Administration January 29, 2009

JP Morgan Hit with SecLending Lawsuit

January 29, 2009 (PLANSPONSOR.com) - A union pension fund has sued JPMorgan Chase over allegations it breached its fiduciary duties to its pension clients investing in the financial services company's securities lending program.
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The Board of Trustees of the American Federation of Television and Radio Artists (AFTRA) Retirement Fund alleged in the suit, which seeks class-action status, that the fiduciary breaches caused billions of dollars in pension investment losses. The losses were related to JPMorgan’s investments in medium-term notes (MTN) issued by Sigma Finance Inc.

According to the complaint filed in the U.S. District Court for the Southern District of New York, numerous pension plans, including the AFTRA fund, entered securities lending agreements with JPMorgan after the company touted its securities lending program as a means to “obtain an attractive return while minimizing risk.”

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Sigma Finance is organized to issue debt securities for its Cayman Islands parent company. The debt securities at issue were secured only by a “floating lien” on the assets of Sigma Finance, which were subject to subordination to the lien interests of Sigma’s other creditors.

Analyst Warnings

The lawsuit said financial analysts warned that structured investment vehicles (SIVs) like Sigma Finance lacked liquidity in the credit market and that sharp declines in the market value of assets backing many SIVs threatened their viability, but JPMorgan “buried its head in the sand and refused to heed the warning signs.”

Analyst predictions later proved true when Sigma Financial’s creditors seized over $25 billion of its approximately $27 billion of assets in late September and early October 2008, leaving Sigma Financial about $2 billion as security for approximately $6.2 billion of outstanding MTNs and other secured debt, the lawsuit alleged. Sigma Financial was placed into receivership in early October 2008.

While JPMorgan was investing the plans’ money in Sigma Financial MTNs, it also earned substantial fees and interest through providing short-term repurchase (repo) financing for Sigma Finance, according to the complaint.

The suit charged JPMorgan’s actions represented Employee Retirement Income Security Act (ERISA) fiduciary breaches because it should have known the Sigma Financial investments were imprudent and because it had a conflict of interest through its repo financial arrangement with Sigma.

The suit is Board of Trustees of the AFTRA Retirement Fund v. JPMorgan Chase Bank N.A., S.D.N.Y., No. 1:09-cv-00686-SAS.

Compliance January 28, 2009

Cash Balance Plan Participants' Document Requests not Subject to ERISA Time Limit

January 28, 2009 (PLANSPONSOR.com) - The U.S. District Court for the Western District of Kentucky has determined that an employer did not have to provide certain documents requested by cash balance plan participants within 30 days as required by the Employee Retirement Income Security Act (ERISA).
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In its opinion, the court said Commonwealth Industries, Inc. “acted in a reasonably timely and sufficient manner to comply with the plaintiffs’ requests.” Judge Jennifer B. Coffman noted that the employer attempted to produce the documents, even trying to timely obtain those that were not in its possession.

According to the opinion, specifically, the plaintiffs claim that the defendants did not provide the following documents within the thirty days as required by ERISA §§ 104(b)(4), 502(a)(1)(A), (c)(1): a complete copy of all ERISA § 204(h) notices; a complete copy of the plan amendments; a statement of the plaintiffs’ respective normal retirement accrued benefit; and a complete copy of the plan document reflecting the form of benefits available upon retirement – as represented on the pan retirement application. The plaintiffs ultimately received all requested documentation, but asked the court for a penalty of $110 per day for each day past the 30-day requirement that the documents had not been received.

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Coffman noted that the § 204(h) notice is a form communication that does not differ among employees, so it did not need to be sent separately in response to each request. The court also found that the complete wording of a 1997 amendment was included in a new comprehensive plan document provided to all participants upon the change from a traditional pension to a cash balance plan, so participants were provided with a complete copy of the plan amendment.

The court further said that those types of historical documents are not the types of documents required to be provided under ERISA § 104.

As for the requested statement of the accrued benefits, the court said the information requested was not formal plan documents or summaries of material modifications so they did not have to be provided within the 30-day time limit of ERISA.

The case is Collins v. Commonwealth Industries Inc.,W.D. Ky., No. 07-57-C, 1/26/09.

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