Plaintiffs Target DST Systems and Ruane Advisory for Fiduciary Failures

Yet another Employee Retirement Income Security Act (ERISA) challenge was filed in the U.S. District Court for the Southern District of New York, this one naming a host of defendants including the advisory committees of the DST Systems Inc. profit sharing and 401(k) plans.

The suit also names the advisory firm Ruane Cuniff & Goldfarb, Inc., as a defendant, as well as the compensation committee of the DST Systems board of directors.

Plaintiffs are participants in the DST Systems profit sharing and 401(k) plans, and they suggest their retirement program, with more than $1 billion invested, is in the top 1% in the U.S. in terms of assets. In terms of specific allegations, the text of the suit is similar to lawsuits filed against the Disney Corporation and FMC Corporation that have emerged in 2017.

“Defendants pursued an exceptionally imprudent investment strategy with respect to a significant portion of the plan’s assets,” plaintiffs claim, “They invested without any input or oversight by participants in the plan, and they failed to adequately monitor the investments of the plan and the fiduciaries pursuing this investment strategy. As a direct result and consequence of these imprudent investment decisions and related misconduct, the plan has suffered losses well in excess of $100 million.”

According to the text of the compliant, defendants “also breached their fiduciary duties by allowing unreasonable expenses to be charged to the plan for administration and selected/retained high-cost and poor-performing investments instead of other available and more prudent, alternative investments … These breaches of fiduciary occurred, at least in part, as a result of severe conflicts of interest between and among the fiduciaries of the DST plan that resulted in repeated prohibited transactions and acts of self-dealing, in violation of Section 406 of ERISA.”

Plaintiffs bring their action on behalf of the whole class of plan participants under ERISA Sections 409 and 502, to recover the following relief:

• A declaratory judgment holding that the acts of defendants described violate ERISA and applicable law;
• A permanent injunction against defendants prohibiting the practices described and affirmatively requiring them to act in the best interests of the participants;
• Disgorgement and/or restitution of all payments and other compensation improperly received by Defendants, or, alternatively, the profits earned by defendants in connection with their receipt of such unlawful payments and other unlawful compensation;
• Compensatory damages, attorney fees and other recoverable expenses of litigation; and
• Such other and additional legal or equitable relief that the Court deems appropriate and just under all of the circumstances.

Defendant Ruane Cuniff & Goldfarb, Inc., the text of the ERISA challenge explains, is a Delaware-based corporation and registered investment adviser with its principal place of business in New York. The firm is an investment firm that served as an adviser and fiduciary to the DST Systems plan until approximately August, 2016, when its services to the plan were terminated.

According to plaintiffs, Ruane’s flagship fund, the Sequoia Fund, contained more than $25 billion in assets “until Ruane engaged in a misguided and reckless investment strategy that was focused upon pursuing investments in Valeant Pharmaceuticals International, Inc.”

More from the text of the complaint 

Additional background detail shows, at all pertinent times, the DST Systems retirement program consisted of two components: a 401(k) portion, which is participant-directed, and a profit sharing account (PSA), in which the assets were invested by the trustee of the plan, as advised by the investment advisory firm. Plaintiffs suggest the DST plan also included an investment option that permitted participants to invest in DST stock. The PSA was terminated in 2016 when the plan terminated the services of Ruane, at which time all of the investments in the plan became participant-directed.

The PSA was allegedly “structured by DST to provide a projected level of benefits through contributions by the company invested in a manner that DTS, the advisory committee defendants and Ruane (as the investment adviser to the PSA) had supposedly determined would achieve a desirable, aggressive, long-term rate of return—in essence, an investment strategy akin to that of a DB plan—without the obligation for the company to make any contributions in the event of an investment return short-fall or provide any guaranteed benefit.”

In sum, with respect to the retirement savings of plan participants, the complaint argues Ruane (under the oversight and with the consent of DST and the advisory committee defendants) “gambled with these plan assets by failing to appropriately diversify the investment of the plan’s assets and pursuing risky, inappropriate investment strategies, while the compensation committee defendants failed to fulfill their duties to supervise the advisory committee defendants. In addition, the plan participants were not provided with meaningful and timely guidance regarding the nature of the investments held in the PSA or any specific or meaningful and timely information regarding the investment objectives or investment components of the PSA.

“Instead, participants in the plan simply received periodic, post-hoc reports regarding the performance of the PSA that provided generalized information regarding the return (or lack thereof) achieved in connection with the investment of the PSA.”

Important to the thrust of the complaint is that, according to plaintiffs, DST serves as the registrar and shareholder servicing agent for the Sequoia Fund.

“DST provides investor recordkeeping, performance communications and other information to shareholders of the Sequoia Fund and has other administrative responsibilities with respect to the Sequoia Fund. Ironically, while the Sequoia Fund is fully transparent to investors due, in part, to DST handling shareholder communications, the PSA is highly opaque,” the complaint argues. “Since the Sequoia Fund was designed as an investment vehicle for high net worth individuals with ample funds to gamble and lose, Ruane’s decision to simply mimic the investments of the Sequoia Fund in the PSA was reckless and imprudent because Ruane gave absolutely no consideration to the fact that the PSA contained retirement funds and, therefore, the investment objectives of the PSA necessarily should be tailored to recognize that plain fact. Likewise, DST and the advisory committee defendants breached their fiduciary duties by failing to adequately supervise RCG and insist upon an appropriate investment strategy for the PSA, while the compensation committee failed to fulfill its duties to supervise these defendants.”

The full text of the complaint is here.