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CHICAGO—Investment firms, retirement plan operators and their insurers should brace for more lawsuits filed under the Employee Retirement Income Security Act, experts say.
Filing litigation under ERISA is an increasingly popular route for plaintiffs, according to several attorneys and others on a panel at the Professional Liability Underwriting Society's 2009 international conference in Chicago earlier this month.
For example, in district court in Pennsylvania, a group of plaintiffs this year sued Austin Capital Management Ltd., an Austin, Texas-based partnership that oversees hedge fund investment portfolios, for investing their money with disgraced financier Bernard Madoff. The plaintiffs, including the Pension Fund for Hospital & Health Care Employees in Philadelphia, allege that Austin Capital Management violated ERISA by imprudently investing the plan's funds and failing to notice red flags that Mr. Madoff's firm was a Ponzi scheme.
Kenneth E. Rubinstein, a Manchester, N.H.-based partner at Nelson, Kinder, Mosseau, & Saturley P.C., said at the PLUS conference that he believed the case has settled. He also said the case “signals the beginning” of a new approach by some plaintiffs.
“I think we can take this as a clear sign that plaintiffs have found a (new) avenue,” he said. “If you go through the (Austin Capital Management) complaint, it effectively states a cause of action that probably would survive a motion to dismiss. Once these claims get going... they're very costly to defend and they have some substantial risk.”
For cases related to Ponzi schemes and other frauds, filing an ERISA suit is attractive to plaintiffs in part because there are not enough assets available through securities lawsuits to compensate all investors who were harmed, Mr. Rubinstein said.
But he said ERISA suits also are a way for plaintiffs to avoid the more stringent requirements of the Private Securities Litigation Reform Act of 1995.
That law requires plaintiffs to meet a higher threshold when pleading a case, and it halts discovery—often an enormously expensive undertaking for corporate defendants—when the defense files a motion to dismiss. An ERISA suit could bring allegations very similar to a traditional securities lawsuit but would not be subject to those PSLRA requirements, Mr. Rubinstein said.
“The plaintiffs are realizing that not only is this an additional pocket but it's an additional pocket where they can get a little more leverage and have to deal with a little less strict requirements,” he said.
In addition to cases involving Ponzi schemes, plaintiffs have filed ERISA cases against large companies operating 401(k) or similar plans for allegedly excessive fees.
Most of these suits argue that the plan operators should not have paid retail-level fees and should have used their large size to negotiate more favorable fees, said Elizabeth Hopkins, counsel for appellate and special litigation at the U.S. Department of Labor.
Some cases also accuse defendants of undisclosed fees, revenue sharing or other conflicts of interest, she said.
One of the most important issues in such cases is who constitutes a fiduciary. Ms. Hopkins said that an employee who is not a named fiduciary but who exercises control over the plan, its management or its assets could be named as a fiduciary in an ERISA suit, and many investment managers have been named as defendants in the suits. Still, she said such cases typically are difficult for plaintiffs.
“Generally these cases are very hard for plaintiffs unless there really was no process that was used in picking the funds and unless there was some pretty obvious self-dealing,” she said.
Earlier this year, the U.S. Supreme Court established more stringent pleading standards in Ashcroft vs. Iqbal, drawing on its 2007 ruling in Bell Atlantic Corp. et al. vs. William Twombly et al. Ms. Hopkins said that those rulings, which require that a claim be “plausible on its face,” have helped corporate defendants, especially in ERISA suits, and have resulted in numerous dismissals.
“These are hard cases for plaintiffs,” she said. “Judges tend not to like them because they're complex and time consuming, and (judges), I think, want to find ways to get rid of these cases. And so far, dismissing them as not being plausible is one way of these cases being dismissed.”
Ms. Hopkins said that the 8th U.S. Circuit Court of Appeals soon is expected to rule on a lawsuit against Wal-Mart Stores Inc. for allegedly costing its 401(k) participants $60 million in unnecessary mutual fund fees.