DOL Lawsuit Over Investment in DST Systems’ 401(k) Will Proceed

In 2019, the Department of Labor filed one of several lawsuits alleging mismanagement of investments in the DST Systems Inc. 401(k) Profit Sharing Plan.

While DST, the DST Advisory Committee and the DST Compensation Committee exercised discretionary authority or control over the plan, the company hired Ruane, Cunniff & Goldfarb & Co. to serve as investment adviser to the plan. Ruane, Cunniff used its explicit investment strategy of “non-diversification,” by which concentrated investment of the plan’s assets in a small number of securities and held those investments for a long period of time.

The lawsuits challenge the investment in Valeant Pharmaceuticals International Inc. stock, which suffered a share price decline in 2015 following a well-publicized fraud scandal involving the company. According to the DOL’s lawsuit, in August 2015, the DST Advisory Committee directed Ruane, Cunniff to limit investments in any one security to no more than 25% of the plan’s portfolio. However, DST afforded the investment manager discretion regarding when and how to effectuate this limit.

The DOL alleges that the defendants violated their fiduciary duties of diversification, loyalty and prudence under the Employee Retirement Income Security Act by employing Ruane, Cunniff’s non-diversification strategy for the plan’s assets. It also claims that the DST defendants failed to follow the plan document by not establishing a written investment policy for the plan and that they failed to monitor the investment manager. In addition, the lawsuit alleges that the DST defendants are liable as co-fiduciaries for Ruane, Cunniff’s breaches.

Settlements to resolve two lawsuits were presented to a federal court in January 2021. But the DOL took issue with a provision in the settlements that would bar the agency’s litigation. Last August, the court rejected the settlement agreements and certified a class in those lawsuits.

Now, Judge Andrew L. Carter Jr. of the U.S. District Court for the Southern District of New York has denied motions filed by the defendants to dismiss the DOL’s case. The defendants argue that the complaint is time-barred by the applicable statutes of limitation and repose. In addition, a committee member defendant and Ruane, Cunniff each argue that the DOL fails to state a plausible claim that they are liable for breach of their fiduciary duties.

Motions for Dismissal Denied

The defendants asserted that the DOL’s claims are untimely as the fiduciary breaches resulted from the initial hiring of Ruane, Cunniff by DST in the 1970s. However, Carter pointed out that ERISA imposes a statute of repose by which breach of fiduciary duty suits must be filed within six years of “(A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.” He said the defendants would be correct if the only breaches alleged related to DST’s decision to hire the investment manager; however, the complaint alleges that the defendants owed continuing fiduciary duties to the plan distinct from that, and that they breached these duties during the statutory period of March 19, 2013 through October 8, 2019.

Under ERISA, the six-year statute of repose is accelerated when the plaintiff has actual knowledge of the breach. Suits must be brought within “three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation,” Carter noted in his opinion. The defendants argued that the DOL had actual knowledge of the alleged conduct from the Forms 5500 that DST annually filed with the agency. Carter cited the Supreme Court’s decision in Intel Corporation Investment Policy Committee v. Sulyma in saying if “a plaintiff is not aware of a fact,” the plaintiff “does not have ‘actual knowledge’ of that fact however close at hand the fact might be,” even if the plaintiff “received numerous disclosures” about the plans at issue. He rejected the defendants’ contention that Sulyma does not apply to the DOL as it does to private plaintiffs because the agency is charged with reviewing the relevant plan information as part of its regulatory duties, saying the “defendants provide no binding caselaw for this distinction.” In addition, Carter pointed out that the Sulyma opinion acknowledges the DOL’s position that “the [DOL] will have a hard time [bringing suits] within § 1113(2)’s timeframe if deemed to have actual knowledge of the facts contained in the many reports that the department receives from ERISA plans each year.”

“At the least, discovery is needed to ascertain whether the [DOL] obtained ‘actual knowledge’ from the Form 5500 filings,” Carter wrote in his opinion.

The judge also rejected Ruane, Cunniff’s argument that the DOL improperly alleges that the investment manager breached a non-existent fiduciary duty to determine the percentage of the assets it manages. According to the opinion, Ruane, Cunniff focused on the lawsuit’s references to its use of its non-diversification strategy for 100% of the plan’s assets and asserted that it was not obligated to know the percentage of assets under its management. Carter determined that this is an overly narrow reading of the complaint.

Ruane, Cunniff also argued that DST was fully apprised of its investment strategy and therefore any ERISA violations related to its investments are attributable to DST. However, Carter found that, irrespective of DST’s knowledge of Ruane, Cunniff’s investment strategy and investments, the investment manager was accountable for its fiduciary obligations. The service agreement with DST acknowledged that the investment manager “was a fiduciary regarding all assets in the portfolio it managed for the plan.” As such, Carter said, Ruane, Cunniff was responsible for “ensuring the prudent management of a properly diversified portfolio . . . regardless of [DST’s] actions in this case.”

The individual committee member that filed a motion to dismiss the suit against him argued that his role on the Advisory Committee terminated in October 2013, before the loss in the value of Valeant shares and before the Advisory Committee’s alleged actions occurred. However, Carter noted that the DOL alleges in the lawsuit that the DST defendants breached their fiduciary duties by omission. More specifically, the complaint alleges that the losses to the plan transpired because of the DST defendants’ inaction over the course of many years in failing to monitor and correct Ruane, Cunniff’s imprudent investments and application of its non-diversification strategy. Similarly, the complaint alleges that the Advisory Committee failed to establish a written investment policy for the plan as mandated by the plan document. “As alleged in the complaint, these breaches by omission persisted for many years, including during [the] defendant[’s] time as a member on the Advisory Committee,” Carter wrote in his opinion.