Deals and People November 3, 2014

Barrow Hanley Hires LDI Specialist

Jeff Passmore has joined investment manager Barrow, Hanley Mewhinney & Strauss LLC to focus on liability-driven investing solutions.
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Passmore has 24 years of industry experience and takes the role of director, client portfolio manager, and LDI strategist to focus on the firm’s liability-driven investing (LDI) solutions. He will work with Barrow Hanley’s institutional clients during the LDI implementation process, including the development and use of custom benchmarks.

Barrow Hanley’s LDI solutions offer institutional investors with long-duration liabilities, such as pension obligations, conservative strategies using cash bonds to hedge pension asset-liability mismatch risk.

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“Jeff Passmore has extensive experience working with institutional investors in understanding sources of pension liability volatility and implementing investment strategies to manage this risk,” says Scott McDonald, managing director for Barrow Hanley’s LDI strategy.

Passmore joins Barrow Hanley from Standish Mellon Asset Management in Boston, where he served as a senior liability strategist since 2012, working with investment consultants and pension plans to adopt LDI solutions. Previously, he was a Dallas-based investment consultant and principal with Buck Global Investment Advisors and a senior retirement consultant for Mercer. He also worked for Towers Watson.

Passmore graduated from the University of Texas at Austin with a bachelor’s degree in Mathematics. He is a CFA charterholder, a fellow of the Society of Actuaries, a member of the American Academy of Actuaries, and an Enrolled Actuary under the Employee Retirement Income Security Act. He is currently serving on the Investment Council of the Society of Actuaries.

Barrow Hanley is a Delaware limited liability company and SEC-registered investment adviser. More information is available at www.barrowhanley.com.

Compliance November 3, 2014

Plan Fiduciaries Liable for Mispriced ESOP Stock Purchase

The owner of Bruister and Associates and trustees of its employee stock ownership plans (ESOPs) were found responsible for causing the plan to pay too much for employer stock.
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A U.S. District Court judge has issued a judgment and order requiring fiduciaries to pay more than $6.48 million to the two employee stock ownership plans sponsored by Bruister and Associates Inc. (BAI).

BAI was a home-service provider that installed and serviced satellite-television equipment for its sole client DirecTV. According to a lawsuit filed by the U.S. Department of Labor in U.S. District Court for the Southern District of Mississippi, during a three-year period, from December 2002 to December 2005, Herbert Bruister, the sole owner of BAI, sold 100% of BAI’s shares to the plans for $24 million. In each instance, Bruister and Amy Smith served as trustees to the plans and members of the BAI Board of Directors. Jonda Henry served as trustee for the three purchases tried by the Court.

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According to court documents, Bruister, Smith and Henry, as plan fiduciaries, engaged in prohibited transactions by causing the plans to pay excessive prices for BAI stock purchased from Bruister. For each purchase, the fiduciaries used flawed valuations prepared by Matthew Donnelly and his firm, Business Appraisal Institute.

The court also found that the three fiduciaries breached their duty of loyalty from start to finish. Additionally, Bruister and his attorney David Johanson went so far as to fire the initial attorney representing the plans because that attorney was too thorough. Moreover, the court found that Bruister and Johanson exercised undue influence over Donnelly’s valuations, and that as a result, Donnelly was not sufficiently independent to provide valuations for the plans.

The court concluded that Bruister, Henry and Smith, in their role as plan fiduciaries, failed to properly represent plan participants’ interests, and that they unreasonably relied on an appraiser who so obviously lacked independence. The court reasoned, “An informed trustee would not have remained idle while the seller communicated directly with the employee stock ownership trust’s independent appraiser and financial advisor in an effort to elevate the price at the participants’ expense.”

Although Johanson was not a fiduciary, the court found his conduct worthy of comment because he was both the attorney for the seller and structured each sale. The court noted that Johanson attempted to influence the valuations in Bruister’s favor, and the testimony Johanson gave at trial did not support his denials. The court even noted that Johanson coached Donnelly during a break in his deposition to retract his testimony that Johanson represented Bruister individually. “History rebuts Johanson’s suggestion that he did not interfere with Donnelly’s valuations and raises doubts as to each of the subject transactions,” the court said.

The court’s order requires Bruister, Smith and Henry to jointly pay $4.5 million in restitution to the plans and requires Bruister to pay an additional $1.98 million in prejudgment interest. The order also held Bruister Family LLC liable with all defendants for $885,065 and jointly liable with Bruister for $390,604.

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