Fiduciaries of two defined contribution retirement plans sponsored by the same employer (the “Plans”) sued the Plans’ former investment manager for breach of ERISA fiduciary duties and state law violations in connection with the transfer of the Plans’ assets from a pooled employee benefit plan trust (the “Combined Trust”) to a separate trust for the Plans in November 2008. In essence, the plaintiffs alleged that the defendants, the Plans’ designated investment manager and the entity’s sole executive, failed to assure that the Plans’ assets would be invested as they had been under the Combined Trust. Instead of using the same percentage investment allocations as had existed under the Combined Trust, the defendants allegedly invested the Plans’ roughly $38 million in assets in a non-diversified pool, 97% of which was invested in 13 energy sector equities.
The defendants did not liquidate the equities until March 2009. The defendants proposed to reinvest the cash in mortgage-backed securities in May 2009, a proposal that was rejected by the Plaintiffs. Plaintiffs terminated the defendants in May 2009, and replaced them with an investment consultant that provided a recommendation to the fiduciaries in July 2009 to invest the Plans in a mix of equities, bonds, and cash, a recommendation that was implemented in July 2009. The Plaintiffs sued on Feb. 5, 2010.
After a two-week trial in July 2014, the District Court for the Southern District of New York (Judge Taylor Swain) issued its decision on Aug. 10, 2015. It found that the defendants were liable for breaching ERISA fiduciary duties by not following the instructions to invest the Plans in the same proportion as the Combined Trust, and for not diversifying the Plans’ assets. It held that the defendants were fiduciaries for providing investment advice for a fee under the Department of Labor’s current five-part test. It held that the defendants breached their fiduciary duties of not diversifying plan assets, holding that even if the defendants could not—as they asserted at trial—effect the diversification, at minimum, the defendants should have raised to the Plans’ fiduciaries any delay in the process of diversifying the Plans’ assets.
After holding that the defendants were liable for breaching their fiduciary duties to the Plans, the court turned to the amount of damages. The court looked to the diminution of value of the Plans during the time of the breach, and also the lost earnings that the Plans could have obtained. The plaintiffs’ expert had identified four measures for the returns that the Plans could have obtained if invested in a proper manner.
The amounts included a high of $9.6 million had the Plans been invested as they were in the Combined Trust, $7.7 or $8.6 million had the Plans been invested as the successor investment consultant recommended in July 2009 (one measure accounting for a transition period in cash), and a low of $5.9 million based on a diversified 60-40 equity-fixed income split appropriate for a population with the demographic characteristics of the Plans.
Following the Second Circuit approach set forth in Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985), the court observed that the proper measure of damages would be to “presume that the funds would have been used in the most profitable” of the “plausible” alternatives, with “[t]he burden of proving that the funds would have earned less than that amount [placed] on the fiduciaries found to be in breach of their duty.” The defendants were unable to meet that burden given evidence that the Plans could have been invested in comparable ways as the Combined Trust.
Applying that standard, the court awarded the plaintiffs $9.6 million, which was inclusive of the $4.7 million diminution in value and the lost earnings. It also awarded disgorgement of the defendants’ management fees, and pre-judgment interest from 2009 at the New York rate of 9%. The 9% rate was used based on the parties’ agreement to be governed by New York law insofar as it was not preempted.