Copyright 2004 Dolan Media Newswires  
The Daily Record of Rochester (Rochester, NY)
September 29, 2004 Wednesday
SECTION: NEWS

LENGTH: 947 words

HEADLINE: ERISA claim against defendant dismissed

BYLINE: Kevin M. Momot

BODY:
Where the plaintiff asserted the defendant breached its fiduciary obligations under the Employment Retirement Income and Security Act (ERISA) while managing particular assets, the defendant acted in conformity with the "prudent man" standard and therefore did not violate its fiduciary duty.

Reviewing the facts in Ulico Casualty Co. v. Clover Capital Management, Inc., U.S. District Court, Northern District of New York Judge Howard G. Munson dismissed the plaintiff's claims in their entirety.

The Facts

The plaintiff, Ulico Casualty Co., underwrote fiduciary liability coverage to Laborers International Union of North America Local 35 Pension Fund; Local No. 322 Pension Fund; and Carpenters Local No. 120 Pension Fund (the Funds). The defendant, Clover Capital Management, Inc., is an asset manager for individuals, employee benefit plans, endowments and foundations and is a registered investment advisor.

This action was commenced as the result of previous lawsuits brought by the U.S. Department of Labor (DOL) against trustees of the union pension Funds, alleging the trustees improperly invested in z-bonds and sold them at a significant loss. (Z-bonds are a class of collateralized mortgage bonds that are considered volatile because an upward change in the interest rate could result in decreasing market value.)

Ulico asserted Clover breached fiduciary obligations under ERISA while managing assets of the Funds' pension plans. Specifically, Ulico brought claims under §§ 404 (a)(1)(B); 404 (a)(1)(D) (fiduciary duties - prudent man standard) and § 405 (a)(2) (liability for breach of a co-fiduciary - circumstances given rise to liability) of ERISA, 29 USC §§ 1104 (a)(1)(B); 1104 (a)(1)(D); and 1105 (a)(2).

Court's Analysis

In making its determination, the court looked at whether Clover breached an ERISA duty by failing to satisfy the "prudent man" standard of 29 USC § 1104 (a)(1)(B) and (D) by not conducting a careful analysis before selling the Fund's major assets at a loss.

'Prudent Person' Standard Under ERISA

Pursuant to applicable ERISA provisions, fiduciaries must perform their duties "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in his conduct of an enterprise of like manner of a like character and with like aims." 29 USC § 1104(1)(B) and (D).

The court noted ERISA's prudent person standard has been interpreted as an objective standard requiring (1) the use of proper methods to investigate, evaluate and structure the investment; (2) to act in the same manner as those who have a familiarity with such matters; and (3) to exercise independent judgment when making investment decisions. U.S. v. Mason Tenders Dist. Council of Greater New York, 744 FSupp 882, 886 (SDNY 1995); Lanka v. O'Higgins, 810 FSupp 379, 387 (NDNY 1992).

This standard requires measuring the fiduciary's behavior against the standards in the investment industry. Lanka, 810 FSupp at 387.

Expert Testimony

Clover's expert, Dr. Martin R. Holmer, testified that based on the materials and depositions he studied, Clover's sale of the z-bonds was correct. Dr. Martin explained that Clover had considered a wide range of issues before reaching a decision as to whether to hold the z-bonds or sell them and use the proceeds to purchase other securities. According to the expert testimony, Clover considered "statistical data from the Bloomberg screens, yield to maturity, shorter term market value risk and diversity of the portfolio it was assuming."

Judge Munson concluded Dr. Holmer's analysis supported the contention that Clover's investment decisions were reasonable.

"Clover's sale of the z-bonds did not violate its fiduciary duty under ERISA. In Board of Trustees of the Local 295/Local 851 Pension Fund v. Callan Associates Inc., 175 F3d 1007, 1999 WL 159893 (2d Cir.), the Second Circuit held that even though the plaintiff pension finds sustained a loss of approximately $1.5 million, it was acceptable in the investment community in 1995 for asset transition between fixed income managers to be executed through a liquidation to cash method similar to what was done in 1995 by Clover when it sold the z-bonds," Judge Munson wrote.

Ulico's expert witness, Dr. Andrew S. Carron, testified that Cover's method of selling the bonds was "imprudent" and resulted in proceeds of approximately $720,000 less than the market prices at the time of the sale. According to Dr. Carron, the z-bonds should have been retained by Clover or sold gradually.

The court determined Dr. Carron's testimony was insufficient to prove Clover's sale of the z-bonds was imprudent and caused proceeds well below the market price.

"Dr. Carron testified that Clover should have kept the z-bonds, or sold them gradually, because his quantitative analysis showed they would have outperformed alternative securities. This opinion overlooks the facts that here was no way to discover with certainty whether additional interest rate raises could have further depressed their market valuation ..."

Conclusion

The court concluded Clover acted in conformity with the prudent man standard, and therefore fully complied with its fiduciary obligations under ERISA. Ulico's claims were dismissed.