Investment Advisor Personally Liable for Employee Pension Fund Losses

By Jeffrey Rhodes Sep 28, 2016
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An investment advisor for an employee pension plan is liable for $15 million in investment losses and interest for his delay in transferring funds to a more diversified plan, the 2nd U.S. Circuit Court of Appeals ruled.

The Retirement Committee of Severstal Wheeling Inc. (SWI), a West Virginia subsidiary of Russian steelmaker OAO Severstal, retained WPN Corp. for investment advisory services in order to manage the assets of its two employee retirement plans (the Severstal plans).

WPN's sole employee and chief officer is Ronald LaBow. Until late 2008, the Severstal plans were funded and maintained through a trust (the combined trust) sponsored by WHX Corp. WHX was a former affiliate of SWI that LaBow had previously managed as a nonexecutive chairman.

In 2008, the custodial trustee of the combined trust, Citibank, decided to exit the trust business. By June 2008, Citibank informed WPN, LaBow and WHX that Citibank intended to withdraw as trustee of the combined trust and that the assets of the Severstal plans had to be transferred to a new and separate trust placed with a new trustee.

LaBow told a prominent member of the SWI Retirement Committee that LaBow would continue to act as the Severstal plans' investment manager after the trust separation. WPN encountered difficulties in transferring the existing assets of the combined trust, which included many different investment accounts, into a new trust. LaBow originally stated that the assets could be converted to cash and thereafter transferred to a new trust (the Severstal trust), but later determined not to make a cash conversion.

The combined trust contained a portfolio that included an account managed by Neuberger Berman LLC, composed of 13 large-capitalization equity securities, 11 of which were energy-sector stocks. These stocks comprised approximately 97 percent of the value of the assets in the account. Instead of converting the combined trust assets to cash, LaBow directed WHX's treasurer to transfer all of the assets maintained in the Neuberger Berman account from the combined trust to the Severstal trust. This large, undiversified portfolio was the only set of assets WPN successfully transferred to the Severstal trust.

In March 2009, LaBow finally liquidated the Severstal plans' assets, but did not present the SWI Retirement Committee with any formal plan for investment of the plans' assets. In May 2009, LaBow proposed to invest the trust in a portfolio consisting entirely of mortgage-backed securities. Later that month, the SWI Retirement Committee decided to change its investment advisor to Mercer Investment Consultants, which proposed and implemented a diversified investment allocation of 50 percent equity securities, 45 percent bonds and 5 percent in cash.

Thereafter, the SWI Retirement Committee, its members and the Severstal plans brought suit against WPN and LaBow, claiming that the advisors violated the Employee Retirement Income Security Act (ERISA) by failing to prudently and loyally manage and diversify the plans' assets and advise the plans' fiduciaries. They also alleged that WPN and LaBow breached their contract with the Severstal plans by failing to obtain fiduciary insurance that would cover ERISA claims of breach of fiduciary duty.

WPN and LaBow argued at trial that they did not exercise full control over the plans' assets or assume fiduciary duties regarding those assets, and thus could not transfer or manage the assets without the SWI Retirement Committee's approval. This was contradicted by WPN's contract with WHX and the Severstal Investment Management Agreement, which gave WPN and LaBow complete control over the combined trust and plans' assets and acknowledged that WPN was an ERISA fiduciary.

The district court found WPN and LaBow responsible for the investment losses in the amount of the difference between what a diversified portfolio holding the plans' assets would have earned and what they were actually worth because of WPN's and LaBow's actions. This difference was $9.7 million and interest on the amount was $5.3 million. The court also ordered WPN and LaBow to pay back their management fees of $110,438.

Severstal Wheeling Inc. Retirement Committee v. WPN Corp., 2nd Cir., No. 15-2725-cv (Aug. 30, 2016).

Professional Pointer: An individual manager can easily assume fiduciary duties concerning the assets of an employee retirement or pension plan. Failure to manage the plan prudently can result in an individual becoming liable for plan losses on a dollar-for-dollar basis.

Jeffrey Rhodes is an attorney with Doumar Martin in Arlington, Va

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