PBGC Seeks Recovery of Investment Losses for Terminated Retirement Plan

The Pension Benefit Guaranty Corporation (PBGC) has filed a lawsuit for breach of fiduciary duties and prohibited transactions under the Employee Retirement Income Security Act (ERISA) against owners and service providers of Freedom Communications’ pension plan, which, after the company’s bankruptcy, was terminated and transferred to the PBGC as trustee.

The agency charges defendants with breaches of fiduciary duties under ERISA, including the duties of loyalty, prudence, and adherence to plan documents; transactions prohibited by ERISA; and knowing participation in breaches of fiduciary duties. The lawsuit claims owners of Freedom Communications made ill-advised, highly speculative investments which caused the pension plan to lose tens of millions of dollars.

According to the complaint, one of the failed investments started when members of Pension Advisory Group, based in North Carolina, approached Freedom’s owners with a proposal which they claimed would instantly improve the plan’s funding status. Under this program, which the owners implemented, the plan purchased life insurance policies with Freedom employees as the insureds. An actuary retained and compensated by Pension Advisory Group then allegedly inflated the value of the policies by valuing them at the net present value of future death benefits, rather than using the correct valuation method, the cash surrender value of the policies. Freedom’s owners abandoned the program when they realized that the plan was legally required to use the cash surrender value, resulting in a loss to the plan of more than $7 million.

The lawsuit also alleges that Freedom’s owners invested in another life insurance scheme, which involved a complex program in which the pension plan purchased a portfolio of loans used to finance life insurance premiums for people unrelated to Freedom or the plan. PBGC says that although such portfolios can have economic value when the insured persons are in poor health with decreased life expectancies, members of Pension Advisory Group failed to obtain the medical information needed to make a meaningful evaluation. Rather than acquiring a valuable asset, the defendants acquired a program with no market value, and lost millions of dollars of pension plan assets.

Freedom’s owners are also accused of losing millions of dollars in plan assets by investing in a highly speculative and unproven foreign hedge fund, which is now worthless, and by causing the plan to buy stock in Freedom when they knew that the company was in financial distress. The stock is also now worthless.