Compliance April 6, 2006

Father and Son Held Liable for not Forwarding Employee Contributions

April 6, 2006 (PLANSPONSOR.com) - The US District Court for the Northern District of New York has held a father and son both liable for failing to forward employee deferrals to their company's 401(k) plan.
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In granting summary judgment in favor of US Secretary of Labor Elaine Chao, the court rejected the plaintiffs’ argument that they were not plan fiduciaries, BNA reports.   The court found that both Jack Docster and his son James were plan trustees and exercised control over contributions that were deducted from employees’ paychecks but never forwarded to the 401(k) plan.

Jack contended that he was “retired” and thus had no responsibility for the 401(k) plan during the five-year period when his son James failed to forward the contributions.   However, the court determined that James ability to withhold the contributions from the plan and to continue doing so for nearly five years was facilitated by Jack’s abdication of the duty he owed to plan participants.   “Jack Docster’s breach of his fiduciary duty enabled James Docster to commit his repeated breaches,” the court said.

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The court also found that Jack played an active role in the company even after his limited “retirement,” saying he continued to receive a paycheck and went to the office nearly every day.

The court said there is ample evidence in the record to support the contention that James was a trustee, administrator and fiduciary of the 401(k) plan from its inception until July 9, 1999, when he claimed he was relieved of his duties at the company.   In addition, the court rejected James’s contention that he “cured” any breach of fiduciary duties that occurred during his tenure as company president by procuring a loan that he said he intended to use to repay the contributions not forwarded to the plan.

Dodge-Markham Co. established a 401(k) plan for its employees in 1995 and both Jack and James Docster were named as plan trustees, according to the court document.   Jack was the president and CEO of Dodge-Markham until his “limited retirement” in 1992 when his son James took over as president. According to the court, James testified that although he was named as president of the company, his father “was always in charge of the company.”  

Between 1995 and 1999, Dodge-Markham deducted 401(k) contributions from employees’ paychecks but failed to forward the contributions to the plan.   After Dodge-Markham went out of business in 2001, the Department of Labor filed a lawsuit against James, Jack, and Dodge-Markham alleging they breached their fiduciary duties under the Employee Retirement Income Security Act by failing to forward approximately $43,000 in contributions to the plan.

The case is Chao v. James C. Docster Inc., N.D.N.Y., No. 3:01-CV-827, 3/31/06.

Administration April 5, 2006

SF Fund Sues AIG Over $4 million in Losses

May 16, 2005 (PLANSPONSOR.com) - San Francisco's employee pension fund has announced the filing of a lawsuit against giant insurer American International Group (AIG) for causing the fund to lose $4 million.
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City Attorney Dennis Herrera announced in a Web statement that the suit was filed on behalf of San Francisco Employees’ Retirement System (“SFERS”) charging New York-based AIG with “egregious business malfeasance” and federal securities laws violations.

The suit, filed in the United States District Court for the Southern District of New York, seeks to recover $4 million losses suffered by SFERS on shares of AIG stock that were purchased between October 1, 1999 and March 30, 2005.

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“Stock fraud like that perpetrated by AIG and its executives isn’t just a harmless shell game for Wall Street high-rollers – it’s a despicable crime that preys on the financial security of retirees and working families,” Herrera said. “With our lawsuit on behalf of the San Francisco retirement system today, we intend to recover the funds our public employees were cheated out of; to punish scam artists who defraud their investors; and to send a clear message to anyone who would contemplate similar conduct in the future that we will move aggressively to protect our retirement system from similar injustices.”

A series of investigations prompted AIG to admit that reports of high earnings were artificially inflated by the company’s top executives, according to the official. According to Herrera’s announcement, the company committed “pervasive accounting improprieties” including:

  • the use of offshore affiliates to manipulate financial statements
  • sham reinsurance deals set up solely to bolster reserves
  • bond transactions that allowed AIG to claim gains without actually selling bonds
  • misclassified losses

The suit further alleges that following the initial investigations, the company destroyed evidence, resisted discovery and attempted to shield personal assets.

On May 1, 2005, AIG announced that it would issue restated financial statements from 2000 forward that would reduce AIG’s net worth by $2.7 billion. Since news of the accounting scandal at AIG broke, AIG’s share price has dropped nearly 30%  This decrease in company value has caused “significant injury” to investors like SFERS, according to the charges.

Also named in the suit was General Re Corp., a unit of Berkshire Hathaway, which allegedly helped AIG create a sham insurance transaction.

Ohio‘s attorney general in April added new defendants to his fraud lawsuit against AIG, including AIG’s auditor and General Re, opening that class-action lawsuit up to more defendants.

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