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Compliance September 29, 2016
Investment Manager on the Hook for Poor Retirement Plan Diversification
A court ordered the investment manager to pay losses to the plan as well as pay back investment management fees.
Reported by John Manganaro
The 2nd U.S. Circuit Court of Appeals has affirmed a lower court’s ruling in Severstal Wheeling Retirement Committee v WPN Corporation, a complicated but informative example of retirement plan litigation that considered the extent of a plan fiduciary’s duty to diversify investments, as well as the allocation of liability among plan managers.
By way of background, WPN Corporation and its lead executive Ronald LaBow are named fiduciaries of two defined contribution plans sponsored for the employees of a company called Severstal Wheeling Inc. The plaintiffs in the initial suit include Severstal Wheeling Inc. Retirement Committee and other named fiduciaries of the plans, who sued WPN and LaBow on behalf of the plans for breaches of their fiduciary duties.
Until late 2008, according to case documents, the plans were funded and maintained through a trust sponsored by the WHX Corporation. The combined trust pooled the plans’ assets with assets from other employee benefit plans sponsored by WHX. After Severstal Wheeling, Inc. separated from WHX, a portion of the assets was transferred from the Combined Trust to a separate trust holding the plans’ assets. Before and after the transfer, the plans were managed by WPN, whose sole employee was LaBow.
The main charge of wrongdoing was that WPN and LaBow did not put into action demands by the investment committee to diversify and otherwise properly manage participant assets. According to the district court opinion, the committee testified that LaBow’s account of whether and how the plans could be diversified was “an ever evolving story of what could or could not be done” that “seemed to change just about during every conversation.”
Crucially, the judge also found that governing documents did not give LaBow and WPN the option of abdicating responsibility to the retirement plans’ committee. LaBow argued that he met with several impediments to diversifying the plans’ assets, including that not all assets the committee wanted were available, that he was not given an investment policy to guide him and that the custodian of the trust did not recognize his authority to direct investments. The bench trial judge was persuaded by testimony of several experts to reject these arguments, case documents show.
The court ordered the investment manager to pay the plans $9,710,438, including disgorgement of the $110,438 paid in investment management fees during the period, plus $5,305,889.74 as prejudgment interest.
NEXT: Details from the appellate decision
The appellate court’s summary decision explains that, in late 2008, LaBow directed the treasurer of WHX to transfer all of the assets maintained in an account managed by Neuberger Berman, LLC, from the combined trust to the newly created Severstal trust. On November 3, 2008, the entire contents of the Neuberger account, an undiversified portfolio comprised of mostly energy stocks, were transferred to the Severstal Trust.
“LaBow and WPN argue that this transfer did not violate ERISA,” the appellate decision states. “But the district court’s finding of liability was not based only on the transfer itself; rather, the district court held that LaBow breached his fiduciary duties by selecting the Neuberger assets—an undiversified portfolio of energy stocks—as the only assets to be transferred to the Severstal Trust, and did so without informing the committee before or after the transfer what investments had been transferred, with the knowledge that Neuberger Berman was not going to manage the assets, and without taking any steps to ensure the ongoing prudent management of the assets.”
The appellate court explains LaBow and WPN’s challenge to these determinations largely turns on the district court’s assessment of the evidence and its credibility determinations as to expert testimony.
However, it is “within the province of the district court as the trier of fact to decide whose testimony should be credited,” the summary order contends, “and we are not allowed to second-guess the district court’s credibility assessments … Because LaBow and WPN have not asserted any arguments that suggest, let alone confirm, that the district court’s factual findings are clearly erroneous, we have no basis to set aside the district court’s ruling.”
Appellants additionally argued that the district court erred in finding that they had been granted management control and authority—and thus were fiduciaries under Section 3(21)(A)(iii) of ERISA—because LaBow could not have exercised such authority had he attempted to do so.
“Even assuming that the inability to actually exercise control over assets could present a defense to a finding that a person is a fiduciary under Section 3(21)(A)(iii)—which requires only the grant of discretionary authority, not its actual exercise, see Bouboulis v. Transp. Workers Union of Am., 442 F.3d 55, 63 (2d Cir. 2006)—the district court made explicit factual findings rejecting that argument at trial. None of Appellants’ arguments indicate that those findings are clearly erroneous.”
The full appellate decision is available for download here.