Chicago

Last month's $16.5 million settlement in an employee benefitsplan case may open the floodgates to suits alleging excessive401(k) fees, and fiduciary liability suits related to Ponzi schemesare poised to climb as well, experts warned at a recentprofessional liability conference.

“I think it's a real game-changing kind of event,” said RhondaPrussack, executive vice president and product manager forfiduciary liability insurance at Chartis Insurance in New York,referring to the tentative settlement reached in Martin v.Caterpillar on Nov. 5–a case that was pending in the U.S.District Court for the Central District of Illinois.

Speaking at the international conference of theMinneapolis-based Professional Liability Underwriting Societyrecently, Ms. Prussack explained that this is the first settlementin one of a dozen similar cases brought by a single law firm in St.Louis–Schlichter, Bogard & Denton.

All the cases allege that fiduciaries responsible for managingmultibillion-dollar 401(k) plans breached their fiduciary dutiesunder the Employee Retirement Income Security Act by allowing theplans to pay excess fees for investment management.

“The $16.5 million isn't going to help the plan participantsvery much,…but it does help [Jerome] Schlichter, who has put a lotof money toward pursuing these very difficult-to-pursue cases,” Ms.Prussack said, referring to the head of the law firm filing theselawsuits.

The settlement also gives a shot in the arm to other plaintiffs'law firms that have been waiting in the wings to see how theexcessive fee cases play out, she said, adding that this is “reallybad news” for fiduciary liability insurers.

In general, fiduciary liability insurance covers employeebenefit plan fiduciaries (people who exercise control over themanagement or administration of pension, health and other employerplans) for breaches of their fiduciary duties and errors they make.Fiduciary duties are prescribed by ERISA.

During the same PLUS session, Kenneth Rubinstein, a defenselawyer and partner in the Manchester, N.H., office of Nelson,Kinder, Mosseau & Saturley, said there's another batch of caseslooming on the horizon for fiduciary insurers to worry about aswell–related to investment losses from Ponzi schemes orchestratedby Bernard Madoff and other scammers.

The excessive-fee cases are the more frequent ones, but theMadoff-related cases are the highest profile right now, hesaid.

“There appears to be no end to the losses, and there's no wayavailable assets are going to cover all the losses. So plaintiffs'lawyers are going to be looking for pockets to help people getwhole,” he said, highlighting an ERISA case filed in February ofthis year called Pension Fund For Hospital & Health CareEmployees v. Austin Capital Management.

With fewer hurdles to face in bringing lawsuits against employeebenefit plan fiduciaries than against directors and officers, morevictims of Ponzi schemes will file pension liability suits, hesuggested.

“The D&O route often doesn't provide enough money, [and]there are some situations where it doesn't apply,” the defenselawyer explained, noting that similar problems exist for suitsagainst lawyers, accountants and investment advisors.

The Austin Capital Management case, which was filed inthe Eastern District Court of Pennsylvania, is widely beingconsidered as the first Madoff-related ERISA claim, Mr. Rubinsteinsaid.

Giving some background of the case, he said that Austin CapitalManagement managed all the pension funds for the plaintiff, andAustin Capital, in turn, put a significant amount of the pensionfunds' money with a feeder fund that invested with Mr. Madoff.

Claims under ERISA spelled out in the lawsuit were failure tosupervise, failure to do due diligence, failure to notice red flagsand failure to continue to monitor the investments, heexplained.

“If you…look at the complaint, it effectively states a cause ofaction that would survive a motion to dismiss,” he said.

That's what's notable about the case, he added. “It signals abeginning,” he asserted, going on to describe other characteristicsof ERISA suits that could make them preferable avenues tosecurities claims.

ERISA claims and securities cases are often based onsimilar theories of liability, he said. As in securities cases,allegations can center on lack of disclosure and misleadingstatements, but ERISA claims, he noted, are not subject to highpleading requirements of the Private Securities Litigation ReformAct on 1995.

Under PSLRA, which governs securities suit filings, plaintiffshave to plead “specific evidence [and] actual knowledge of factsthat give rise to a strong likelihood” of liability, according toMr. Rubinstein.

He also pointed out there's a stay of discovery associated withsecurities cases that's absent in ERISA cases. Under PSLRA, once amotion to dismiss is filed by defendants, “everything stops,” hesaid.

That discovery stay of the PSLRA puts a lid on document reviewcosts–”an extraordinarily high cost item” for defendants andinsurers that can involve going through “hundreds of thousands, ifnot millions” of documents and e-mails.

“If they bring the same case under ERISA, you don't have theprotection,” Mr. Rubinstein said.

“Plaintiffs are realizing that not only is this an additionalpocket, but an additional pocket where they can get a little moreleverage having to deal with less strict requirements,” heconcluded.

In contrast to Mr. Rubinstein, Elizabeth Hopkins, counsel forappellate and special litigation for the U.S. Department of Labor,stressed the difficulties that plaintiffs are having in gettingthese ERISA cases through the courts–focusing on the excessive feecases, in particular. She used a defense win in a case known asHecker v. Deere to illustrate her point.

She said the “biggest, most central issue” in Deere andsimilar cases is the question of whether it was prudent for the401(k) plan to pay retail market fees. “Particularly for a big planwith billions of dollars in assets, [fiduciaries] probably couldhave gotten a better deal,” the cases allege, she explained.

The 7th Circuit Court–affirming a lower court dismissal ofthe case against Deere and Fidelity Investments, which was involvedin the management of mutual funds that were among the investmentoptions of Deere's $2.5 billion 401(k) plan–said plaintiffs did notplead a plausible case.

The court based this ruling on the fact that the plan offered 23mutual fund options, a company stock fund and an open brokerageoption with access to 2,500 other funds. The court found it was notplausible that ranges of fees for all these options were imprudent,she said.

Ms. Hopkins said the court was also swayed by a defense under aprovision of ERISA known as 404(c), which absolves fiduciaries fromliability with regard to certain individual account plans, if thelosses that occurred result from of the individuals' failure toexercise control over their accounts.

She noted that the Department of Labor believes the 404(c) “passfrom liability should not apply with regard to whether it wasprudent [for fiduciaries] to select an investment option that hasvery high fees.”

“It may be possible that the decision is limited to the facts ofthat case, [since] a lot of investment options were available,” shesaid, noting that the DOL and plaintiffs are keeping a close eye ona case currently on appeal in the 8th Circuit–Braden v.Walmart–which didn't involve an open brokerage option.

The Walmart case, which was not brought by theSchlichter firm, corrects some of the pleading problems present inDeere and other cases, she said. In Walmart,plaintiffs actually point out different, cheaper investmentoptions, and they specifically allege that fiduciaries could havegotten the same level of services for the cheaper available prices.The 7th Circuit had noted that this last argument was missing inthe Deere case, she said.

Still, Ms. Hopkins–countering Mr. Rubinstein's discussion of theabsence of the high pleading standards of the PSLRA in ERISAcases–said the U.S. Supreme Court in recent years imposed a newstandard of plausibility for all civil litigation, which has been akey sticking point in the fee cases.

The Supreme Court (in decisions such as in a 2007 case known asBell Atlantic Corp. v. Twombly) ruled that “you can't justplead a theory,” but that plaintiffs must instead spell out aplausible claim, she said.

While plausibility remains undefined, “judges tend not to like[ERISA cases] because they're complex and time-consuming, and[they] want to find ways to get rid of them,” she said, noting thatthis has been a common reason for dismissing excessive feecases.

The Caterpillar settlement, however, changes thepicture for plaintiffs' lawyers, Ms. Prussack argued. “Plaintiffs'firms were waiting to see if there would be any success,” she said.“There's a rich payday here for these firms, and I think there areother firms waiting in the wings that will now bring more of thesecases.”

She speculated that the Schlichter firm will now press hard forsettlements in cases still pending–”as will many judges who want toclear their caseloads. We're already seeing pressure from courts tosettle these matters.”

Christine Dart, vice president and global fiduciary liabilityproduct manager at Chubb in Warren, N.J., agreed. “Insureds arefeeling the pressure to settle. It takes a lot of time and effortaway from their business to produce documentation and prepare fordepositions,” she said.

“This isn't going away anytime soon,” Ms. Prussack said. “Justlike stock-drop cases became really a big revenue stream for thesefirms, this is going to be the new thing.”

The panelists also discussed the history of ERISA stock-dropcases and the potential for more ERISA cases as a result of theeconomic downturn. (See NU, Nov. 9, page 21, for more onthe effects of the downturn.)

The stock-drop cases are sometimes referred to as securitiesclass-action tagalongs because they are filed on the basis ofallegations of lack of disclosure about a company's stock that istypical in securities suits. The ERISA cases are brought byemployees of participants in 401(k) plans heavily invested inemployer stock.

Tagalong, however, might be a bit of a misnomer, according toMs. Dart, who said her firm has seen stock-drop cases filed fouryears after a securities claim.

Ms. Prussack said her firm saw one ERISA stock-drop case filedsix years later–close to the end of the statute of limitations–andthat “more and more, they're brought just on their own” without acompanion securities case. “Even when the securities matter isdismissed, the ERISA suit continues on,” she added.

Ms. Hopkins noted that stock-drop cases also drag on because“there's disarray in the courts” about key issues such as classcertification.

Panel moderator Ann Longmore, executive vice president forD&O and fiduciary product lines at Willis Executive Risks NorthAmerica, showed a slide listing 15 large settlements in ERISAstock-drop cases totaling $1.1 billion.

The case list, compiled from a data base put together by NewYork-based Advisen, also revealed that the average settlement wasaround $75 million, excluding defense costs.