, then corporate management performance and pension fund investment performance will be better for it.
"To err is human; to forgive is against company policy."
2. VESTED INTEREST IN PROFIT SHARING PLAN CONSIDERED "WAGES" FOR PURPOSES OF ATTORNEYS' FEES STATUTE: Section 448.08, Florida Statutes, provides that the court may award to the prevailing party in an action for unpaid wages, costs and reasonable attorneys' fees. An employee brought an action against his employer to recover his vested interest in a profit sharing plan. In affirming the trial court's determination to award attorneys' fees to the employee, the appellate court found that although the term "unpaid wages" is not defined in the statute, it does encompass more than mere salary. The court had to distinguish the decision of another district court of appeal, Coleman v. City of Hialeah, 525 So.2d 435 (Fla. 3d DCA 1988), which held that benefits given by an employer to an employee as part of a Social Security type scheme -- such as pension benefits, workers' compensation benefits, employee disability benefits, sick-leave benefits or unemployment benefits -- are not considered wages in the commonly accepted use of that term. The court's distinction is quite tortuous: "Even though the profit sharing benefit in this case is retirement-oriented, it cannot be considered a retirement benefit since, like a bonus, it is given as payment of services rendered, thereby distinguishing it from other benefits that are given because of a perceived societal or moral obligation due an employee when he or she can no longer work." C'mon. In any event, at least as to firefighters and police officers, the Coleman rationale is no longer significant because prevailing party attorneys' fees are now authorized under Sections 175.061(5) and 185.05(5), Florida Statutes. Speer v. Mason, 25 Fla. L. Weekly D2357 (Fla. 4th DCA October 4, 2000).
3. AND MORE GREENSPEAK: From Plan Sponsor's "News Dash," more quotes from Federal Reserve Board Chairman Alan Greenspan: "As best we can judge, credible evidence that the rate of structural productivity growth has stopped increasing is still lacking." Translation: productivity is still rising. "Most of us harbor doubts about whether the dynamics of the political process, some of which have been on display in the current budgetary deliberations, will allow the surpluses to continue to grow." Translation: the politicians won't be able to keep their paws off the surplus.
4. FLORIDA D.L.I.S. "CLARIFIES" E-MAIL/PUBLIC RECORD ISSUE: Over four years ago, the Florida Attorney General held that e-mail messages sent or received by employees of a governmental agency are public records and may not be destroyed except in accordance with the retention schedule adopted by the agency and with consent of the Division of Library and Information Services of the Department of State (see C&C Newsletter for July, 1996). However, six months earlier, Department of State General Counsel issued a memorandum concluding that some e-mail messages are public records and others are not. E-mail messages that are not public records need not be retained. E-mail messages that are public records should be retained in accordance with Department of State rules. Counsel goes on to state that courts and other authorities (with no citations) have begun to recognize the existence of "transitory" communications, created without any intention to perpetuate or formalize knowledge. They have only communicative value that is lost as soon as the communication is received. Their informal nature can be compared to a communication taking place during a telephone conversation or verbal communications in an office hallway. Retention periods for e-mail messages containing traditional information such as memoranda and correspondence are adequately covered by existing records retention schedules. However, Counsel recommends that the Department amend its schedules to facilitate disposition of transitory communications, the intimation being that they may be destroyed as soon as they have been received. Frankly, this area is still very unclear -- at least to us. We wish the Attorney General Opinion had made specific reference (http://legal1.firn.edu) to the concept of "transitory" communications or to General Counsel's November 9, 1995 memorandum (http://dlis.dos.state.fl.us/barm/email.htm).
"Be more or less specific."
5. T + 1 TRADE SETTLEMENT LESS THAN TWO YEARS AWAY: Just when we got used to the T + 3 Trade Settlement deadline, we realized that in July, 2002 investment firms will be required to meet a one-day trade settlement deadline. Most firms will have to re-engineer their trading processes and implement new technology to meet the conversion date. The Securities Industry Association estimates that the industry will have to spend about $1.7 Billion in order to achieve compliance, according to a Pensions & Investments report.
6. CUSTODIANS SURVEYED AGAIN: Plan Sponsor has released the results of the 10th Annual Survey of Worldwide Custody Services conducted by its sister publication, Global Custodian. Ranked by total assets, the top twelve are Bank of New York, State Street, Chase Manhattan, Deutsche Bank, Citibank, Mellon Trust, Credit Suisse, Northern Trust, Royal Trust, HSBC-GIS, BNP Paribas and Browne Brothers Harriman. The survey also ranks custodians based on client service, client reporting, securities lending and performance measurement.
7. FORFEITURE OF WORKERS' COMP BENEFITS NOT DOUBLE JEOPARDY: Effective January 1, 1994, Section 440.09(4), Florida Statutes, precludes an employee from Workers' Compensation benefits if he has committed Workers' Compensation fraud (see C&C Newsletter for May, 1999, Item 5). That section does not limit the forfeiture to benefits obtained by virtue of the unlawful conduct. Nevertheless, this statute does not violate the double jeopardy clauses in the Florida and U. S. Constitutions. (Note, the statute also does not violate the excessive fines clauses of those constitutions because a "fine" means payment to the government.) Wright v. Uniforms for Industry, 25 Fla. L. Weekly D2468 (Fla. 1st DCA, October 17, 2000).
"A sinner can reform, but stupid is forever."
8. NO FLORIDA CIVIL RIGHTS ACTION WHERE EMPLOYEE TERMINATED FOR DISABILITY: An employee was discharged from employment because he was totally disabled at the time and unable to work for an indefinite period. Such discharge was not unlawful under Section 760.10(8)(a), Florida Statutes, since his hospitalization and illness prevented him from performing the physical requirements of his job, even with reasonable accommodation. Further, there was no cause of action for discriminatory refusal to rehire because the employee did not advise the employer that he was available for work or otherwise seek to be rehired. Application for unemployment benefits is not the same as reapplication for employment. Sections 760.01-760.11, Florida Statutes, the Florida Civil Rights Act, should be construed in conformity with the Rehabilitation Act and the Americans with Disabilities Act. Tourville v. Securex, Inc., 25 Fla. L. Weekly D2473 (Fla. 4th DCA, October 18, 2000).
9. FEDERAL COURT FINDS NO USERRA VIOLATION: The Uniformed Services Employment and Reemployment Rights Act, 38 USC §4311, et. seq. (USERRA), prohibits an employer from denying any benefit of employment to a member of the Uniformed Services on the basis of his military obligation. A burden-shifting framework is used to determine whether an employer has discharged in violation of USERRA. The employee must initially establish a prima facie case of discrimination by showing that his military status was a substantial or motivating factor in the employer's decision to terminate. A motivating factor is not necessarily the sole cause of the action, but rather is one of the factors that a truthful employer would list if asked the reasons for its decision. Military status is a motivating factor if the employer relied on, took into account, considered or conditioned its decision on that consideration. If such is the case, the employer may still avoid liability if it can demonstrate that it would have made the same decision without regard to the employee's protective status, solely on the basis of another legitimate reason. Sanguinetti v. United Parcel Service, Inc., 14 Fla. L. Weekly Fed. D23 (S.D. Fla., August 8, 2000).
10. POLITICIANS SHOULDN'T SPEND SURPLUS SO FAST: The Federal Budget Surplus for the fiscal year ended September 30, 2000 is a whopping $237 Billion, not only the largest ever, but meaning for the first time since 1949 that there has been a budget surplus for three successive years. But a few things could put future surpluses in question. First, expenditures rose 5% vs. a growth rate of 3%. (Just three years ago, spending grew at only 2.6%.) Second, most increased expenditures have been in agriculture, defense, health/human services, Social Security and interest on the National Debt. (Our readers are not surprised by the last item, because they know that the nonmarketable debt is increasing although the marketable debt is slowly being reduced -- see C&C Newsletter for September, 2000, Item 17.) Third, surpluses have come from the largely-unanticipated tax revenue generated from a very strong economy. Because we are in the eleventh year of the longest economic expansion on record, odds favor a slowdown at best or a recession at worst. If the economy does slow significantly (third quarter GDP growth slowed to 2.7% from 5.6% the previous quarter), tax revenue will also decline. In short, surpluses appear to be under attack on two fronts: from increased spending and from a possible economic slowdown that will cut into tax revenues. We thank James Lebherz for another fine article in the Miami Daily Business Review.
11. AARP PUBLISHES REPORT ON IMPACT OF MANDATORY SOCIAL SECURITY COVERAGE: The American Association for Retired Persons, on record as favoring mandatory Social Security coverage for newly hired public employees and their employers (see C&C Newsletter for July, 2000, Item 8), has published a lengthy report entitled "The Impact of Mandatory Social Security Coverage of State and Local Workers: A Multi-State Review." Our readers know that Social Security was enacted in 1935, as a social insurance program to pay retired workers a continuing income; but, because there were constitutional concerns about whether the federal government could impose taxes on state governments, state and local workers were excluded from mandatory coverage (see Special Supplement to C&C Newsletter, April, 1997). In the 1950's, legislation allowed states to elect voluntary coverage for their employees. Today, about 30% of the state and local work force (about 4 million workers) are not covered by Social Security. The following is an excerpt from the Executive Summary: The strongest argument for mandatory coverage is an issue of equity -- excluded state and local employees or taxpayers in their jurisdictions are not paying their share of income redistribution. Excluded state and local workers and employers also are not paying their share of financing the unfunded liability associated with the startup of the Social Security program, roughly 3% of the 12.4% payroll tax. Another argument for coverage is that excluded workers would receive three types of benefits they currently lack: (1) They would enjoy full portability of benefits as they move from job to job, or even if they leave government; (2) they would have full inflation protection for their retirement and disability benefits; and (3) they would be eligible for dependent and survivor benefits that may not be offered by public plans. The strongest argument against mandatory coverage of state and local workers is that even if plan sponsors cut back on their own pensions, in an attempt to maintain a constant level of benefits, they will face an increase in costs. Some of the increase will reflect the above "new" benefits; some will reflect the 3% "tax" component of Social Security to cover the unfunded liability that arose from paying benefits to older generations; and some will reflect state and local workers' contribution to income redistribution. The increased costs of mandatory coverage, about 6% of payroll, would probably be borne equally by taxpayers of the affected jurisdictions and by employees. Taxpayers will be hit because current compensation, even in jurisdictions without Social Security, already reflects the Social Security System's unfunded liability, and government employers are unlikely to be able to shift this cost onto the backs of their employees. Employees will bear the cost increase associated with the new benefit protections. The report itself, written by Alicia H. Munnell of Boston College, can be viewed at http://research.aarp.org/econ/2000_11_security.pdf.
"A conclusion is the place where you got tired of thinking."
12. CHECK OUT OUR NEW LINKS: We have added several new resource links from our website. Among them are Association for Investment Management and Research: http://www.aimr.org/; Council of Institutional Investors: http://www.cii.org/; Investment Counsel Association of America: http://www.icaa.org/html/home.html; Investment Management Consultants Association: http://www.imca.org/; National Association of Government Deferred Compensation Administrators: http://www.nagdca.org; and Public Retirement Institute: http://www.pripension.org/. Happy surfing.
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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.