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Last month's $16.5 million settlement in an employee benefits plan case may open the floodgates to suits alleging excessive 401(k) fees, and fiduciary liability suits related to Ponzi schemes are poised to climb as well, experts warned at a recent professional liability conference.

“I think it's a real game-changing kind of event,” said Rhonda Prussack, executive vice president and product manager for fiduciary 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 the Minneapolis-based Professional Liability Underwriting Society recently, Ms. Prussack explained that this is the first settlement in 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 managing multibillion-dollar 401(k) plans breached their fiduciary duties under the Employee Retirement Income Security Act by allowing the plans to pay excess fees for investment management.

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

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

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

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

The excessive-fee cases are the more frequent ones, but the Madoff-related cases are the highest profile right now, he said.

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

With fewer hurdles to face in bringing lawsuits against employee benefit plan fiduciaries than against directors and officers, more victims of Ponzi schemes will file pension liability suits, he suggested.

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

The Austin Capital Management case, which was filed in the Eastern District Court of Pennsylvania, is widely being considered as the first Madoff-related ERISA claim, Mr. Rubinstein said.

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

Claims under ERISA spelled out in the lawsuit were failure to supervise, failure to do due diligence, failure to notice red flags and failure to continue to monitor the investments, he explained.

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

That's what's notable about the case, he added. “It signals a beginning,” he asserted, going on to describe other characteristics of ERISA suits that could make them preferable avenues to securities claims.

ERISA claims and securities cases are often based on similar theories of liability, he said. As in securities cases, allegations can center on lack of disclosure and misleading statements, but ERISA claims, he noted, are not subject to high pleading requirements of the Private Securities Litigation Reform Act on 1995.

Under PSLRA, which governs securities suit filings, plaintiffs have to plead “specific evidence [and] actual knowledge of facts that give rise to a strong likelihood” of liability, according to Mr. Rubinstein.

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

That discovery stay of the PSLRA puts a lid on document review costs–”an extraordinarily high cost item” for defendants and insurers that can involve going through “hundreds of thousands, if not millions” of documents and e-mails.

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

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

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

She said the “biggest, most central issue” in Deere and similar cases is the question of whether it was prudent for the 401(k) plan to pay retail market fees. “Particularly for a big plan with billions of dollars in assets, [fiduciaries] probably could have gotten a better deal,” the cases allege, she explained.

The 7th Circuit Court–affirming a lower court dismissal of the case against Deere and Fidelity Investments, which was involved in the management of mutual funds that were among the investment options of Deere's $2.5 billion 401(k) plan–said plaintiffs did not plead a plausible case.

The court based this ruling on the fact that the plan offered 23 mutual fund options, a company stock fund and an open brokerage option with access to 2,500 other funds. The court found it was not plausible that ranges of fees for all these options were imprudent, she said.

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

She noted that the Department of Labor believes the 404(c) “pass from liability should not apply with regard to whether it was prudent [for fiduciaries] to select an investment option that has very high fees.”

“It may be possible that the decision is limited to the facts of that case, [since] a lot of investment options were available,” she said, noting that the DOL and plaintiffs are keeping a close eye on a 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 the Schlichter firm, corrects some of the pleading problems present in Deere and other cases, she said. In Walmart, plaintiffs actually point out different, cheaper investment options, and they specifically allege that fiduciaries could have gotten the same level of services for the cheaper available prices. The 7th Circuit had noted that this last argument was missing in the Deere case, she said.

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

The Supreme Court (in decisions such as in a 2007 case known as Bell Atlantic Corp. v. Twombly) ruled that “you can't just plead a theory,” but that plaintiffs must instead spell out a plausible 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 that this has been a common reason for dismissing excessive fee cases.

The Caterpillar settlement, however, changes the picture 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 are other firms waiting in the wings that will now bring more of these cases.”

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

Christine Dart, vice president and global fiduciary liability product manager at Chubb in Warren, N.J., agreed. “Insureds are feeling the pressure to settle. It takes a lot of time and effort away from their business to produce documentation and prepare for depositions,” she said.

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

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

The stock-drop cases are sometimes referred to as securities class-action tagalongs because they are filed on the basis of allegations of lack of disclosure about a company's stock that is typical in securities suits. The ERISA cases are brought by employees of participants in 401(k) plans heavily invested in employer stock.

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

Ms. Prussack said her firm saw one ERISA stock-drop case filed six years later–close to the end of the statute of limitations–and that “more and more, they're brought just on their own” without a companion securities case. “Even when the securities matter is dismissed, 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 class certification.

Panel moderator Ann Longmore, executive vice president for D&O and fiduciary product lines at Willis Executive Risks North America, showed a slide listing 15 large settlements in ERISA stock-drop cases totaling $1.1 billion.

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

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