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Case 1:06-cv-01083 Document 29 Filed 05/11/2006 Page 1 of 61 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS : CHARLES V. CALDER, et al. : : On behalf of themselves and on : behalf of all others similarly situated, : : 1:06-cv-01083 Plaintiffs, : : Judge Gottschall : v. : : AT&T PENSION BENEFIT PLAN and : : AT&T INC., : : Defendants. : : FIRST AMENDED CLASS ACTION COMPLAINT Plaintiffs, by and through their counsel, allege as follows: NATURE OF THE ACTION 1. This is a class action under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), 29 U.S.C. § 1001, et seq. 2. Plaintiffs are former management employees of AT&T Inc. (“AT&T” or the “Company,” formerly known as SBC Communications Inc.), and participants in the AT&T Pension Benefit Plan (the “AT&T Plan” or “Plan,” formerly known) (a/k/a AT&T Pension Benefit Plan), which AT&T both sponsors and administers. 3. The Plan is the Company’s main defined benefit plan and one of the largest private pension plans in the country, with approximately $30 billion in assets and covering Case 1:06-cv-01083 Document 29 Filed 05/11/2006 Page 2 of 61 some 350,000 current and former AT&T employees around the country. See Plan 2004 IRS Form 5500. The Plan has a significant concentration of participants who reside and earn or earned pension benefits in the Northern District of Illinois. 4. These Plan participants are current or former employees of the AT&T “controlled group” of corporations, namely, subsidiaries or affiliates that are owned at least eighty percent (80%), directly or indirectly, by AT&T. Several of these subsidiaries or affiliates under the common control of AT&T are headquartered in this District, including AT&T Teleholdings, Inc., the former Ameritech Corporation which does business as “AT&T Midwest,” and one of AT&T Teleholding, Inc’s operating companies, the former Illinois Bell Telephone Company now doing business as “AT&T Illinois.” These subsidiaries or affiliates are “Participating Employers” in the AT&T Plan and employ thousands of residents of this District who also earn or earned their benefits under the Plan in this District. 5. Plaintiffs include Plaintiff David R. Koenig who lived and worked in this District for a Participating Employer (SBC Services, Inc., now known as AT&T Services, Inc.) and earned and received his Plan benefits here – except for the Plan benefit he would have received in the District had Defendants not calculated his benefit according to a purported amendment to the Plan that never had any legal force or effect and never became part of the Plan. 6. In this action, Plaintiffs Koening, Calder and Vaughn-Smith seek, among other things, an order, on behalf of themselves and all others similarly situated (the proposed “Class,” defined below), declaring that a series of purported amendments to the Plan, known as the “actual base pay” or “actual pay” amendments, that had the effect of substantially 2 Case 1:06-cv-01083 Document 29 Filed 05/11/2006 Page 3 of 61 reducing their future rate of benefit accrual, never became effective as to them or other members of the proposed Class (with limited exceptions set forth below). They also seek an order declaring that Class members are entitled to have their benefits calculated and paid according to the Plan’s lawfully effective, unamended terms, without regard to the ineffective, purported actual base pay amendments. They also seek corresponding injunctive relief directing that the Plan now be administered in that regard according to its unamended terms and that their benefits and those of the Class be recalculated and paid according to the undisputed, pre-existing way the Plan and the Administrator calculated all other similarly situated participants benefits prior to Defendants’ assertion that the Plan had been effectively amended by the actual base pay amendments. They request that the Court retain jurisdiction over this matter following the issuance of the foregoing relief while the Plan and its Administrator perform this ministerial act -- which includes the ministerial act of now paying participants, with interest, the benefits they are indisputably due, as even Defendants read, construed, interpreted and applied the Plan prior to the ineffective adoption of actual base pay amendments. BACKGROUND 7. The actual base pay amendments were five separate but very similar enactments that each would have significantly reduced the rate of affected participants’ future benefit accrual under both the Plan’s traditional and “cash balance” formulas. 8. The amendments were adopted on five different dates between 1997 and 2000, to be effective on six different dates between 1998 and 2000. The amendments were commonly referred to as the “actual base pay” or “actual pay” amendments because, among 3 Case 1:06-cv-01083 Document 29 Filed 05/11/2006 Page 4 of 61 other things, they were meant to change the way an employee’s “Pension Compensation” (defined below) was calculated. Prior to the amendments, a participant’s pension compensation accrued based on the rate at which he or she was paid, as opposed to the amount of pay the participant actually earned. Thus, if a participant missed work due to a short-term disability or worked on a part-time basis, and hence did not earn an amount equivalent to his or her designated salary rate, the participant would nevertheless accrue pension compensation as if he or she had done so. The actual base pay amendments sought to substitute “actual base pay” – the pay the employee actually earned and received – in place of rate of pay (i.e., whether the employee actually earned and received that pay or not). The amendments would have also significantly reduced the rate of future benefit accruals by excluding “differentials” from the calculation of participant’s pension compensation.1 9. The reason why the amendments, with limited exceptions set forth below, never became effective is because the Plan’s administrator failed to satisfy the strict requirements of ERISA § 204(h), 29 U.S.C. § 1054(h) which, at all times relevant to this suit, provided that: a plan ... may not be amended so as to provide for a significant reduction in the rate of future benefit accrual, unless after adoption of the plan amendment and not less than 15 days before the effective date of the plan amendment, the plan administrator provides a written notice, setting forth the plan amendment and its effective date to ... each participant in the plan. 1 As discussed below, differentials are special compensation that an employee earned for work performed in a temporary job with a classification higher than the employee’s immediately preceding job classification or on tours of duty where additional compensation was appropriate, in the judgment of the employee’s “Participating Company,” i.e., AT&T-related entity participating in the Plan. Excluding such payments from the calculation of participants’ benefits would thus also significantly reduce the future benefit accruals of affected participants. 4 Case 1:06-cv-01083 Document 29 Filed 05/11/2006 Page 5 of 61 Former ERISA § 204(h), 29 U.S.C. § 1054(h).2 10. To be valid, a § 204(h) notice must in timely fashion either “set [] forth the plan amendment” itself or must contain an accurate summary of it “written in a manner calculated to be understood by the average plan participant.” See 26 C.F.C. (“Treas. Reg.”) § 1.411(d)-6, Q&A 10. 11. Here, however, the Plan administrator either gave no notice whatsoever to affected participants or when it did it failed to set forth the amendment’s terms or (with limited exceptions) provide in timely fashion an accurate summary of the amendment written in a manner calculated to be understood by the average plan participant. As a result, the Plan amendments in question did not become effective as to the affected participants who received no notice or who received inadequate notice, and cannot be applied against them. See Treas. Reg. § 1.411(d)-6, Q&A 13. 12. The chart below summarizes the actual base pay amendments, their adoption and effective dates, the dates on which notice, if any, was given, and the effectiveness of the amendments, if any, as to the affected participants. (“GB” = Grandfathered Benefit; “CB” = Cash Balance Benefit, as explained more fully below). 2 Congress modified ERISA § 204(h) in 2001. The provisions of the modified version of the statute do not apply to the time period or events at issue here. 5 Case 1:06-cv-01083 Document 29 Filed 05/11/2006 Page 6 of 61 Participating Adoption Effective Notice Amendment Valid as to Affected Companies Date Date Date Participants? SBMS SBWI 11/17/97 1/1/98 None No WBCLP PTG PB Directory PB Extras PB I Services PB Internet PB Mobile PT Elec. Pub. S 1/12/99 1/1/99 None No PT Sh. Services PT Finance PBAHoldings SBC Interactive WBCLP Nevada Bell Pacific Bell 4/13/99 5/1/99 4/9/99 No California Celcom SBC-MSI 4/13/99 7/1/99 6/14/99 Not to exclude an entire pay period from the computation of Pension Compensation for the 5 year averaging period SBC Asset M SBC MSI USA SBC Int’l SBC Int’l-MS SWB Internet SWBell CS SB Telecomm SBC Tech R 4/13/99 7/1/99 None No SWB Video SWBY SB Advertising SB Adv. Group Worldwide Dir. SB Messaging SBC Operations SWBT 6 Case 1:06-cv-01083 Document 29 Filed 05/11/2006 Page 7 of 61 SBC Asset M SBC MSI USA SBC Int’l SBC Int’l-MS SWB Internet No SW Bell CS notice SB Telecomm for GB Not as to any changes to the SBC Tech R 11/12/99 12/1/99 changes Grandfathered Benefit and not to exclude SWB Video SWBY an entire pay period from the computation SB Advertising Notice of Pension Compensation for the 5 year SB Adv.

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