Court Says Private Equity Funds Are Liable For Pension Liabilities of Portfolio Company

If you open a box and a dog pops out, your enthusiasm will be curbed if you were expecting something else. Surely this is how several private equity funds must feel now about one of their investments. According to "Private Equity Funds Liable to Union Pension Plan" by Jacklyn Wille (Pension & Benefits Daily, March 30, 2016), a federal judge recently ruled that several Sun Capital funds are "jointly liable for more than $4.5 million in withdrawal liability" that one of its portfolio companies, Scott Brass, "owed to a Teamsters pension fund." (You can visit Bloomberg Law to read the March 28, 2016 decision by clicking here.)

I will defer to attorneys to address the legal issues. So far, I found two commentaries on the heels of this 2016 legal decision. See "District Court Concludes Private Equity Fund Is Liable for Pension Obligations of the Portfolio Company" (Fried Frank Harris Shriver & Jacobson LLP, March 30, 2016) and "Private Equity Funds Held Liable for Pension Liabilities of a Portfolio Company" (Sullivan & Cromwell, March 31, 2016).

From my perspective as an economist, any surprise claim on future cash flows could be disastrous if it is large enough to jeopardize the ongoing viability of a business. Even if a business has sufficient resources to maintain itself as an ongoing concern, utilizing cash for something that was not planned for could lead to a lower growth rate than originally expected. Keep in mind that pension funds, endowments and foundations frequently allocate monies to private equity on the basis of expected returns for this asset class.

Projecting cash flows as part of due diligence is nothing new for many investors. That said, I am not convinced that all enterprise investigations fully address the impact of an underfunded defined benefit plan. I was recently contacted by a firm that was tasked to render a fairness opinion and wanted my views about pension math. The investment bankers were reviewing documents from bidders that radically differed with regard to the treatment of the target company's benefit plan burden. When I was asked to speak and also write about pensions and enterprise value, the invitation came from a senior valuation executive who felt that the topic was not being adequately addressed. See "Pension Plans: The $20 Trillion Elephant in the (Valuation) Room" by Dr. Susan Mangiero (Business Valuation Update, July 2013). Email me if you would like a copy of my 2013 slides about this topic.

In 2013, when this Sun Capital case originally made its way to the court, it struck me as an important issue. (I was not involved in this matter as an expert.) Several editors agreed and I ended up co-writing two articles with Groom Law Group partner David Levine. I've uploaded one of these articles to this pension blog. Click here to read "Private Equity Funds and Pension Plans: A Changing Dynamic" (CFA Institute Magazine, March/April 2014). At my request, Attorney Levine responded to this 2016 decision by emailing the following: "In short, while some private equity firms have already moved to evaluate and, in some cases, clarify their fund structures, this case is likely to lead to a second look at their structures and methods of involvement with their portfolio companies."

If certain limited partners are not already asking questions of their private equity fund general partners about the nature of portfolio company pension plans, controlling interest status and deal structure, their due diligence could quickly change in the aftermath of the 2016 Sun Capital litigation.

Interested persons can click on the links provided below to read earlier blog posts about this topic:

Public Pension Fund Litigation Database

In carrying out research for a client about public pension fund trends, I came across a website called Pension Litigation Tracker. Maintained by the Laura and John Arnold Foundation, this collection of court documents and descriptions of ongoing developments in "pension reform lawsuits" looks to be a helpful resource at a time when there is increased pressure on numerous municipalities to address the challenges associated with underfunded retirement plans, including questions about the constitutionality of benefit arrangements. A drop down menu allows the user to search by state or by topics such as double dipping, increased employee contribution, pension rights and reduced benefits.

As I have discussed extensively in analyses about the impact of pension deficits on the sponsor's ability to raise capital, service debt and/or sustain economic growth, it is no surprise that litigation and regulatory enforcement that alleges either contractual non-performance or fiduciary breach (or both) is growing. Interested readers can download "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz (American Bankruptcy Institute Journal, July 2014). Also visit the Municipal Bond section of the Good Risk Governance Pays website.

These cases have the potential to be large in terms of dollar damages as well as the cost of defense. An example is the class action filed against the Board of Trustees of the Kentucky Teachers' Retirement System by its "75,000 active members, and over 45,000 annuitants."

While emphasizes the legal nature of disputes about benefit reforms proposed by cities and states, it does not showcase the large number of investment-related lawsuits wherein a public pension plan(s) files a 10b-5 lawsuit against the issuer of a security that is owned by the plaintiff, alleging securities fraud. These actions are likewise large and plentiful. More will be said about this topic in a later post.

An Economist's Perspective of Fiduciary Monitoring of Investments

I am delighted to share my recent article with readers of this pension blog. Entitled "An Economist's Perspective of Fiduciary Monitoring of Investments" (by Dr. Susan Mangiero and published in Bloomberg BNA Pensions & Benefits Daily, May 26, 2015), I wrote this article in the aftermath of the May 18 Tibble v. Edison decision by the U.S. Supreme Court.

A central thesis is that "ongoing oversight is an exercise in risk management" and that "[r]isk management is a never ending process." The article emphasizes the importance of (a) examining multiple risk factors and not relying on performance numbers alone (b) understanding the presence of financial leverage (should it exist) (c) clarifying the role of a service provider when an outside party is used and (d) letting participants know about the type of monitoring being done by an investment committee.

The topic of this article readily lends itself to at least one lengthy book as there is a considerable amount to say. I am co-writing a sequel article with fellow economist, Dr. Lee Heavner.

If you are interested in discussing investment fiduciary monitoring as relates to trustee training, compliance or dispute resolution, please email

ERISA Litigation Webinar Transcript Now Available

Seeking to accomplish a goal without having the right tools can result in frustration and possible failure. One solution is to get outside help when needed as long as the party being hired is knowledgeable and independent. Otherwise, what looks like a solution could quickly become a problem. Applied to ERISA plans, trouble might take the form of costly and time-consuming enforcement and/or litigation. Over the last few years, that reality has set in for more than a few employers.

Recognizing the importance of abiding by good governance principles, several of us agreed to speak as part of an educational webinar on April 8, 2015 about fiduciary tools, pitfalls and lessons learned. Sponsored by fi360 and entitled "ERISA Litigation and Enforcement: The Role of the Independent Fiduciary and Best Practices for Financial Advisors," this webinar joined Attorney Tom Clark (Counsel with the Wagner Law Group), Dr. Susan Mangiero (Managing Director with Fiduciary Leadership, LLC) and Mitchell Shames, Esquire (Partner with the Harrison Fiduciary Group) to address the (a) use of an independent fiduciary (b) clarifying what an outside vendor should be doing and (c) avoiding legal and economic landmines that have revealed themselves in prominent court cases and regulatory examinations.

If you missed the event, email for a copy of the slides. Click here to download the written transcript. Edited for clarity (and because the audio file is spotty in some places), this fourteen page document lays out cornerstone concepts and includes suggestions for plan sponsors and the advisers who serve them. These include, but are not limited to, the following:

  • The outsourced fiduciary market is growing in the United States and elsewhere.
  • When an outside party is hired by a plan sponsor, it is critical to specify responsibilities and contract accordingly. When an "expectations gap" exists, some critical tasks may be left wanting or not addressed at all.
  • When multiple fiduciaries are in place, a plan sponsor must ensure that a central person or team is adequately coordinating the efforts of all fiduciaries.
  • The newly proposed Conflict of Interest rule is predicted to materially change the landscape of fiduciary relationships between plan participants and retirement advisers.
  • A fiduciary status may exist due to either a contractual agreement or by virtue of the functions assumed by an individual or organization.
  • ERISA litigation is getting more attention these days, with a particular focus on fees, use of proprietary funds, revenue-sharing and disclosure of compensation paid to investment consultants, advisers and asset managers.
  • Demonstrating procedural prudence in part depends on what others in the industry are doing (or not doing as the case may be) and whether actions make sense for a given plan.
  • A renewed focus on disclosure and transparency is in the works according to comments made by the U.S. Department of Labor.
  • An independent fiduciary can be engaged for a singular transaction or for a task that continues over a long period of time.
  • An independent fiduciary can be engaged by either a defined contribution plan or defined benefit plan or both.
  • When there is a perception or reality of a conflict of interest, it may be prudent for an independent fiduciary to be engaged. The participants pay for said party because the independent fiduciary works on behalf of the participants.
  • The concept of co-fiduciary status is important and should be paid heed by any adviser who has an ERISA plan as a client.
  • Before delegating duties (to the extent allowed) to a third party, a plan sponsor should decide what financial issues should be vetted. Liquidity, the use of leverage by asset managers and asset allocation are a few of the many topics that a delegated fiduciary could be asked to measure, monitor and manage.
  • A fiduciary audit can be extremely helpful as a tool for identifying areas of improvement for an ERISA plan sponsor.

It may be no surprise that over 500 people registered for this educational webinar about fiduciary foibles. After forty years since its inception, ERISA remains a force that cannot be ignored.

ERISA Litigation Predicted To Rise

I have just returned from Chicago where I spent two days listening to transaction attorneys, litigators and insurance company executives talk about trends in ERISA enforcement and legal disputes. Sponsored by the American Conference Institute, this assembly about ERISA litigation included sessions on class actions, Employer Stock Ownership Plan ("ESOP") problem areas, the role of economic experts in litigation, challenges to the church plan exemption, questions about excessive fees, de-risking, stock drop defense strategies, health care reform, how much ERISA fiduciary liability insurance to purchase and much more.

I took a lot of notes and intend to write about implications for plan sponsors and their service providers through an economic and governance lens.

It may be coincidental but certainly not trivial that the United States Department of Labor released its fiduciary proposed rule about conflicts of interest on the second day of this important ERISA litigation convening, i.e. on April 14, 2015. The thinking is that the adoption of a more rigorous rule could open the door wide to a multitude of further disputes and heightened examinations. Click here to access the language of the proposed rule and supporting documents.

It sounds like many will be even busier in the coming months.

X Marks The Spot Approach to Pension Risk Management

Anyone who has been on the receiving end of major surgery may tremble after reading "How to Make Surgery Safer" (Wall Street Journal, February 16, 2015). Journalist Laura Landro describes a panoply of horribles such as operating on the wrong body part or leaving a foreign object inside a patient's body. Honing in on "never events" (i.e. those that are serious and should never occur), she describes attempts by hospitals to reduce human error in a quest to contain the rate of injury, minimize the number of deaths and avoid the billion dollar whack for serious faux pas. Besides the collection and analysis of big data to glean lessons learned and track performance, the writer describes how operating room teams are being prepped to emphasize safety in numerous ways. These include, but are not limited to, the following:

  • Adding radio frequency tags to instruments and sponges;
  • Empowering nurses to override a doctor's orders to wrap up if questions exist about missing items;
  • Convening as a team to agree on strategy before any cuts occur;
  • Identifying ahead of time what procedure should take place and on what part of the body;
  • Training all staff about how to use electrical equipment;
  • Creating, and then following, an appropriate checklist; and
  • Asking patients to actively participate by getting into good shape ahead of time and scrubbing with anti-bacterial soap prior to surgery.

In the pension world, setting a risk management objective by proverbially marking the target spot with a big X merits consideration. After all, if the goal (or set of goals) is vague or flat out wrong, chances are that the "operation" will fail. Should that happen, the "patient" (i.e. participants) could suffer.

The concept of proper goal-setting is far from trivial. Fiduciary breach allegations are undeniably here to stay, courtesy of an increasingly active plaintiffs' bar. Settlements can cost sponsors millions of dollars, even when a company feels strongly that it has done everything correctly. Changing regulations could up the ante. According to "President Obama to Address DOL Fiduciary Redraft at Monday AARP Meeting" (Think Advisor, February 22, 2015), proposed standards put forth by the U.S. Department of Labor appear to be moving closer towards some type of final conflict of interest rule. In a January 13, 2015 memo, the White House seems to be taking the view that retirement plan fees are often too high and have cost savers more than $6 billion. No doubt the financial industry will continue to rebut these estimates.

Based on my experience as a forensic economist and someone who has served as a testifying expert, goal-setting is hugely important when it comes to resolving disputes. An inevitable question is whether something went awry and, if so, what monetary damages should be paid (and to whom). Answering inquiries about whether wrongdoing occurred (and its magnitude) has to start with identifying the objective(s) and then examining the achievement of said goals (or lack thereof).

Similar to the health care profession, continuing to up its game in terms of process improvement, retirement plan sponsors (and their service providers) have a vested interest in creating goals that are (a) clear (b) measurable (c) realistic and (d) appropriate for the situation at hand.

ERISA Plan Investment Committee Governance

In case you missed "ERISA Plan Investment Committee Governance: Avoiding Breach of Fiduciary Duty Claims" with Dr. Susan Mangiero (Fiduciary Leadership, LLC), Ms. Rhonda Prussack (Berkshire Hathaway Specialty Insurance) and Attorney Richard Siegel (Alston & Bird), click to download the November 17, 2014 presentation or visit the Strafford CLE website to obtain the audio recording.

Given the importance of the investment committee governance topic and emerging market trends in the area of outsourcing, my comments focused on committee structure, guiding documents, training and implications when third parties sign on as fiduciaries. Points I made during the webinar include, but are not limited to, the following:

  • The ERISA Advisory Counsel, in its 2014 Issue Statement about outsourcing employee benefit plan services, cites a desire to understand how vendor contracts address provisions such as termination rights, indemnification, liability caps and service level agreements.
  • An evaluation of the outsourcing business model is not surprising given a service provider push to serve as an Outsourced Chief Investment Officer or Fiduciary Risk Manager. (An Asset International publication refers to the OCIO movement as a fast-growing segment of investment consulting.)
  • Once an investment committee has been authorized by the sponsor's board of directors, a core set of qualifications and experience needs can be assembled. Plan counsel can play a vital role in explaining fiduciary obligations.
  • Beyond that core base, facts and circumstances such as plan design, company size, industry structure and investment strategy should be taken into account as part of determining requisite training and experience.
  • Regular meetings are encouraged with frequency being determined in part by what has to be done by the investment committee and related time sensitivity of completing a task(s).
  • Notwithstanding the voluntary nature of having an Investment Policy Statement ("IPS") in place, an ERISA plan investment committee should establish one nevertheless that makes sense for a particular plan. Some organizations have been questioned after creating an IPS but not following it.
  • Creating (and following) an appropriate Risk Management Policy can likewise be useful, especially for ERISA plans that utilize derivative instruments and/or allocate money to more complex products or strategies.
  • Training is another mission-critical area. (According to "DOL Investigators Quiz Plan Sponsors On Training of Fiduciary, Attorneys Say" by Bloomberg BNA contributor Joe Lustig, fiduciaries are being asked by regulators whether training programs exist.)
  • Continuing education is beneficial since regulations, market conditions and plan-related objectives and strategies can change over time.

Someone from the audience asked whether it made sense for an investment committee to consist of a senior corporate executive such as a Chief Financial Officer and her direct reports. The point is that each fiduciary is equal at the investment committee "table" but otherwise unequal. This can present a big problem if any or all of the investment committee members disagree with the Chief Financial Officer. Worse yet, a subordinate (in corporate organization terms) may be reluctant to whistle blow about an imprudent decision made by the CFO while wearing her hat as ERISA fiduciary. I will leave the question as to legal protection to attorneys. However, in doing some research, it turns out that U.S. federal pension law does address whistle blower protections. Interested persons can click to read "ERISA Has a Whistleblower Provision? Yep." by Seyfarth Shaw attorneys Ada Dolph and Robert Szyba (June 19, 2014).

There is a lot more to say on the topic of investment committee governance, notably because ERISA lawsuits that are adverse to a plan sponsor tend to include all investment committee members as defendants. An effective infrastructure and good governance policies and procedures can help to mitigate fiduciary personal and professional liability and position the investment committee to better serve participants.

Decision Making When You Don't Like Your Colleagues

As an independent economic consultant, I am fortunate to have flexibility as to project selection and the make-up of my team. From what I hear from colleagues, others don't feel as lucky. They tell me they feel stuck in a situation where they have important duties to carry out but do not necessarily trust or like their work mates. This could be dangerous, especially since plan fiduciaries are exposed to personal liability.

I've heard some say that you can dislike someone yet still have respect for their knowledge and integrity. Others suggest that you may want to break bread with an individual over lunch but want to avoid having to depend on their judgment about serious matters. I supposed the ideal is to both like and trust someone to be careful about things such as vendor selection, changing an investment line-up, freezing a plan and so on. When the perfect combination of sparkle, professionalism and gray matter is non-existent, what should a fiduciary do?

I haven't seen much on this topic about how to select someone to serve as a fiduciary of a pension fund with respect to their personality and integrity. One public plan trustee asked for my opinion about a committee on which he served. His concern had to do with what he deemed to be anemic attempts on the part of one of his colleagues to gather information about various asset managers and asset classes. His fear was that this person would vote "yea" or "nay" without a proper basis. I told him that his anxiety was far from trivial. Based on my experience, this gentleman was right to be scared. When a fiduciary breach complaint is filed, all past and present members of the investment committee are often cited as defendants. The notion is that the fiduciaries were making important decisions on a collective basis.

In my view, there is room for improvement as to how pension plan fiduciaries are selected, trained, monitored for appropriate performance and terminated, as needed. It wouldn't hurt to assess the friendliness factor of each candidate either. Not that everyone has to bond over Friday night pasta but the investment committee typically works as a team. It is important that the members of said team can have an open and meaningful exchange among one another, debate various topics in depth and decide what makes sense for participants thereafter. Speaking in plain language helps. See "Even Pension Board Members Can't Understand Pension Jargon" by Ari Bloomekatz (Voice of San Diego, September 5, 2014), for an interesting example of questions that fiduciaries are right to ask and the disparate level of investment knowledge reflected on a board.

If you have a good story to tell about investment committee dynamics, email  

Brown M&Ms and Investment Service Provider Due Diligence


According to marketing guru Steve Jones, parties seeking to do business with one another can learn a lot from rock musician David Lee Roth. As explained in "No Brown M&M's: What Van Halen's Insane Contract Clause Teaches Entrepreneurs" (Entrepreneur Magazine, March 24, 2014), each of their agreements included a rider that was designed to force a promoter to pay attention to the band's true objective about ensuring safety. By adding what may have seemed like a silly provision about "melt in your mouth" candies being unwelcome, Van Halen was testing whether the promoter had read the contract in its entirety and was therefore more likely to install equipment properly. "If any brown M&M's were found backstage, the band could cancel the entire concert at the full expense of the promoter," leaving him or her with a possible loss in the millions of dollars.

In institutional investment land, there are intriguing parallels. For one thing, there is the safety issue. If a pension plan is poorly managed, beneficiaries may suffer. Second, if there is confusion or ambiguity about who is supposed to do what, when, how and at what price, there are likely to be disputes and economic consequences. There is a growing number of lawsuits and regulatory investigations that are scrutinizing service providers and/or the pension plan trustees who are tasked with diligently selecting them.

The developing market in outsourcing various services to a third party is yet another reason for paying close attention to the quality of engagement letters and vendor contracts. Earlier this year, the ERISA Advisory Council announced its plan to study "current contracting practices with respect to outsourced services, including provisions such as termination rights, indemnification, liability caps, service level agreements, etc. that might assist plan sponsors and other fiduciaries in negotiating service agreements."See "Outsourcing Employee Benefit Plan Services."

As someone who has done business intelligence research and trained investment fiduciaries and their advisors, I often hear the same frustration being expressed about a gap in expectations. Budget-strapped buyers want more for less. Consultants, asset managers and banks say they are searching for ways to satisfy their clients while still being able to earn a reasonable rate of return for their efforts. One solution is to streamline operations, to the extent possible, while acknowledging any fiduciary implications associated with prevailing law and governance standards. If cutting corners to preserve a profit margin ends up sacrificing requisite quality, trustees could be at risk of being investigated for anemic oversight of service providers. Vendors could be at risk for failing to deliver contractual services.

Based on my work for both defense and plaintiff counsel (depending on the matter and whether there is a counterclaim), a poorly worded agreement can be a potential trouble spot. Another hugely important issue is whether a service provider has self-identified as a fiduciary. An attorney or judge may categorize a particular service provider as a functional fiduciary even if a written contract is silent on that point. Trust counsel can play a critical role in assisting with negotiations before authorized persons sign on the dotted line.

ERISA attorneys David C. Kaleda and Theodore J. Sawicki address the issue of fiduciary status in a 2012 article for the National Society of Compliance Professionals. See "Should You Have a Formal ERISA Compliance Program?" In a recent discussion about the best practices for creating and adhering to service level agreements, ERISA attorney Howard Pianko expressed his strong view that there are numerous ways to ensure "plausibility" and still be able to hire affordable outside organizations to assist. He went on to describe the advantages of having a systematic mechanism in place such as the Six Sigma type model that his firm employs. Click to read about Seyfarth Lean. (Having earned a Green Belt in Six Sigma, I can attest firsthand to the upside of developing a process to control quality.) 

For those involved in the selection and oversight of service providers or the delivery of said services, ask yourself if you know as much about an existing or anticipated contract as you should.

Making Bets on U.S. Supreme Court Decisions

If I ever earn a spot on a game show like Jeopardy, answering questions about sports will be a challenge. I recognize that, unlike me, there are serious fans who spend more than a few hours each week, vetting all sorts of statistics and data points about what team is likely to win and by how much. At family gatherings, I hear nephews and in-laws waxing poetic about games such as Fantasy Football. According to the Fantasy Sports Trade Association ("FSTA"), only skilled parties need apply, adding that there is no gambling.

Big money is at stake. According to "Industry Demographics: At A Glance," nearly 34 million individuals, mostly men, played fantasy sports in the United States in 2013. Canada counts roughly 3.1 million fantasy sports players. Over a twelve month period, aggregate league fees for fantasy games tallied $1.71 billion. For information materials, the spend was $656 million. It was $492 million for challenge games. (For us neophytes, what is a challenge game?) Decade-long performance reflects "explosive absolute growth" of 241 percent or an annualized growth rate of 13.1 percent for 2008 through 2018. See "Top 10 Fastest Growing Industries" (April 2013).

So here I am, sitting at my computer, researching certain ERISA litigation matters, and lo and behold, what do I find? You guessed it - FantasySCOTUS. According to its dedicated website, over 20,000 lawyers, law students and "other avid Supreme Court followers" have opined as to how they believe cases will be decided. Click to view a short video about this Harlan Institute initiative.

For those who are waiting with bated breath for commentary about stock drop cases, fear not. Of 53 predictions, as of today, 23 votes are for affirmation by the U.S. Supreme Court and 30 votes are for reversal. There is even a breakdown of votes as to how each justice is expected to respond to the April 2, 2014 hearing about prudence. Click to check out the Fifth Third Bancorp v. Dudenhoeffer roster of votes. Click here to download a transcript of the hearing.

What will they think of next?

Private Equity Fund Limited Partners and Pension Funding Levels

Some pension plans invest in private equity funds or funds of funds. Certain private equity funds invest in companies with pension plans. This means that pension funds that invest in this asset class need to be aware of any deficiencies in their plans as well as those portfolio company plans to which they are likewise exposed. While the notion of "my brother's keeper" may not resonate well with stewards of billions of dollars, it is a reality. This is especially true, in the aftermath of the Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund decision, No. 12-2312 (1st Circuit, July 24, 2013).

Despite the "record year" described by Wall Street Journal reporter Ryan Dezember, private equity investments, like any other, necessitate careful due diligence on the part of institutional investors that seek a seat at the limited partner table. (See "Private Equity Enjoys a Record Year: Firms That Buy and Sell Companies Are Set to Return More Than $120 Billion to Investors in 2013," December 30, 2013). A critical question is whether continued gains will be diminished if a portfolio company has to divert cash to top off an underfunded pension plan. One way to address the issue is for a pension plan, endowment or foundation to ask the private equity fund general partner how much attention they pay to ERISA economics.

There are numerous other queries to make. In the March/April 2014 issue of CFA Institute Magazine, ERISA attorney David Levine (with Groom Law Group, Chartered) and Dr. Susan Mangiero, CFA (with Fiduciary Leadership, LLC), provide insights for improved due diligence, in a post-Sun Capital world. Suggested action steps include, but are not limited to, the following items:

  • Ask whether a private equity fund is "relying on the position that it is not a 'trade or business' and is therefore not subject to liability for a portfolio company's" ERISA plan deficit;
  • Request to see a list of the holdings for purposes of knowing whether a particular private equity fund has a majority ownership in any or all of its portfolio companies;
  • Investigate whether the Pension Benefit Guaranty Corporation ("PBGC") has red flagged any of the pension plan(s) of a business that is part of a private equity fund's portfolio;
  • Understand how, if at all, a private equity fund is planning to solve a pension plan underfunding problem;
  • Acknowledge that a portfolio company's ERISA liabilities could make an exit difficult, whether via an Initial Public Offering or an acquisition, and that this in turn could lengthen the time before a limited partner can cash out;
  • Identify the extent to which a private equity fund regularly examines the degree to which any or all of its portfolio companies are parties to labor contracts that may be difficult to modify; and
  • Be aware that this important legal decision could invite more litigation and regulatory actions that, regardless of outcome, have a cost and therefore a potential impact on future private equity fund returns.

If you have any difficulty in accessing our article, please send an email request to

Pension Risk Governance Blog Celebrates Seventh Birthday

I am delighted to announce our seventh year as an educational resource for the $30+ trillion global retirement plan industry. With over a million visitors to, I appreciate the ongoing feedback and encouragement from financial and legal readers. This blog began as a labor of love and continues to be personally rewarding as a way to help guide the discussions about pension risk, governance and fiduciary duties.

Here is a link to the March 25, 2013 Business Wire press release about, an educational pension risk governance blog for ERISA, public and non-U.S. pension plan trustees and their advisors.

As always, your input is important. Click to send an email with your comments and suggestions.

Thank you!

Yahoo and Moms Gone Wild - How Will Shareholders Respond?

On February 24, I blogged about Yahoo's just-issued memo to employees. The message from the top is to get your shoes on and be seen in the office. See "What Companies Are Doing About Working at Home."

Jump ahead a few days later and mom blogs are chockablock with negative comments. Kristin Rowe-Finkbeiner and Joan Blades, co-founders of MomsRising, issued a press release that denigrates the decision to ban telecommuting. They go on to describe the role of female workers as critical to the majority of families that require two incomes to pay bills. Their primary argument is that talented workers will go elsewhere in search of flexibility and a chance to stay on the fast track without being forced to sacrifice time with family. (Elsewhere, some suggest that Yahoo may have designed this pseudo layoff without having to officially let go of people.) Direct from Cafe Mom Studios, Amy Boshnack asks lots of women for their two cents. "Backward" was one mother's description of the new policy, especially for a technology company. Several women said that they understood the need for in-person brain storming but said that commuting four or five hours a day from a rural location is neither realistic nor productive for those individuals who live far away. Click to view the video discussion on

Moms are not alone in their dissent. NBC News reports that some might interpret this edict as "anti-parent." Others counter that mothers and fathers could win by being forced to accept a more traditional schedule in the office since telecommuting arguably encourages "creep" with emails and phone calls occurring well after 5 pm. Founder of the Virgin Group, Richard Branson, decries the move as "perplexing" and not compatible with a well-connected labor force and a modern work day that no longer spans 9 to 5. See "Give people the freedom of where to work" by Richard Branson (February 25, 2013).

In the end, the decision will likely be deemed successful (or not) if it makes it easier for the company to go where the CEO, Marissa Meyer, and other Yahoo board members want to be. There are numerous moving parts. Indicting this or any other policy per se is hard. One must consider (1) job descriptions and the need for on-site dealings (2) the economics of working together face to face versus the cost savings of having fewer and/or smaller offices (3) strategic objectives of the firm (4) company morale and much more.

My prediction is that we will see a lawsuit or two for any workers who were contractually allowed some latitude with respect to how, when and where they work. If that occurs, the cost of a lawsuit(s) will not be welcome news to the 71% of institutional and mutual fund owners of Yahoo (ticker is YHOO) stock.

Fiduciary Duty is More Than Numbers

As a published author, I am constantly assessing what has appeal to readers. I try to write about topics that are relevant and timely and welcome feedback. Click here to send an email with your suggestions. As a financial expert, I continuously seek to stay on top of what is being adjudicated. As a risk manager, I regularly evaluate what might have been done differently when things go seriously awry.

What I have noticed is that enumeration seems to offer comfort. Lists of this or that are common to many best-selling books and widely read articles. A trip to the Inc. Magazine website today illustrates the point. Consider this excerpted list of lists:

The popularity of laying out "to do" items extends to the retirement industry as well. For example, Attorney Mark E. Bokert provides insights in his article entitled "Top 10 ERISA Fiduciary Duty Exposures - And What to Do About Them" (Human Resources - Winter Edition, Thomson Publishing Group, 2007). His list of vulnerabilities - and prescriptive steps to try to avoid liability - includes the following:

  • Identify who is a fiduciary and making sure that they are properly trained;
  • Create a proper process by which investments are selected and monitored;
  • Monitor company stock in a 401(k) plan and consider whether to appoint an independent fiduciary;
  • Assess the reasonableness of "like" mutual funds versus existing plan choices;
  • Ensure that communications with plan participants are adequate;
  • Undertake a thorough assessment of vendors and review their performance thereafter;
  • Assess whether 401(k) deferrals and loan repayments are being made in a timely fashion;
  • Identify the extent to which service providers enjoy a float and whether they are entitled;
  • Understand what is allowed in terms of providing investment advice to participants and abide by the rules accordingly; and
  • Critically evaluate whether auto enrollment makes sense and the nature of any default investment selection.

One could easily break out each of the aforementioned items into sub-tasks and create appropriate benchmarks to ascertain whether fiduciaries are doing a good job. Indeed, ERISA attorneys are the first to invoke the mantra of "procedural process" as a cornerstone of this U.S. federal pension law. Importantly however, relying only on numbers is not sufficient. Increasingly legal professionals and regulators are asking that process be demonstrated and discussed. Expect more of the same in 2013. Analyses and expert reports may be deemed incomplete if they do not include a deep dive of the fiduciary decision-making process that took place (or not as the case may be).

House of Cards, Netflix and the Bottom Line

I spent hours this weekend glued to my computer screen. Curious to know if "House of Cards" would entertain as promised, I watched the first few episodes as a skeptic, only to be rewarded with solid acting, clever writing and a story line that kept on giving. This political thriller boasts a bevy of Hollywood talent, with Kevin Spacey at the helm. After losing a bid to be the next Secretary of State for a new president, this ethically challenged Congressman plots revenge and an alternative path to power. If you liked "The West Wing" and won't get discouraged by the seemingly realistic portrayal of what happens behind closed doors in Washington, you will enjoy the thirteen episodes of Season 1 and anxiously await the next baker's dozen.

Here's the rub. You need to be an existing Netflix subscriber or sign up tout-suite. In a move that has Hollywood paying close attention, this self-described "leading Internet television network" laid out $100 million to a star cast of writers and actors to recreate a Yankee version of this popular UK theatrical offering.

Why would a company do this? Some assert that original content is where the money is. According to several recent studies, "Streaming videos online are becoming more popular as technology evolves and more content is created for the Internet." See "NPD study: More people watch Internet videos on TVs than computers." CBS News, September 26, 2012. If you hate the countless ads that now consume the first twenty minutes of any in-person showing, you will be glad to have an alternative to movie-watching.

For institutional investors, this push to garner new subscribers and hopefully add to the bottom line is noteworthy. According to the NASDAQ website, 86.85% of the $8+ billion capitalization for Netflix, Inc. (ticker is NFLX) is in the hands of institutional owners. Some of them may not be appeased, certainly those who have sued the company over financial statement disclosures. In April 2012, Judge Samuel Conti appointed the Arkansas Teacher Retirement System and State-Boston Retirement System as lead plaintiffs in this putative class action. Click to read the "Netflix Inc. Securities Litigation" court order.

Fiduciary Shortcuts To Valuation Can Be Dangerous

Despite a plethora of information about how to implement shortcuts to enhance workplace productivity, fiduciaries need to ask themselves whether a "jack in the box" approach that equates speed with care and diligence is worth pursuing.

This topic of shortcuts came up recently in a discussion with appraisal colleagues about the dangers of using a "plug and play" model to estimate value. Although New York Times journalist Mark Cohen rightly cites the merits of having a business valuation done, he lists all sorts of new tools such as iPhone valuation apps that some might conclude are valid substitutes for the real thing. Rest assured that punching in a few numbers versus hiring an independent and knowledgeable third party specialist to undertake a thorough assessment of value is a big mistake, especially if the underlying assumptions and algorithms of a "quick fix" solution are unknown to the user. See "Do You Know What Your Business is Worth? You Should," January 30, 2013.

It's bad enough that a small company owner opts for a drive-in appraisal. It's arguably worse when institutional investors do so, especially as their portfolios are increasingly chock a block with "hard to value" holdings. In the event that a valuation incorrectly reflects the extent to which an investment portfolio can decline, all sorts of nasty things can occur. A pension, endowment or foundation could end up overpaying fees to its asset managers. Any attempts to hedge could be thwarted by having too much or too little protection in place due to incorrect valuation numbers. Asset allocation decisions could be distorted which in turn could mean that certain asset management relationships are redundant or insufficient.

Poor valuations also invite litigation or enforcement or both. As I wrote in "Financial Model Mistakes Can Cost Millions of Dollars," Expert Witnesses, American Bar Association, Section of Litigation, May 31, 2011:

"Care must be taken to construct a model and to test it. Underlying assumptions must be revisited on an ongoing basis, preferably by an independent expert who will not receive a raise or bonus tied to flawed results from a bad model. Someone has to kick the proverbial tires to make sure that answers make sense and to minimize the adverse consequences associated with mistakes in a formula, bad assumptions, incorrect use, wild results that bear no resemblance to expected outcomes, difficulty in predicting outputs, and/or undue complexity that makes it hard for others to understand and replicate outputs. Absent fraud or sloppiness, precise model results may be expensive to produce and therefore unrealistic in practice. As a consequence, a “court or other user may find a model acceptable if relaxing some of the assumptions does not dramatically affect the outcome.” Susan Mangiero, “The Risks of Ignoring Model Risk” in Litigation Services Handbook: The Role of the Financial Expert (Roman L. Weil et al, eds., John Wiley & Sons, 3d ed. 2005).

In recent months, it is noteworthy that regulators have pushed valuation process and policies further up the list of enforcement priorities. Indeed, in reading various complaints that allege bad valuation policies and procedures, I have been surprised at the increased level of specificity cited by regulators about what they think should have been done by individuals with fiduciary oversight responsibilities. Besides the focus of the U.S. Department of Labor, the U.S. Securities and Exchange Commission has brought actions against multiple fund managers in the last quarter alone. Consider the valuation requirements of new Dodd-Frank rules (and overseas equivalent regulatory focus) and it is clear that questions about how numbers and models are derived will continue to be asked.

For further reference, interested readers can check out the following items:

Pension De-Risking: Compliance and ERISA Litigation Considerations

On January 16, 2013, this blogger - Dr. Susan Mangiero - had the pleasure of speaking with (a) Attorney Anthony A. Dreyspool (Senior Managing Director, Brock Fiduciary Services) (b) Attorney David Hartman (General Counsel and Vice President, General Motors Asset Management) and (c) Attorney Sam Myler (McDermott Will & Emery) about compliance "must do" items and litigation vulnerabilities. Sponsored by Strafford Publications, "Pension De-Risking for Employee Benefit Sponsors" attracted a large audience of general counsel, outside ERISA counsel and financial professionals. In addition to numerous talking points shared by all of us presenting, we had lots of attendee questions about issues such as balance sheet impact, case law and annuity regulations.

Click to download the slides for "Pension De-Risking for Employee Benefit Sponsors."

In my opening comments, I described some of the factors that are being discussed as part of conversations relating to whether a plan sponsor should de-risk or not. These include, but are not limited to, the following:

  • Low interest rates;
  • Higher life expectancies;
  • Increased PBGC premiums;
  • Company's debt capacity;
  • Intent to go public or sell to an acquirer;
  • Available cash; and
  • Knowledge and experience of in-house ERISA fiduciaries.

Attorney Hartman urged anyone interested in de-risking to allow ample time of between six to eighteen months in order to file documents, research and create or modify policies and procedures as needed. He also advised companies to make sure that participants are fully apprised of their rights and to explain the merits of any particular transaction. For companies that may want to redesign a plan(s) for hourly workers, more time may be needed, especially if collective bargaining agreements are impacted.  His suggestion is to inform plan participants about state guarantees that apply in the event of an insurance company default. When retirees are emotionally attached to getting a check from their employer, care must be taken to allay any concerns that future monies will come from an outside third party. Keep in mind that the market may be moving at the same time that a deal is being put together. Regarding the transfer of assets, Attorney Hartman stated the importance of finding out early on what an insurance company is willing to accept. An independent appraiser may be required to determine the appropriate value of certain assets.

I talked about the various risks that can be mitigated via de-risking versus those that are introduced as the result of some type of defined benefit plan transfer or derivatives overlay strategy. The point was made that there is no perfect solution and that facts and circumstances must be taken into account. I added that litigation may arise if a plaintiff (or class of plaintiffs) question any or all of the following items:

  • Whether executives are unduly compensated as the result of an earnings or balance sheet boost due to de-risking;
  • Timing of a transaction and whether interest rates are "too low" at the time of a deal;
  • Completeness (or lack thereof) of information that is provided to participants;
  • Amount of fees paid to vendors;
  • Use of an independent fiduciary;
  • Level of asset valuations;
  • Use of an independent appraiser;
  • Extent to which due diligence was conducted on the structure of deal; and/or
  • Level of vetting of "safest available" annuity provider.
Continue Reading...

Pension De-Risking for Employee Benefit Sponsors: Minimizing Risks and Ensuring ERISA Compliance When Transferring Pension Obligations to Other Parties

Click to register for a January 16, 2013 webinar entitled "Pension De-Risking for Employee Benefit Sponsors: Minimizing Risks and Ensuring ERISA Compliance When Transferring Pension Obligations to Other Parties." Sponsored by Strafford Publications, this Continuing Legal Education ("CLE") webinar will provide benefits counsel with a review of pension de-risking approaches used by companies to reduce some of the risks involved with employee retirement benefits. The panel will offer best practices for leveraging the precautions to prevent ERISA fiduciary law violations when making transfers.


As U.S. pension plans face record deficits, options for transferring some or all of a sponsor's plan risk make sense for many companies. General Motors, NCR and Verizon are a few companies that have chosen de-risking options in 2012.

De-risking transactions take many forms, from transferring company obligations to third parties, to offering payouts to plan participants, to undertaking liability-driven investing and other strategies. Counsel and companies must tread carefully to avoid ERISA-based litigation or enforcement actions.

Prudent de-risking requires thorough financial analysis and clear demonstrations that fiduciary standards under ERISA are met. Counsel should guide companies on how to establish the reasonableness of decisions and prepare to defend against possible court challenges.

Listen as our panel of experienced employee benefit practitioners provides guidance on precautions for companies undertaking transfers of pension plan obligations to third parties or other de-risking options. The panel will outline best practices for assembling a thorough financial review, complying with ERISA requirements, and responding to potential legal challenges from plan participants.


  1. De-risking overview
    1. Current trends
    2. Different approaches
      1. Transfers to third parties
      2. Lump sum payouts for participants
      3. Investment strategies
  2. Procedural prudence
    1. Financials
    2. Government filings and participant notifications
    3. Meeting ERISA fiduciary requirements
      1. Prudence
      2. Care
      3. Loyalty
  3. Potential challenges from plan participants
    1. Grounds for challenges
    2. Likelihood of success


The panel will review these and other key questions:

  • What kind of financial reviews are needed to support a de-risking transaction?
  • How can pension providers demonstrate they have met their ERISA standards of prudence, care and loyalty to plan participants?
  • What steps should be taken in preparation for termination of a pension plan?

Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.


Susan Mangiero, Managing Director
Fiduciary Leadership, LLC, New York Metropolitan Area

She has provided testimony before the ERISA Advisory Council, the OECD and the International Organization of Pension Supervisors as well as offered expert testimony and behind-the-scenes forensic analysis, calculation of damages and rebuttal report commentary for various investment governance, investment performance, fiduciary breach, prudence, risk and valuation matters.

Nancy G. Ross, Partner
McDermott Will & Emery, Chicago

She focuses her practice primarily on the area of employee benefits class action litigation and counseling under ERISA. She has extensive experience in counseling and representing employers, boards of directors, plan fiduciaries, and trustees in matters concerning pension and welfare benefit plans. Her experience includes representation of pension plans, ESOPs, trustees and employers.

Anthony A. Dreyspool, Senior Managing Director
Brock Fiduciary Services, New York

He specializes in the investment of assets of ERISA-covered employee benefit plans and all aspects of ERISA fiduciary law compliance.  He has more than 30 years of experience with respect to ERISA matters and has substantial knowledge in the structuring and formation of private real estate and equity funds for the institutional investment market.

CFO Liability and Pension Plan Governance and Risk Management

On October 16, 2012, thousands of CFOs,Treasurers, Vice Presidents of Finance and other corporate leaders will meet in Miami, Florida for a chance to attend timely and informative sessions as part of this year's annual conference of the Association for Financial Professionals ("AFP"). Dr. Susan Mangiero is proud to have been selected to speak at the Association for Financial Professionals' big event. She will be joined by senior ERISA litigation attorney Howard Shapiro with Proskauer Rose LLP to address the topic of CFO liability and pension plan governance and risk management. Click to access information about the Pension & Benefits educational session track that includes this important session and many others.

According to Dr. Susan Mangiero, a managing director with FTI Consulting's Forensic and Litigation Consulting practice and based in New York, financial professionals, board members and their advisors can learn numerous lessons by examining what went wrong elsewhere and, by extension, what to avoid. Mangiero emphasizes that "Litigation is a reality. Mitigating enforcement, regulatory, litigation and reputation risk is hugely important because of the expensive consequences of inaction. For enlightened companies both large and small, employee benefit plan governance is high on the priority list for officers and directors. When retirement plan problems exist, it could compromise a firm's ability to raise capital, finalize corporate finance transactions and/or add to enterprise value. Most importantly, it could mean that a company is unable to keep its promises to plan participants."

Dr. Mangiero is also the author of "Pension risk, governance and CFO liability" (Journal of Corporate Treasury Management, Henry Stewart Publications, Vol. 4, 4, 2012, pages 311 to 323). Click to read "Pension risk, governance and CFO liability."

Click to read "The Risk Manager" by Elliot A. Fuhr and Christine Wu McDonagh (FTI Journal, April 1, 2012) for a current discussion about the importance of having chief financial officers embrace and support enterprise risk mitigation.

What Every Fiduciary Needs to Know About How to Mitigate Investment Fraud Risk

Economic growth may be anemic but fraud continues to find a life of its own. According to the Financial Fraud Research Center, at least 30 million people are impacted by fraud each year with an annual cost of $100 billion for retail fraud alone.  In a 2011 speech, the head of the U.S. Securities and Exchange Commission discussed how key offices and divisions are working together in all areas of its anti-fraud efforts and how the SEC is collaborating more frequently with state regulators, criminal prosecutors or local nonprofits in an effort to weave these initiatives into an increasingly fine-meshed net that is focused on fighting fraud. While the U.S. Department of Labor is not exclusively focused on fraud, enforcement teams have been busy with a closure of nearly 3,500 civil cases and 302 criminal cases, monetary results of $1.39 billion and 129 indictments.

Surprisingly, there is little information available to institutional and individual investors alike as to how to mitigate the risk of losing money to fraudsters. The goal of this webcast is to empower investors to better protect themselves with knowledge of situations to avoid whenever possible. Attendees will hear experts talk about:

  • Common causes of investment fraud;
  • Enforcement and litigation trends relating to investment misdeeds;
  • Lessons learned from financial scandals of the last decade;
  • Role of the investment fiduciary in vetting service providers;
  • Red flags to detect poor internal controls that could lead to fraud; and
  • Regulatory action to stem financial fraud and preserve the integrity of the capital markets.

Speakers for this 75-minute event include:

  • Dr. Susan Mangiero, CFA, FRM – Managing Director, FTI Consulting
  • Jonathan Morris, Esq. – Day Pitney LLP / former General Counsel of Barclays Wealth
  • Brian Ong – Senior Managing Director, FTI Consulting
  • Karen Tyler, North Dakota Securities Commissioner and former president of the North American Securities

To attend this webcast scheduled for Wednesday, June 13, at 1 pm Eastern and sponsored by FTI Consulting, please visit the investment fraud webinar page at

ERISA Pension Plans: Due Diligence for Hedge Funds and Private Equity Funds


Join me on May 1, 2012 for a timely and interesting program about alternative investment fund due diligence and other considerations for ERISA plan sponsors, their counsel and consultants. Click here for more information.

This CLE webinar will provide ERISA and asset management counsel with a review of effective due diligence practices by institutional investors. Best practices will be offered to mitigate government scrutiny and suits by plan participants.


With the DOL's and SEC's new disclosure rules and heightened concerns about compliance and valuation, corporate pension plans that invest in alternatives must focus on properly vetting asset managers more than ever before or risk being sued for poor governance and excessive risk-taking.

The urgencies are real. The use of private funds by asset managers is crucial for 401(k) and defined benefit plan decision makers. Understanding the obligations of private funds is essential to any retirement funds with limited partnership interests.

In addition, suits and enforcement actions against asset managers make it incumbent on counsel to hedge fund and private equity fund managers to fully grasp and advise on full compliance with the duties of ERISA fiduciaries to plan participants.

Listen as our ERISA-experienced panel provides a guide to the legal and investment landmines that can destroy portfolio values and expose institutional investors and fund managers to liability risks. The panel will outline best practices for implementing effective due diligence procedures.


  • ERISA fiduciary duties for institutional investors
    1. Hedge funds and private equity funds compared to traditional investments
  • Regulatory developments
    1. Disclosure
    2. Compliance
    3. Valuation
  • Developments in private litigation involving pension plan fiduciaries and alternative fund managers
  • Best practices for developing due diligence plans



The panel will review these and other key questions:

Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.

  • Regulatory developments
    1. Disclosure
    2. Compliance
    3. Valuation
  • Developments in private litigation involving pension plan fiduciaries and alternative fund managers
  • Best practices for developing due diligence plans
  • What are the regulatory concerns for ERISA pension plans that allocate assets to hedge funds and private equity funds?
  • What are the potential consequences for service providers that fail to comply with new fee, valuation and service provider due diligence regulations?
  • What can counsel to pension plans and asset managers learn from recent private fund suits relating to collateral, risk-taking, pricing, insider trading and much more?
  • How should ERISA plans and asset managers prepare to comply with expanded fiduciary standards?


Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.


Susan Mangiero, Managing Director
FTI Consulting, New York

She has provided testimony before the ERISA Advisory Council, the OECD and the International Organization of Pension Supervisors as well as offered expert testimony and behind-the-scenes forensic analysis, calculation of damages and rebuttal report commentary for various investment governance, investment performance, fiduciary breach, prudence, risk and valuation matters.

Alexandra Poe, Partner
Reed Smith, New York

She has over 25 years of experience in investment management practice counseling managers of hedge funds, private equity funds, institutional accounts, mutual funds and broker-dealer advised programs. She counsels hedge and private equity fund advisers in all stages of their business and due diligence matters.



Pension Risk, Governance and CFO Liability

My November 2011 presentation about pension risk, governance and liability to financial executives struck a chord. Part of a Chief Financial Officer ("CFO") conference held at the New York Stock Exchange, attendees alternatively listened with interest while adding their insights from the front lines here and there. It is no wonder.

With ERISA litigation on the rise and 401(k) and defined benefit plan decisions often driving enterprise value in a material way, CFOs and treasurers have accepted the obvious. Corporate governance and pension governance are inextricably linked. Make a bad decision about an employee benefit plan and participants and shareholders alike may suffer. As a result, the CFO is exposed to fiduciary liability, career risk and the economic consequences of an outcome with broad impact.

Rather than rely on luck, there is no better time to apply discipline and rigor to employee benefit plan management for those companies that have not already done so. With trillions of dollars at stake, properly identifying, measuring and mitigating pension risks continues to be a critical element of fiduciary governance.

The complexity and ongoing nature of the risk management process is sometimes overlooked as less important than realizing a particular rate of return. Recent market volatility, large funding deficits and pressures from creditors, shareholders, rating agencies and plan participants make it harder for pension fiduciaries to avoid the adoption of some type of pro-active risk control strategy that effectively integrates asset and liability economics.

In "Pension risk, governance and CFO liability" by Susan Mangiero (Journal of Corporate Treasury Management, Henry Stewart Publications, Vol 4, 4, 2012, pages 311 to 323), the issues relating to a panoply of risks such as actuarial, fiduciary, investment, legal, operational and valuation uncertainties are discussed within a corporate treasury framework. Article sections include:

  • Enterprise risk management, employee benefit plans and the role of the CFO;
  • Conflicts of interest and pension plan management;
  • Risk management principles and 401(k) plans;
  • Pension liability and mergers, acquisitions and spinoffs;
  • Prudent process;
  • Pension risks; and
  • Benchmarking success.

Click to download "Pension risk, governance and CFO liability" by Dr. Susan Mangiero, CFA, FRM.

ERISA and Securities Litigation Snapshot -- Things You Can Do Now to Minimize CFO and Board Liability

In the last few years, pension funding levels and 401(k) account balances have fallen dramatically. New disclosure rules, volatile market conditions, investment complexity and mandatory cash contributions are only a few of the many challenges that are unlikely to go away. Not surprisingly, ERISA litigation continues to grow, along with lawsuits related to employee benefit plan governance. Personal liability claims against C-level executives and board members have become the normal.

Join FTI Consulting and the Securities Docket for a timely and informative webinar about the link between employee benefit plan management and shareholder value.

During this 60 minute live event, attendees will learn:

  • Why ERISA litigation claims against top executives and board members continue to grow
  • How securities litigation and ERISA filings are related and what it means for corporate directors and officers
  • What ERISA liability insurance underwriters want clients to demonstrate in terms of best practices
  • What steps the Board and top executives can take to minimize their liability
  • What investment fiduciary bad practices to avoid
  • When to get the CFO and board members involved

The distinguished panel includes (a) Attorney Jim Baker, ERISA litigator of the year for 2012 and a partner with Baker & McKenzie (b) Ms. Rhonda Prussack, EVP and Fiduciary Liability Product Manager for Chartis (c) Mr. Gerry Czarnecki, governance guru and State Farm Insurance board member and (d) Dr. Susan Mangiero, Managing Director with FTI Consulting’s Forensic and Litigation Consulting Practice in New York.

To register for this March 7, 2012 webcast, click here.


Hedge Fund Lock Ups and Pension Inflows

Various sources tout increasing inflows to hedge funds from public and corporate pension plans.

In "Strong start to hedge fund activity in 2011" (April 1, 2011), Pensions & Investments reporter Christine Williamson writes that "First-quarter institutional hedge fund activity, including net inflows and pending searches, totaled $18 billion - the highest since the intense investment pace of the first quarter 2007, which saw $25 billion in activity." James Armstrong of Traders Magazine describes the billions of dollars going to hedge funds in recent months as a catalyst to "increased trading volumes for the equities trading business." See "Hedge Funds Could Juice Volume" (June 2011). Imogen Rose-Smith of Institutional Investor gives readers a detailed look at the love affair with hedge funds in "Timeline 2000-2011: Public Pensions Invest in Hedge Funds" (June 20, 2011).

Fortune writer Katie Benner says "wait a minute" to what seems to be an upward trajectory in retirement plan allocations to hedge funds with a 51% increase since 2007 and a doubling of the mean allocation to 6.6% (according to a study by Preqin). In "Hedge fund returns won't save public pensions" (March 30, 2011), she cites willful underfunding and a "mish-mash of accounting tricks" as fundamental problems that will not be corrected with more money in alternatives.

In her May 16, 2011 article for Pensions & Investments and entitled "Promises, promises: $100 billion still locked up," Christine Williamson writes that assurances made to institutional investors in 2008 and 2009 about redemptions are not being met by some hedge fund managers. At that time, jittery pension funds, endowments and foundations that wanted out were asked to be patient rather than force hedge funds to unwind hard to value positions at sub-par prices. Quoting Geoff Varga, a senior executive with Kinetic Partners US LLP, a consultancy for asset management firms, there is an estimated $100 billion in "exotic" or non-standard investments that were stuffed into "emergency side pockets." He adds that it is hard to come up with an exact number, especially since managers' valuations of these illiquid positions are not always realistic.

Certainly the issue of side pockets is unlikely to go away any time soon. On October 19, 2010, Emily Chasan reported that the U.S. Securities and Exchange Commission ("SEC") had filed a civil complaint against several hedge fund managers for overvaluing illiquid assets. See "SEC charges hedge fund of inflating 'side pockets'" (Reuters). Click here to read the SEC complaint and October 19, 2010 press release from the SEC. On March 1, 2011, Azam Ahmed with the New York Times Deal Dook described another case in "Manager Accused of Putting $12 Million in Side Pockets."

This blogger, Dr. Susan Mangiero, has written extensively on the topic of hard to value investments and liquidity and served as expert witness on cases involving due diligence allegations. Acknowledging that not all hedge funds invest in hard to value instruments, the following items may be of interest to readers:

Pensions and Washington Mutual Class Action Lawsuit

According to "Washington Mutual settles class-action suit for $208.5 million," Associated Press, July 1, 2011, pension plans that include the Ontario Teachers' Pension Plan Board (as lead) will benefit as shareholders of the failed bank (if and once the Bankruptcy Court approves the terms).

On a related note, Judge Mary F. Walrath of the U.S. Bankruptcy Court for the District of Delaware tells certain Washington Mutual ("WaMu") employees that they are "entitled only to general unsecured claims because they do not have a right to the funds that is superior to the rights of the other general unsecured creditors." She added that "Because the plans were unfunded, and the funds were identified as property of WaMu," it was not possible to "impose a constructive trust because the money allegedly owed to the participants can no longer be clearly traced to funds or property in their possession." See "WaMu wins bankruptcy fight over employee retirement funds," Thomson Reuters News & Insight, June 20, 2011.

The two articles caught this blogger's attention as a timely example that financial distress can impact multiple constituencies in completely different ways.

Fiduciary Liability: Risks and Insurance

Thanks to ERISA Attorney Steve Rosenberg for reminding people about an upcoming webinar entitled "ERISA Fiduciaries Under Attack: Key Litigation and Regulatory Developments." Attorney Andrew Oringer, a partner with Ropes & Gray will address recent cases and what the decisions mean to ERISA fiduciaries. He will likewise address the concept of prudence and the role of the investment committee versus the board. Ms. Chris Dart, VP and liability insurance product underwriter for Chubb & Son, will talk about fiduciary liability insurance, recent trends in litigation settlements, what concerns insurance underwriters and best practices to preserve all available coverage. Dr. Susan Mangiero will address the concept of failure to hedge, post-Enron investment in company securities, service provider due diligence and hard-to-value investing concerns.

Click to join us on June 16 from 1:00 to 2:15 pm EST.

Financial Model Mistakes Can Cost Millions of Dollars


It's been awhile since I've blogged. Work has been busy and then I took off ten days to visit Paris. The City of Lights is amazing indeed. Now that I'm back, I will try to blog more frequently. There is certainly no shortage of topics about risk, governance, litigation, valuation and so on.

For those who don't know, I created a sister blog a few months ago. See Nearly all of the time, the posts on each blog are different. However, I decided to reprint a post from here since the topic is hugely important. After all, for those defined benefit and defined contribution plans that are exposed to "hard-to-value" investments, leverage and perhaps higher than expected volatility, model risk could be the hidden alligator that bites if left unchecked. As always, I welcome your comments at

Here is the post that was originally posted on June 2, 2011 by Dr. Susan Mangiero.

In a recently published article about financial models entitled "Financial Model Mistakes Can Cost Millions of Dollars" (American Bar Association, Section of Litigation, Expert Witnesses, May 31, 2011), Dr. Susan Mangiero defines model risk and explains why it is so important. Referencing the recent $242 million enforcement action by the U.S. Securities and Exchange Commission as a result of model mistakes made by a well-known asset management firm, this financial expert cites the heightened regulatory and litigation imperatives with respect to risk and valuation models. She concludes the article by listing some of the ways to mitigate risk. These include, but are not limited to the following:

  • Hire knowledgeable programmers with capital market experience;
  • Create and follow a set of policies and procedures that govern how and who will validate financial models over time and what will trigger revisions in a model(s);
  • Avoid conflicts of interest that would reward managers for ignoring problems and would potentially preclude an independent and objective assessment of problems and related corrective action(s);
  • Test assumptions for validity in stable markets as well as extreme circumstances;
  • Stress a model using a sufficient number of economic scenarios to gauge its predictive power and whether results can be relied upon in both good or bad times;
  • Educate personnel about how a particular model is supposed to work;
  • Establish a response strategy should a problem occur and investors need to be informed before things get out hand;
  • Scrap models that are overly complex and expensive to replicate;
  • Don't be afraid to ask questions about inputs, data quality, results, and concerns; and
  • Invite informed outsiders to offer an independent and regular critique on a confidential basis.


Dr. Susan Mangiero to Speak at ERISA Litigation Conference

Dr. Susan Mangiero, CFA, FRM joins an esteemed panel of speakers as part of "Conflicts in Plan Sponsor and Service Provider Relationships." She is joined by:

  • Attorney Michael J. Prame, Groom Law Group
  • Attorney Elizabeth J. Bondurant, Smith Moore Leatherwood LLP and
  • Attorney Bradley J. Schlichting.

According to the agenda, the panel will address the "unique issues that arise in connection with the provision of services to employee benefit plans, understanding the division of responsibilities and whether discretion has been delegated to the service provider, assessing the fiduciary status of third-part service providers" and much more.

Given current worldwide efforts to broaden the definition of who serves as a fiduciary and a classification of their duties, this panel's purview is timely and important.

Click to visit the American Conference institute website.

Advisor Service Agreements: The Weak Link

Today's blog post is provided, courtesy of Mr. Phil Chiricotti, President of the Center for Due Diligence. Since the topic of contract review as an important element of proper due diligence is one which I have addressed elsewhere on and in my articles and speeches, I asked Phil for permission to reprint his article and he kindly agreed.         

                                          Advisor Service Agreements: The Weak Link

Enormous attention has been centered on retirement plan fees in recent years, including the new 408(b)(2)disclosure requirements. The liability has also increased for those who fail to comply. Lost in this shuffle is the fact that fees are only one piece of the puzzle.

While a well drafted, reviewed and understood service agreement can help preclude errors and claims, the service agreement is also the primary defense against liability caused by service provider mistakes and negligence. In spite of this important role, many plan sponsors - particularly small plan sponsors - sign standard service agreements without adequate review or counsel.

In addition to agreeing to vague service agreements, some sponsors engage advisors without a service agreement or verification of insurance coverage and bonding. As noted many times, most small plan sponsors also lack first party fiduciary liability insurance. A combination of the aforementioned is nothing less than a nuclear accident waiting to happen.

The DOL's new regulations provide an increase in both fee disclosure and clarity for comparative shopping, but 408(b)(2) does not preclude the need for an equitable service agreement. In our minds, the service agreement remains a weak link in the advisor vetting process, particularly in the small plan market. Indeed, the service agreement may not even reflect what was discussed and/or negotiated during the vetting process.

As noted by many attorneys, ERISA's primary focus has been on regulating the relationship between plan sponsors and participants. Beyond prohibited transactions and prior to the DOL's new disclosure regulations, little guidance was provided on how to manage the relationship between sponsors and service providers, including those assuming a fiduciary role.

The courts have not spoken uniformly about recourse between the plan and outside fiduciaries, but the plan sponsor's supervisory role, or the lack of it, has come under intense scrutiny in recent years. Because errors and disputes are a fact of life, it is long past time for the service agreement to become an integral part of the advisor vetting process from the beginning.


Bad Disclosures - Recipe For Disaster?

According to "State workers face privatization" by Jason Stein (Milwaukee Journal Sentinel, January 6, 2011), over 300 Wisconsin State Department of Commerce employees may soon be classified differently. The stated goal is to better deploy its $183 million budget to try to create jobs. (Whether you believe that governments are the engine of jobs creation is a post for another day.)

Questions remain about the benefits for identified employees and whether they will be covered by the state's retirement system. A related question is whether the general public will have a true assessment of Wisconsin's retirement plan IOUs if these privatized workers are counted as "public" for some purposes but not for others. In reading the many comments posted for the aforementioned article, emotions are running high about the real costs associated with this decision. Clearly, more information would go a long way to quelling any concerns.

The topic of financial disclosures may soon create real problems for public plans and, by extension, ERISA plans that are sponsored by companies that issue stocks and/or bonds. In today's New York Times, Mary Williams Walsh reports that the U.S. Securities and Exchange Commission ("SEC") may be investigating the large California pension plan known as CalPERS. It's premature and inappropriate to speculate but the inference is that bond buyers may have been in the dark about the "true" risks associated with this $200+ billion defined benefit plan. If true, California could pick up an even bigger than expected tab and municipal security investors could be in a position of having paid too much to own state debt. See "U.S. Inquiry Said to Focus on California Pension Fund."

As recently as 2009, then Special Advisor to California Governor Arnold Schwarzenegger, David Crane, referred to public pension plan reporting as "Alice-in-Wonderland" accounting. He added that "state and local governments are understating pension liabilities by $2.5 trillion, according to the Center for Retirement Research at Boston College." Since these are legal contracts that bind the state, city or municipal sponsor, they are on the hook for bad results, with large cash infusions likely.

It's not rocket science to conclude that other states and municipalities could face the same type of securities regulation inquiry. Indeed, even ERISA plans are vulnerable to allegations of fraud or sloppy reporting if their risk disclosures are incomplete, inaccurate, misleading or all of the above. See "Testimony for Securities and Exchange Commission Field Hearing re: Disclosure of Pension Liability" (September 21, 2010). Investors want to know whether they have a striped horse or a zebra in their stable. They need and deserve a solid understanding of investment risks to which they are exposing themselves. That can only occur if accurate and complete information is provided. To its credit, CalPERS seems to be emphasizing risk-adjusted performance as paramount. A December 13, 2010 press release describes the adoption of a "landmark" asset allocation that emphasizes "key drivers of risk and return."

Email Dr. Susan Mangiero, CFA and certified Financial Risk Manager if you would like information about what a risk disclosure assessment entails for your organization or on behalf of a client(s). You may likewise be interested in one of our workshops for directors, trustees and/or members of the investment committee about performance reporting within a fiduciary and financial risk management framework.

The Lawyers Are Coming

Law scholar, author and derivatives pundit Frank Partnoy had an interesting piece in the Financial Times on April 19, 2010. In "Wall Street beware: the lawyers are coming," Mr. Partnoy warns that the floodgates of litigation are about to open with the SEC's filing of a fraud lawsuit against Goldman, Sachs & Co. He asserts that the regulatory enforcement takes complex financial alchemy and spins a "morality tale." A second take is that litigation picks up where regulations stop with Wall Street heretofore having interpreted "detailed rules as a shield from liability."

Leaving the Goldman case aside (as only those involved can opine with the clarity of full information), Professor Partnoy provides food for thought. Indeed, as I have written lo these last four years since the inception of this blog, Main Street pain invites legal and regulatory action. Investment losses are vote killers for elected officials who turn a deaf ear to calls for change.

I agree emphatically with the notion that regulations can only do so much.Worse yet, regulations could lull market participants into having a false sense of security. Post implementation of new rules and regulations, investors might think that all is good with the world when the truth could be the polar opposite, i.e. "compliance" having masked a host of bad practice nasties. I've often made the point in print and at the podium that onerous mandates induce the Law of Unintended Consequences, leading to a costly and counterproductive outcome that is antithetical to the original problem. Pick any accounting rule or regulation and it's possible to show the costs and benefits in terms of changed behavior.

There are noble-minded regulators and attorneys alike who really want to make a difference on behalf of the ultimate beneficiaries - retirees, shareholders, taxpayers, working families and so on. They are going to be beyond busy in the coming months and years unless, and until, investment stewards in need of improvement snap to. The wagons are circling. Count on luck or hunker down and get a good fiduciary risk management process in place ASAP. Otherwise, start preparing for deposition.

Editor's Note: Click here to read "Tips From the Experts: Working Effectively With A Financial Expert Witness" by Susan Mangiero (Expert Alert, Summer 2008, American Bar Association). While we prefer by far to help asset owners and their advisors before the fact, call us if you need help with "after the fact" analysis.

Institutional Investors and Venture Capital Funds - Frenemies or Pals?

On March 1, 2010, Dr. Susan Mangiero, CEO of Investment Governance, Inc. sat down to talk to financial and strategy expert, Mr. Pascal Levensohn. In this final question of ten, read what this Investment Governance, Inc. Advisory Board member has to say about limited partners and lawsuits involving venture capital "VC" fund managers. Click here to read Mr. Levensohn's impressive bio.

SUSAN:  I've read that some general partners ("GP"s) are suing LPs for not making capital calls. The LPs claim that they are cash constrained and/or the VC fund has not performed. Do you see a trend in the making?

PASCAL: First, it would appear that the reports of numerous limited partner ("LP") defaults exceed the reality. Based upon discussions with industry participants, most institutional LPs have, in fact, met their  obligations to make capital calls. Second,  the decision of a GP to sue an LP over a default is most often the absolute last resort. The GPs are not in business to institute litigation. This is a distraction for the GP and added publicity that neither GPs nor LPs desire. When the LP Agreement is executed, all of the parties enter into a contract with the expectation that both LPs and GPs will honor their respective commitments. The GPs have committed their time. They have built an organization  to implement an investment strategy and program for the VC fund. They should be  entitled to rely on the contractual obligations of those sophisticated  investors who agreed to support this program over the long  term.

Editor's Note: Our heartfelt thanks to Mr. Pascal Levensohn for taking time to talk to Investment Governance, Inc. on behalf of subscribers to The topic of venture capital fund investing is an important one indeed. Readers may want to check out "A Simple Guide To The Basic Responsibilities of VC-Backed Company Directors" (Working Group on Director Accountability and Board Effectiveness, National Venture Capital Association, October 2007).

Happiness and the Zen of Work


Work is a four-letter word so can it ever be fun? According to the Conference Board, maybe not. In a recent survey, nearly half of respondents expressed dissatisfaction about doing work that was neither meaningful nor engaging. In contrast, six out of ten survey-takers declared themselves happy in 1987. Somewhat disturbing for would be recruiters is that angst and disappointment was not unique to any particular age group or income level though persons under 25 expressed "the highest level of dissatisfaction ever recorded by the survey for that age group."

As many on the hiring side know already, finding talent can be time-consuming and sap energy from even the most ardent employers. Now add the challenges of retaining productive workers while adding bright-eyed team members in a sad sack era of layoffs, mistrust and diminished budgets. Besides turnover costs, the bottom line could be impaired if few cheer lead for their company, collecting a pay check and already planning for the next gig.

Click to read more about "I Can't Get No...Job Satisfaction, That Is: America's Unhappy Workers," The Conference Board, January 5, 2010 press release entitled "U.S. Job Satisfaction at Lowest Level in two Decades. Click to read "Where America Stands: The State of America and Its Future," CBS News Poll, January 4, 2010 which echoes the observation that not everyone is optimistic about what the future holds.

In an attempt to end this blog post on an upbeat note, I invite interested readers to take a look at the work conducted by best selling author Marcus Buckingham. Rather than dwell on employees' weak points, he urges organizations to focus on strengths. According to his website, this author of "Go Put Your Strengths to Work" and "Now, Discover Your Strengths" urges that "individuals and teams playing to their strengths significantly outperform those who don't in almost every business metric."

The discussion that needs to take place now is one of responsibility.

  • Who should properly motivate and on what basis?
  • Do  happy, satisfied workers self-select by joining companies that provide "thank you" goodies such as great benefits, bonuses and opportunities to retool?
  • How much should and can employers do to make work fun or at least a place where people want to be for a reasonable period of time each day?
  • What can organizations do to overcome the survivor worries that accompany any recession?
  • How should benefit plans be modified, if ever, to marry together financial pressures with the part of the bottom line that is attributable to human capital?

We may never emulate Snow White's seven friends ("Hi Ho, Hi Ho, It's Off to Work We Go") but obviously something has to give if one out of every two workers is unlikely to stay put for more than a few months.


A Halloween Trick or a Halloween Trick from the Eighth Circuit?

ERISA legal expert and Ropes & Gray LLP partner, Attorney Andrew L. Oringer provides an interesting insight into a recent case about the investment of excess assets and prudence. The case he cites can be downloaded by clicking here. Note the court's opinion on page 5 wherein it writes that the plaintiff, seeking redress over a question of fees paid by the plan, cannot "bring suit because the plan's surplus was sufficiently large that the 'investment loss did not cause actual injury to plaintiff's interests in the Plan'."

Our thanks to Attorney Oringer for his contribution, provided below.

A Scary Halloween Gift from the Eighth Circuit?

So here's a question - you're managing an overfunded defined benefit plan (remember those) and you want to let your guard down. You want to roll the dice a bit or push the limit of what you can do with ancillary (non-investment) motivations, and you figure you can do so because you're playing with house money. At least, you want to play around just with some of the excess. Or maybe you're just a touch careless, albeit unintentionally so. What's the big deal?  After all, participants and beneficiaries are going to get their money, without government help, unless the whole overfunded thing goes to heck in a hand basket and turns radically south.

Now, you'd expect that you might be on the wrong end of this one, so, as your feet get colder, you poke around a bit. And what do you find? You find that you may indeed have a friend or two in the Eighth Circuit with an ever-so-slightly delayed Halloween present for you.  In McCullough v. AEGON USA, No. 08-1952 (8th Cir. Nov. 3, 2009), which follows its earlier decision in Minnesota Mining and Manufacturing, 284 F.3d 901 (8th Cir. 2002), the Eighth Circuit in effect seems to hold that one cannot violate the prudence rules with respect to the investment of excess assets.  (Note that the widely discussed 3M case may well be wrong on both of the issues considered there.)  Assuming AEGON is not reviewed en banc and reversed on rehearing, its confirmation of the 3M decision seems like a welcome development for those seeking to limit potential liability for investment decisions under a DB plan.

My advice, however, is to be careful, real careful, even in the Eighth Circuit. The reasoning of AEGON and 3M is so suspect that, outside the Eighth Circuit you would draw comfort from these cases at your own peril, and, even within the Eighth Circuit, I think you'd have to be at least a little concerned that any given case could be reversed by the nine old and young men and women in the black robes. Having said that, the cases are certainly nice precedent if you need to use them defensively

So: "Boo" or "Boo!" depending on your perspective.

Hamsters and Investment Governance

The plight of the hamster is simple. He is cute, furry and going nowhere fast. Sure he gets exercise but, measured in inches and miles, he's stuck in the same place, treading the same pattern over and over again.

Lest this sound like a zany rant from a busy blogger, might I suggest that the current spate of "pay to play" scandals reflects what some in the industry have been saying for years? Be scared, be very scared about the dsyfunction that is roiling financial markets. 

With respect to writer George Santayana, "Those who cannot learn from history are doomed to repeat it." With Enron, Worldcom and Bear Stearns far from a distant memory, why on earth are we still reading about bad players who end up costing taxpayers, shareholders and innocent bystanders gazillions of dollars? Worse yet, those individuals who wear the fiduciary hat proudly are being unfairly tainted by those who should know better and/or simply do not care about the lives they ruin with their bad acts.

Recent articles about California and New York pension problems only add fuel to the fire and leave most folks scratching their heads, asking legitimate questions, some of which are listed below:

  • Given existing regulations, why are there so many scandals?
  • Where is the board oversight that is supposed to prevent conflicts of interest or at least nip things in the bud before losses mount?
  • How much are Sally and Joe "everyperson" supposed to tolerate in terms of broken trust on the part of those tasked with leadership?
  • Why aren't major lessons being learned sooner than later?

As an ardent advocate of capitalism (and no, we do not have a pure capitalistic system in place anywhere, contrary to Michael Moore's movie lament), I find the current state of affairs impossible to defend.

Bad practices have got to stop. We need to be moving forward, not running around and around, making no progress and chasing our tails. Let me also add that I am not objective here. Our company (newly named Investment Governance, Inc.) has been busy at work for nearly a year, building investment "best practice" tools (to debut in short order). What has kept our team going lo these many months of 15 hour days are the repeated and strident cheers from all the good guys and gals who take their institutional fiduciary work seriously and want things to improve in a big way.

Bravo to those for whom trust is a sacred word! We seek to help you gain the recognition and support you so richly deserve. 

Pension Governance Sponsorship of Major ERISA Event

Pension Governance, Incorporated is pleased to announce its sponsorship of what looks to be a collection of best in class legal minds. Developed by the American Conference Institute, "Defending and Managing ERISA Litigation" will address the importance of written procedures and prudence process and much more. Both plaintiffs and defendants can no doubt benefit from listening to the many in-house attorneys and judges who are scheduled to speak. Readers of this blog can enjoy a $700 registration discount by typing ERISA PENSION when prompted for a code if they complete registration by July 17, 2009. Click here to download the full agenda.

As an owner of, we believe that plan decision-makers can learn a lot by examining case precedent, especially given the evolving nature of ERISA litigation activity. If you missed it when posted in April 2009, enjoy our complimentary debut white paper about pension lawsuit statistics. Click to read "ERISA Litigation Study," dated April 15, 2009.

Pension Plans as Plaintiffs - 800 Pound Gorilla of Litigation

Just a reminder that our webinar entitled "Pension Plans as Plaintiffs - 800 Pound Gorilla of Litigation" will be held on May 12, 2009 from 2:00 PM EST to 3:30 PM EST. Our esteemed speaker panel includes:
  • Dr. Susan Mangiero, AIFA, AVA, CFA, FRM - Moderator and President, Pension Governance, Incorporated
  • Attorney James Baker - Speaker and Partner, Jones Day
  • Attorney Daniel Berger - Speaker and Partner, The Pomerantz Law Firm
  • Attorney Jay McElligott - Speaker and Partner, McGuire Woods LLP.

Since the passage of the Private Securities Litigation Reform Act of 1995, pension plans in the U.S. and abroad continue to play the role of lead plaintiff. Empirical evidence suggests that their presence can often impact litigation terms such as settlement amunt and timing. Hear experts talk about (a) when, and on what basis, pensions are likely to serve as lead plaintiff (b) what happens when a pension plan opts out of settlement (c) trend in sequential lawsuits (ERISA first, followed by securities litigation complaints (d) relationship between fiduciary liability insurance costs and litigation damages and (e) globalization of class action litigation that involves pension plaintiffs. 

Email or click here for more information 

Harvard Law School Presentation About Pension Litigation


Back from several speaking engagements (governance is a hot topic these days), I'll be chairing a session about pension litigation at the Harvard Law School on Friday, May 1. Part of the "Capital Matters: Managing Labor's Capital Conference" that spans several days, "Litigation to Remedy Meltdown Damage: What Can Be Gained, What Can Be Learned?" will include comments from Attorney Jeffrey C. Block, Partner, Berman DeValerio and Professor of Law Allen Ferrell, Harvard Law School. 

I will have much more to say about pension litigation trends in the next few days. In case you missed it, our ERISA litigation study may be of interest. Click here to access "ERISA Litigation Study: April 15, 2009."

New ERISA Litigation Study Launched

As part of its ongoing commitment to independent research, analysis and training, Pension Governance, Incorporated and its partner, The Michel-Shaked Group, are proud to debut a new study about pension litigation statistics for plan sponsors, their service providers, legal counsel and policy-makers, respectively.

Based on over 2,400 ERISA cases filed between January 1, 2005 and August 31, 2008, "ERISA Litigation Study - April 15, 2009" is a statistical overview of pension lawsuits by category, court and case disposition.

The study's findings include the following:

  • ERISA lawsuits are increasing in number and complexity in terms of combinations of allegations.
  • Nearly every case in the database is categorized as including an allegation of fiduciary breach.
  • ERISA litigation volume was highest for the 2nd, 3rd and 6th federal circuit courts.
  • A majority of ERISA-related lawsuits settled out of court.
  • Numerous cases examined reflect an ERISA Section 502 claim. (ERISA Section 502 relates to civil enforcements.)
  • Some legal venues favored plaintiffs in terms of the reported outcome. ("PLD") is a subscription searchable database of pension litigation events. Focused on finance and investment issues, PLD includes cases posted since January 1, 2005. New cases are added on an ongoing basis. Over 100 various identifier codes are used to cross-classify cases, enabling subscribers to search by keyword, circuit, plaintiff, defendant and a host of other relevant attributes. Recognizing the need to simplify an otherwise complex process, provides litigators, regulators, policy-makers, plan sponsors and their financial advisors and consultants with a user-friendly interface and the wherewithal to gather critical intelligence about litigation activity. Interested parties can email for more information about customized research projects.

Enron Redux? Pension Plans as Plaintiffs

According to the Stanford Law School Securities Class Action Clearinghouse, several cases against Washington Mutual, Inc. were consolidated in May 2008. Ontario Teachers' Pension Plan Board was designated lead plaintiff. The "complaint alleges that, during the Class Period, defendants issued materially false and misleading statements regarding the Company's business and financial results....On September 30, 2008, defendant Washington Mutual Inc. filed a notice of bankruptcy."

According to "Suing a Broken Bank" (CNN Money, March 30, 2009) and other sources, a motion to dismiss has since been filed.

Elsewhere in this video, I am asked by CNN Money anchor Poppy Harlow to comment on financial reporting as an element of risk management. (I agreed to discuss transparency in general but told producers upfront that I possessed no information about this particular case, other than what I had read as a member of the general public.) About allegations that material information was withheld from shareholders (whether this case or others), I stated that "It's essentially the same thing that we saw a couple years ago with Enron and WorldCom - Who knew what, when and on what basis and what was the obligation of senior management to disclose information to the shareholders?" Click to view "Suing a Broken Bank." In terms of full disclosure, I own 212 shares of Enron common (worth about a penny per share).

I wrote about Washington Mutual on September 26, 2008 when I posited whether better disclosure would have helped WaMu shareholders. At the time, the U.S. Securities Exchange Commission had just released a statement urging more "transparent disclosure for investors." I countered that "sufficient" news is always welcome but wondered (and still do) if numbers alone are meaningful. I think not. Let me repeat what I said then.

<< What exact type of disclosure can really make a difference? I vote for information about process and accountability. Otherwise, financial statement users end up with snapshot assessments of mandated metrics. While these numbers could be potentially helpful, they are made less so without an understanding as to how they are derived, why they change and the extent to which an organization is exposed to economic danger. A few of the countless questions on the minds of inquiring individuals are shown below. (This is by no means an exhaustive list.)

  • Who has the authority to effect change for all things financial management?
  • Who oversees authorized persons and the latitude they enjoy to make decisions?
  • How are risk drivers identified, measured and managed on an ongoing basis?
  • What creates "stop loss" threshholds?
  • How are functional risk managers compensated? >>

In addition to their already long "to do" list regarding asset allocation, plan design and so forth, countless pension fiduciaries are charged with corporate governance related duties such as monitoring. After all, they are frequently large shareholders in public companies stateside and abroad. It is interesting to note that most securities litigation leads are either public pension funds (U.S. and non-U.S.) or Taft-Hartley plans but not ERISA funds. Why this is true is one of the questions that will be discussed during our April 27, 2009 webinar entitled "Pension Plans as Plaintiffs - 800 Pound Gorilla of Litigation." Click here to register.

Pension Governance, Inc. Schedules Two Live Webinars About Pension Litigation

Pension Governance, Incorporated, an independent research, analysis and training company, is pleased to announce a top-notch roster of legal and fiduciary experts, each of whom will address the changing landscape of litigation as relates to plan sponsors. Click to learn more about “Pension Fiduciaries in the Hot Seat – What to Avoid & How to React if Sued” to be held on April 14, 2009 from 2:00 PM to 3:30 PM EST and “Pension Plans as Plaintiffs – 800 Pound Gorilla of Litigation” to be held on April 27, 2009 from 11:00 AM to 12:30 PM EST.

Learn why pension plans are a force in the legal arena, how both corporate governance and investment governance practices are fast-changing as a result, what can be done to manage litigation exposure and the link between litigation and fiduciary liability risk.

Who Should Attend: Public pension plan trustees, ERISA fiduciaries, pension analysts, asset managers, financial advisors, actuaries, consultants, securities litigation attorneys, pension attorneys, board members

Speakers for “Pension Fiduciaries in the Hot Seat – What to Avoid & How to React if Sued,” scheduled for April 14, 2009 (2:00 PM to 3:30 PM EST):

  • Dr. Susan Mangiero, AIFA, AVA, CFA, FRM - Moderator and President, Pension Governance, Incorporated
  • Mr. Richard Haran, Jr. - Speaker and Vice President, Chubb & Son
  • Attorney Marla J. Kreindler - Speaker and Partner, Winston & Strawn LLP
  • Attorney Stephen Rosenberg - Speaker and Partner, The McCormack Firm, LLC
  • Attorney Joshua Sternoff - Speaker and Partner, Paul, Hastings, Janofsky & Walker, LLP

Speakers for “Pension Plans as Plaintiffs – 800 Pound Gorilla of Litigation,” scheduled for April 27, 2009 (11:00 AM to 12:30 PM EST):

  • Dr. Susan M. Mangiero, AIFA, AVA, CFA, FRM - Moderator and President, Pension Governance, Incorporated
  • Attorney James Baker - Speaker and Partner, Jones Day
  • Attorney Daniel Berger - Speaker and Partner, The Pomerantz Law Firm
  • Attorney Jay McElligott - Speaker and Partner, McGuire Woods LLP

Email or visit to register for one or both of these exciting webinars. Additionally, registrants are entitled to a 10% discount off a subscription to

Risk Management for Corporate Counsel

I am pleased to announce my participation as part of the February 26, 2009 Lexis Nexis Corporate Counsel Series. According to the official program site, the 60-minute Webcast will focus on critical corporate governance and risk assessment issues that pertain to in-house company attorneys. Click here to register for what promises to be an interesting and timely event.

I've excerpted information about panelists below. I hope you can join us.

  • Susan Mangiero, Financial Analyst, Risk Assessment and Valuation Expert -  Susan has over 20 years of experience in capital markets, global treasury, asset-liability management, portfolio management, economic and investment analysis, derivatives, financial risk control and valuation. She has worked for organizations such as the General Electric Company, PricewaterhouseCoopers LLP, Bank of America, and Bankers Trust.
  • Lynn Brewer, Ethics Expert and Author of Confessions of an Enron Executive: A Whistleblower's Story - Lynn was responsible for Risk Management in Energy Operations at Enron, worked in forensic accounting, and spent 18 years as a legal professional in private practice until she joined Ralston Purina, where she worked in Corporated Development for the General Counsel and Chief Financial Officer.
  • Jason Greenblatt, Executive Vice President and General Counsel. The Trump Organization - Jason is involved in a large number of transactions worldwide, including deals with major financial institutions, Fortune 500 companies, governmental agencies, and joint venture partners.

Company Stock Case Outcome Favors Employer

Hat tip to attorney Janell Grenier and creator of BenefitsBlog for her nice write-up about Bunch v. W.R. Grace & Co. Savings and Investments Plan. The nature of the case differs from what some experts refer to as "stock drop cases" because plaintiffs asserted that the fiduciaries were at fault for not holding onto the stock. (In contrast, a "stock drop" case typically reflects a situation wherein (a) company stock is a defined contribution investment choice (b) the price of the company stock drops and (c) investment committee members (among others) are sued for allegedly not monitoring the "riskiness" of the company stock and its "suitability" as a 401(k) plan choice.)

Attorney Grenier describes the case as a "roadmap" for other corporate defendants who seek guidance with respect to "prudent process and procedures" they should follow in tracking company stock as a plan investment choice. Among other things, the court positively acknowledge that (excerpting from Attorney Grenier's blog):

  • Appointed fiduciaries recognized a potential conflict of interest by making a decision about the prudence of the company stock as a viable investment choice.
  • The plan sponsor appointed an independent fiduciary to assist.
  • Financial and legal advisors were made available to assist the independent fiduciary.
  • Plausible reasons for divesting company stock were documented.
  • Plan participants were made aware of the sponsor's decision to remove company stock as an investment choice but also told that the situation would be monitored and that circumstances might result in a changed decision, later on.

The Court's decision, on appeal, refuted the plaintiff's assertion that market price should have been a determinant of the decision as to whether to divest or not, adding that prudent process trumps. Specifically, "(T)he test of prudence -- the Prudent Man Rule --  is one of conduct, and not a test of performance of the investment."

Not being an attorney, I would never offer legal commentary. From an economic perspective, howerver, this case is noteworthy for any plan sponsor but perhaps more so for companies that have seen stock prices plunge, forcing questions of "suitability" for a 401(k) plan.

Editor's Notes:

  • One of the two independent experts "specifically cited by the First Circuit as having been hired by the investment manager to advise it" - Goodwin Procter LLP - has its own write-up about the case in its February 3, 2009 Financial Services Alert.
  • Attorney Steve Rosenberg has a nice piece about the original case adjudicated in the United States District Court, District of Massachusetts. Click to read the January 30, 2008 "Findings and Rulings" in which the "Court holds that State Street and Grace did not breach their fiduciary duties when making the decision to divest the Plan of the Grace Stock Fund." Click to read "The Benefits of Relying On Investment Managers" by Stephen D. Rosenberg, February 7, 2008.

Troubled Pensions - CNN Money Interview

Click here to view "Troubled Pensions," an interview I gave to CNN Money anchor Poppy Harlow on November 24, 2008. (The piece aired on November 26, 2008.) The roughly five minute discussion centered on four questions, including:

  • Is Congressional reform of the Pension Protection Act of 2006 needed or should plan sponsors be forced to top off underfunded plans?
  • Will the Pension Benefit Guaranty Corporation be able to handle traditional plans of ailing auto manufacturers?
  • Will plan sponsors be tempted to assume more investment risk in order to make up for current losses?
  • Is pension litigation on the rise?

Pension Litigation Soars

I am speaking at the first annual "National ERISA Fiduciary Execusummit" with a particular focus on litigation. As I've been doing a lot lately, I am addressing the wide array of litigation and regulatory enforcement pain points (too many to list here). My goal is to encourage anyone who will listen that good process can go a long way to defending otherwise expensive and time-consuming actions.

Click to access the National ERISA Fiduciary Execusummit program.

Class Action Certification and 401(k) Fees

According to Class Action Litigation Report ("Court Certifies Class Action Alleging Fiduciary Breach in Charging Excessive Fees, July 25, 2008), a U.S. federal court has granted class action status to a claim by 401(k) plan participants that they were forced to pay "unreasonable" fees to service providers. Alleging that Kraft Foods Global Inc. plan fiduciaries failed to keep a lid on costs related to recordkeeping and asset management, this case may raise the stakes for Corporate America, with at least a dozen other "excess fee" cases awaiting adjudication.

Filed in October 2006, the original complaint describes the four individual members of the Benefits Investment Committee ("BIC") as having "the authority and discretion to control and manage the investment operations of the Plan," thereby rendering the BIC a named fiduciary according to ERISA. Click to read the original complaint and the order on class certification.

On a related note, the U.S. Department of Labor ("DOL") proposed its new "Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans," (published in the Federal Register, July 23, 2008). Written comments will be received by the DOL on or before September 8, 2008. If approved, 401(k) plan sponsors will have to report details about fees and expenses to participants. Interestingly, the U.S. House of Representatives deferred a decision on requiring enhanced 401(k) plan disclosures. Interested persons may want to watch Bloomberg's video entitled "The Truth Behind Hidden Fees in 401(k) Plans" (June 19, 2008) in which 17 separate fees are cited as eroding investment returns.

As countless employers switch to defined contribution plans, putting more responsibility on individuals as to how their monies are deployed, the economic impact of fees becomes arguably even more important than before.



CSX Battles Hedge Funds - A Cautionary Tale for Pensions?

In case you missed it, possible trend-setting legal parries are commanding attention from New York jurists, institutional investors and proxy specialists. According to corporate governance expert Jay Brown, "The CSX case is the first decision to find that shareholders must sometimes disclose the shares acquired by investors as part of equity swap transactions. This holding makes it harder for activist shareholders - trying to acquire or influence control of a public company - to keep their holdings secret." Brown should know. As a securities law professor (University of Denver Sturm College of Law) and lead contributor to The Race to the Bottom (a widely read legal blog), he and colleagues have penned no fewer than 16 posts about the ongoing litigation between CSX Corporation ("CSX") and several CSX investors - 3G Capital Partners ("3G" or "3G Capital") and The Children's Investment Master Fund ("TCI").

By way of background (and this is a summary only), a letter was sent to CSX by TCI on February 7, 2008, stating its intentions to acquire effective control. In response, CSX filed a lawsuit against the two funds. The Q1-2008 quarterly SEC filing for CSX states:

<< On March 17, 2008, the Company filed a lawsuit against The Children’s Investment Master Fund (together with certain of its affiliates, “TCI”), 3G Capital Partners Ltd. (together with certain of its affiliates, “3G”) and certain of their affiliates (collectively, the “TCI Group”) in the United States District Court for the Southern District of New York alleging violations of federal securities laws, including violations of Sections 13(d) and 14(a) of the Securities Exchange Act of 1934. The lawsuit alleges, among other things, that TCI and 3G have undisclosed plans with respect of CSX. The lawsuit further alleges that TCI and 3G have employed swap agreements in order to evade the filing requirements of Section 13(d) and that their Section 14(a) and Section 13(d) filings concerning their collective 12.3 percent swap position in CSX shares are materially misleading. The lawsuit further alleges that TCI’s and 3G’s disclosures in their Section 14(a) and Section 13(d) filings concerning their formation of a Section 13(d) group are false and misleading. >>

Click to access the CSX 10-Q, filed on 4/16/08. Click to read the complaint for "CSX Corporation v. The Children's Investment Management (UK) LLP et al," filed with the U.S. District Court, Southern District of New York.

Following various motions (in limine, opposition and so on), the two funds (owning about 20 percent in direct form and via equity derivative contracts) sent a letter to other CSX shareholders on June 20, 2008 in which they explain why five nominees should be elected to the CSX board. Citing support for their slate from RiskMetrics Group - ISS Governance Services, they write:

<< If you believe CSX cannot afford to rest on its laurels in favorable pricing and market environments, if you believe that CSX should strive to achieve its full operating potential, if you believe that CSX can and should be the best railroad in America and, finally, if you believe the board of CSX will benefit from the railroad experience of our nominees, along with the perspectives of large shareholders who are engaged because they have made a significant investment in CSX stock using their own money, we urge you to join with us in electing our five nominees to the board of directors of CSX by voting on the BLUE TCI/3G proxy card today. >>

On June 20, 2008, Judges Hall, Livingston and McMahon opine that TCI and 3G Capital Partners can vote their shares, additionally setting up a briefing schedule to include a July 25, 2008 date by which reply briefs in each appeal must be filed. Click to read the ruling.

The "TCI and 3G Comment on Circuit Court Ruling" (dated June 20, 2008) is short and sweet, expressing confidence in the then future June 25, 2008 vote to elect "five highly qualified director nominees." Following that vote, CSX declares the June 25, 2008 board vote "too close to call." In its June 25, 2008 press release, CSX states that the "annual meeting will reconvene at 10 am ET on Friday, July 25, 2008.

Courtesy of Knowledge Mosaic, we know that many large pension funds likewise invest in CSX (at least as of the end of Q1-2008). Regardless of the election results, the corporate governance impact is real. A partial list of funds is included below.


Not being an attorney, this case caught my eye because of the numerous and complex investment and governance implications, including the concept of"beneficial ownership" and use of financial derivative instruments. Several things come to mind.

  • When a defined benefit invests in a particular stock (or selects such stock for its defined contribution plan participants), are plan fiduciaries doing sufficient homework with respect to identifying "large" ownership stakes and assessing possible corporate governance implications?
  • For those defined benefit plans allocating monies to activist hedge funds, are investment fiduciaries taking into account a potential diversification "offset" that could occur if the plan invests directly in the same stock that represents a concentrated hedge fund position? (This is predicated on the notion that many pensions invest in alternatives for portfolio diversification reasons.)
  • Are pensions (endowments and foundations too) asking enough questions about their external money managers' use of derivatives? Always a critical exercise, this case illustrates that equity exposure can be material through both direct buys and indirect trades, i.e. equity swaps. Though not germane to this case, equity futures or options facilitate exposure to an individual stock and/or a particular sector of the equity markets. Will their use connote "beneficial ownership" and is the exposure deemed significant? (Note that in their June 2, 2008 amici curiae brief, the International Swaps and Derivatives Association, Inc. and Securities Industry and Financial Markets Association argue against the notion that equity swaps evidence "beneficial ownership," adding that to conclude otherwise would disrupt derivative market activity.  In an unrelated case, "Securities and Exchange Commission v. Larry P. Langford et al" (filed with the U.S. District Court for the Northern District of Alabama, Southern Division, on April 30, 2008), the issue as to whether swaps (interest rate) are securities appears again. See "SEC Plan for Swaps 'Securities' Gets Alabama Rebuff" by Bloomberg reporter Joe Mysak (July 3, 2008).
  • In the event that a fund manager is known to use equity derivatives (because the pension fund or consultant inquires), should plan fiduciaries be carefully tracking whether the derivatives represent a hedge, a cross-hedge or an anticipatory price/volatility trade? In the case of a hedge, yet another question goes to how best to measure effectiveness.

The CSX case is sure to be the beginning of a lively debate among financial market participants and corporate issuers.

Editor's Note: Go to for a great collection of corporate governance sites. Directors and Boards is another valuable resource.

ERISA Attorney Blogger Comments on Tullis v. UMB Bank

ERISA legal blogger, otherwise known as attorney Stephen Rosenberg, comments on our June 22, 2008 post entitled "Rights of Individual Plan-Holders Expanded by Sixth Circuit" with his usual insight. See below for an excerpt of his June 30, 2008 post.

"There are two particularly interesting side notes about this. First, it illustrates a particular point I - and others - made in a number of media outlets after the Supreme Court issued its opinion in LaRue, namely that, while it may not result in an avalanche of litigation that otherwise would not have been filed, the ruling is certainly going to lead to an increase in the filing of smaller cases on behalf of a few participants in circumstances that, in the past, would not have generated suits unless a class wide action could be brought. Second, the case presages what may be the dying off, by a thousand cuts, of the long held use of standing to cut off ERISA breach of fiduciary duty suits at the earliest stages of procedural wrangling, long before any litigation over the merits of a case, something which occurred at the federal district court level in the original LaRue case itself. Roy Harmon, over at his Health Plan Law blog, has a detailed analysis of this question, one I have been thinking about since LaRue was decided but which Roy has thankfully saved me from addressing in detail at this point.

Click to read the full text version of "From Preemption to ERISA Standing, and Lots of Things In-Between."

Pension Litigation Trends - What Do You Want to Know?

On January 14, 2008, we announced the launch of Since then, we've collected over 2,000 cases that involve pension funds, either as plaintiff or defendant. We are adding about 300 to 400 cases per quarter. A joint venture of Pension Governance, LLC and The Michel-Shaked Group, this continuously updated and searchable database reflects the dramatic rise in pension lawsuits. Topics include, but are not limited to, prudence, fees, risk management, diversification, suitability and plan design.

Like it or not, lawsuits are growing in number, severity and frequency. If we can learn from attempts to seek legal redress or understand why a case is dismissed, perhaps we can gain a better understanding of fiduciary vulnerabilities and ways to improve bad practices, when they exist. (It should go without saying that the filing of a case does not necessarily equate to culpability.)

We want your feedback in order to make our first trend analysis paper (and those to follow) as helpful as possible to pension fiduciaries and professionals who work with them. We currently use nearly one hundred codes to categorize each case (by court and topic).

  • Readers (attorneys or otherwise) - What kind of information about pension litigation do you want to know? Click to send an email with your thoughts.
  • Attention attorneys (litigators on either side, general counsel or plan counsel) - If you would like to contribute an analysis or helpful hints to and our fast-growing audience, send an email with your suggestions and contact information.

We want to hear from you!

Rights of Individual Plan-Holders Expanded By Sixth Circuit

According to ERISA attorney Jason Sheffield, a recent decision by the U.S. Court of Appeals for the Sixth Circuit opens the courtroom doors wider to individual plan participants. In Tullis v. UMB Bank, the Sixth Circuit grants individuals legal standing to sue (rather than have to show damage to the entire plan).

According to the opinion (decided and filed on January 28, 2008 by circuit judges Merritt, Rogers and McKeague), ERISA allows these two Toledo Clinic Employees' 401(k) Profit Sharing Plan participants to proceed with a case against the fiduciaries of UMB Bank. By way of background, in the early 1990's, the two doctors selected an investment advisor affiliated with Continental Capital Corporation. In the fall of 1999, the U.S. Securities and Exchange Commission "entered a Temporary Restraining Order against Capital because two of its brokers were engaged in fraudulent activities. The plaintiffs contend that the defendant, UMB Bank, which served as the Trustee for the plan, knew of the fraud yet failed to inform them."

In the aftermath of a recent U.S. Supreme Court case (LaRue v. DeWolff, Boberg & Associates, Inc.), is it likely that plan fiduciaries are more vulnerable to allegations of breach?

Click to read a copy of the Tullis, et al. v. UMB Bank, 515 F.3d 673, 678-79 (6th Cir. 2008) opinion. For an analysis of this case and many others, visit, Resources, Analyses by Circuit or Analyses by Topic. (A subscription is required.)

Click to read the LaRue v. DeWolff, Boberg & Associates, Inc. opinion. Click to read "U.S. Supreme Court Rules 9-0 in Major Pension Case" and "LaRue, Corporate Governance and the Next Pension Enron."

Arkansas Teachers Sue Company Directors for Risk Taking

According to business vox populist Gretchen Morgenson, a Los Angeles federal judge plans to hold mortgage company executives accountable by allowing a lawsuit to proceed. In "Judge Says Countrywide Officers Must Face Suit by Shareholders" (New York Times, May 15, 2008), Morgenson quotes Christa Clark, chief attorney for lead plaintiff, Arkansas Teacher Retirement System, as urging institutional investors to recognize a "duty to seek recourse when a company's directors engage in practices that are not in the best interests of shareholders."

It is impossible to know all facts at this stage, let alone guilt. Only ensuing testimony will shed light on whether Countrywide's CEO and about a dozen directors and officers are deemed culpable. According to the complaint (not yet included in the national judiciary's repository), those described as in the know were allegedly liquidating their personal holdings while making "misleading" public statements about the financial health of the company.

Two things are notable about this case. First, it is yet another indication of the power of institutional investors, in the aftermath of the passage of the Private Securities Litigation Reform Act of 1995. Second, questions remain about whether, and to what extent, other boards will find themselves defending suspicious practices. The outcome of this lawsuit portends greater focus on who should be held responsible for financial practices. So far, the outcome is mixed with respect to the sub-prime blame game.

The Fire & Police Pension Association of Colorado ("FPPAC"), Louisiana Municipal Police Employees Retirement System ("LAMPERS"), Central Laborers Pension Fund, and the Mississippi Public Employees Retirement System ("MPERS") are listed as additional plaintiffs.

Pension Funds Ask - "Who is Responsible for Risk Oversight?"

In "Bear's board was busy elsewhere," Financial News reporter Jeff Nash (March 31, 2008) writes that the investment bank's board has been busy, with three individuals doing work for "at least four other public companies" and two "of those three extremely busy directors" doing double duty as members of the risk committee. Corporate governance pundits add that outside distractions do little to help business fiduciaries carry out critical risk oversight duties.

Wall Street Journal reporter George Anders likewise addresses the question of where the buck stops, or if it arrived at all. In "Wall Street Housecleaning May Bypass Boardroom," the executive director of the $12 billion Illinois State Board of Investment, William R. Atwood puzzles over the involvement of directors as relates to sub-prime losses, wondering if "directors at big banks and Wall Street firms share some responsibility for what has gone wrong." Others quoted in the April 2, 2008 article counter that it may be ill-advised to unseat veteran directors. New appointees face a steep learning curve that exposes a company to risk of another kind.

The courts will surely play a prominent role in determining who pays (if at all) as shareholders and pension plan participants file lawsuits aplenty.

Bear Stearns Sold to J.P. Morgan - Real Pain for Employees

Sunday was no day of rest for the Board of Governors of the Federal Reserve System.  A unanimous vote to "create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets" accompanied approval to decrease the discount rate by 25 basis points, to 3 1/4 percent. A third initiative was the approval of a deal for JPMorgan Chase & Co. to buy The Bear Stearns Companies Inc. (ticker symbol BSC).

An announced acquisition price of $2 per share (or $236 million in aggregate) is an economic fall from grace by most counts. Bear common last closed at $30 and traded as high as $159 and change over the last year. Click for BSC information. While good news for some, others are reeling from the precipitous drop in stock price. According to "Bear execs lack golden parachutes as stock plan crunched" (Reuters, March 17, 2008), journalist Joseph A. Giannone writes that executives will have little to celebrate since "shares held by the top handful of executive officers plunged in value from about $1.8 billion 14 months ago to just $22 million today." Employees are likely to fare no better with 30 percent of company stock in their various benefit plans (profit sharing, options and so on).

Litigation is underway with Pittsburgh law firm, Stember Feinstein Doyle & Payne, LLC, announcing "possible illegal conduct relating to the Bear Stearns Companies Inc. Employee Stock Ownership Plan, Profit Sharing Plan and Deferred Compensation Plan." According to the March 14, 2008 press relelase, the firm is investigating whether identified plan fiduciaries "knew or should have known that Bear Stearns was concealing its large exposure to highly risky Collateralized Debt Obligations, subprime mortgages, and other poor-quality securities, which has rendered Bear Stearns common stock and certain funds that it manages and offers as a risky investment for Plan participants."

Editor's Note: Does anyone know if BearMeasurisk, LLC is likewise sold to JPMorgan? The BSC web page for institutional investors currently links to a description about this web-enabled product for pensions as follows.

<< Our plan sponsor offering addresses Corporate, Public and Taft Hartley Funds with defined benefit and defined contribution plans. We provide Value at Risk (VaR) analysis at all levels of your fund, including security level, asset class, country, account and total fund. We also provide marginal VaR (contribution of risk), Relative VaR (risk versus benchmark) and risk of the total fund as compared to a policy portfolio. >>

Emotions, Trading Risk and the Twinkie Defense

Following on the heels of our March 15 post about emotions and retirement planning, another just published article addresses the role of the brain with respect to risk proclivity. In "The Science of Risk-Taking," TIME reporter Kate Stinchfield writes that thrill-seeking has a chemical payoff. Research suggests that higher risk tolerance relates to the reabsorption of dopamine, a neurotransmitter. Serotonin is a factor as well. Normal levels prevent erratic behavior. Testosterone is yet another consideration, with lower (higher) amounts linked to risk aversion (taking). Stinchfield quotes Professor Marvin Zuckerman (University of Delaware) as saying that "high-sensation seekers tend to underestimate the risk."

So does this mean that current excesses of financial risk-taking are tied to unusual brain activity? Can "bad" body chemistry interfere with the prudent process of implementing and monitoring risk controls?

"Sorry your honor, my chemical levels made me take wild, zany risks with other people's money." This sounds like the financial equivalent of the Twinkie Defense.

U.S. Supreme Court Rules 9-0 in Major Pension Case

On February 20, 2008, the U.S. Supreme Court released an opinion heard round Corporate America. In LaRue v. DeWolff, Boberg & Associates, Inc., these nine top justices held that ERISA does "authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account" and allows for lawsuits to enforce "liability-creating provisions" that involve fiduciary breach of duty. This is big news indeed, opening the door for individual participants in 401(k) plans to seek legal redress when their investment directives are ignored or incorrectly processed. In "Top Court Allows Suit Over 401(k)," New York Times legal reporter Linda Greenhouse describes this as "one of the most important rulings in years." It clarifies an otherwise somewhat ambiguous element of ERISA (Employee Retirement Income Security Act of 1974) as to whether fiduciary duty relates to the financial health of the plan versus that of an individual participant.

Click to read our November 28, 2007 post entitled "LaRue, Corporate Governance and the Next Pension Enron."

Pension Fund Sues Yahoo

There will be no hearts and flowers for Yahoo from a Michigan pension fund. In "Yahoo Rejection of Microsoft Bid Draws First Shareholder Suit," Information Week reporter Antone Gonsalves writes that the Wayne County Employees' Retirement System of Michigan is taking Yahoo to court. Alleging failure to "meet its obligation to shareholders in evaluating the offer," Wayne County is asking Yahoo directors to thoroughly vet the computing giant's offer, especially given the bid price compared to where Yahoo common stock is currently trading ($31 versus roughly $19).

According to the 2006 Annual Report (most recent document posted on the Wayne County Employees' Retirement System website), their common stock holdings take the form of mutual funds. It's not clear if their reported 13,600 shares of Yahoo are held as part of a pool. An asset allocation pie chart shows equity with a 66 percent sliver. As of September 30, 2006, Wayne County's assets came close to $1 billion. What will be interesting to watch is whether WCER is left in the dust as pension funds with larger stakes compete for a more visible litigation role.

According to the Yahoo company website, its 401(k) plan includes a company match. If that match takes the form of Yahoo stock, a 401(k) stock drop lawsuit may be just around the corner.

Susan Mangiero Moderates Pension - Hedge Fund Mock Deposition

At a time when pensions, endowments and foundations are investing billions of dollars in alternatives such as hedge funds, responsible decision-makers must understand financial and legal risks. If they fail to dig deep or negotiate their interests properly (even when they use a consultant or fund of funds manager), fiduciary breach lawsuits could result. Join Dr. Susan Mangiero, AIFA, AVA, CFA, FRM (President of Pension Governance, LLC); ERISA attorney Noah Weissman (Bryan Cave LLP); and hedge fund attorney Nir Yarden (Bryan Cave LLP) for a mock deposition involving a pension fund’s investment in hedge funds, gone awry. Part of the Fiduciary 360 National Conference, audience members can see what happens during this discovery phase of litigation, watch and hear firsthand what someone in the “hot seat” is likely to experience and learn lessons about proper investment fiduciary process. According to Mangiero, author of "Risk Management for Pensions, Endowments and Foundations" and countless articles about investment risk and valuation, "The challenge is particularly acute when hedge funds invest in 'hard to value' assets or employ complex derivative instrument strategies. Identifying hidden risks can save institutional investors money, reduce stress and avoid harm to reputation."

For more information about this May 7 - 9, 2008 conference, go to For more information about pension best practices, visit

Subprime Crisis and Pension Governance

In "Investing in Good Governance: Subprime-Related Losses Stir Up the Conversation," reporter Rachel McMurdie addresses the growing number of lawsuits in pensionland, along with an urgent focus to identify improvements that can and should be made. Interviewing this blog's author and fellow blogger, attorney Stephen Rosenberg, McMurdie describes recent attempts to codify pension governance standards. One initiative, the Clapman Report, is something I analyzed at length when it was published in the summer of 2007.

Click to read the full text of "Investing in Good Governance" (The Institutional Real Estate Letter, January 2008). Click for our take on the Clapman Report

Fiduciary Fallout in Canada, US and UK

According to, NatBank Brokerage will pay $750,000 (assume this is Canadian dollars) to medical doctor, Gilles Dussault. Representing lost income and interest on such, the court-determined fine follows a rough and tumble relationship between the physician and his brokers, a father and daughter team. Advised to short $2 million of savings bonds and then left to make his own decisions when prices rose, Dussault's losses grew until, two and a half years later, his holdings were liquidated to "cover what he owed in 1996." As a result, Dr. Dussault sued, alleging that the "original short sale was contrary to his investment objectives and financial interests." The bank countered, asserting that he knew the risks all along and that his losses would have been smaller had he closed his position sooner than occurred. In a 29-page opinion, Judge Mark Peacock described the plaintiff as "a man alone in a rowboat in a storm in the mid-Atlantic," adding that "The firm had always been his guiding light in the past and now that the waves were towering over him, the beacon was gone." He further characterized the transaction as conflicting with the investor's objectives and lambasted the brokers for not providing adequate information about the riskiness of the short sale. (See "Bitter pill for NatBank brokerage,, January 16, 2008 for the full text of the article.)

Thanks to Mr. Carlos Panksep, General Manager of the Centre for Fiduciary Excellence, for pointing out this item. When asked what caught his attention about this news story, Carlos responded as follows. "In reading about this case, I could sense the lack of fiduciary accountability on the part of the advisor, possibly due to her inexperience. However, a firm which promotes a high priority to fiduciary education and sensitivity would have possibly avoided this outcome. I hope this firm will improve its practices as a result rather than bury this incident as unimportant or rare."

On the institutional front, Massachusetts Secretary of State William F. Galvin is asking Merrill Lynch about a $12+ million loss incurred by the City of Springfield. According to The Republican, the Springfield Control Board accuses the brokerage firm of "investing funds in an unsafe manner not permitted by state law." Focus on a collateralized debt obligation ("CDO") known as "Centre Square" ("a fund based in the Cayman Islands and Delaware") will logically examine why a $12.6 million spring 2007 outlay fell to $1.2 million by November. Reporters Peter Goonan and Dan Ring write that Merrill Lynch has declared the city responsible for making "its own investment decisions." (See "State subpoenas Merrill Lynch officials in Springfield investment loss," January 14, 2008). 

Expect more articles along these lines of "he said, she said." Inevitably losses (especially big ones) are going to result in lawsuits. Determining who bears ultimate responsibility is far from trivial and opens the door to other inquiries. Disclosure is a factor. Education is another consideration.

  • Suppose a broker (advisor) provides significant information about risk drivers but the investor is unable to digest it properly. Should the broker (advisor) turn down the business even if it means that he (she) might lose his (her) job for not bringing in enough clients? How will he (she) know that a client is ill-equipped to invest in a particular instrument or strategy?
  • In the absence of mandatory education and experiential requirements to sit on a city board (or state or company equivalent), what controls should be in place to preclude individuals from being able to inappropriately commit funds? How should the institution better vet the broker (advisor) at the outset and during the investment period?
  • What constitutes fraud on the part of the broker (advisor) for not "properly" disclosing risk factors?
  • Will the typical broker (advisor) be able to adequately explain the risk trouble spots associated with a complex investment instrument or strategy? If not, why are they promoting such to investors?
  • For individuals or institutions, what safeguards (action steps) should kick in as an investment is heading south, if at all? (Value may plummet only to rise again as long as the position is not liquidated before recovery.)
  • How should regulators better define and enforce suitability?
  • What role should the market play in terms of "lessons learned" by various players? 
  • Will attorneys have a different take on suitability than that of brokers (advisors)?

A recent article about UK trustees suggests that fiduciaries may acknowledge a problem but not feel comfortable moving towards a solution. In "Trustees ask for help," Global Pensions reporter Heather Dale (January 21, 2008) cites grim statistics from Hewitt Associates. Requests from British plan decision-makers "have doubled over the past 18 months" at the same time that more work, due to increased regulatory scrutiny, adds pressure. Do the math. More work, more complexity, more pressure, more scrutiny = big challenges. Does this mean that trustees must forge an even closer relationship with the fund's broker (advisor)? If so, how will questions of responsibility be impacted?

Caveat emptor will surely be the watchword for months to come. At what point are individuals (institutions) considered "duped" into investing in "excessively risky" assets and on what basis? How should suitability vary by type of institution? How can plan participants, shareholders and taxpayers better inform themselves about the risks being taken by a particular city, state or company pension?

The questions are endless. The answers are important.

Pension Litigation Database Launches as Lawsuits Surge debuts with over 1,500 retirement plan legal actions, each classified by nearly 100 fields, including court circuit, type of allegation, plaintiff, defendant and date. A joint venture of Pension Governance, LLC and The Michel-Shaked Group, this continuously updated and searchable database reflects the dramatic rise in pension lawsuits. Market volatility, complex investment strategies, new accounting rules, federal regulations and heightened scrutiny of financial decision-making are a few of the many reasons that explain the addition of hundreds more cases each quarter.

This unique web-enabled tool helps attorneys, trustees, board members and policy-makers to better understand the nature of individual pension lawsuits and related litigation trends, thereby encouraging improved practices. “We’re excited to introduce as a way to stimulate the conversation about fiduciary responsibilities,” said Dr. Susan Mangiero, President and CEO of Pension Governance, LLC. “Litigation is a fact of life now. Regardless of plan type, those in charge need to understand the personal and professional liability. Our hope is that subscribers can learn valuable lessons about what to avoid.” Co-founder of The Michel-Shaked Group, Dr. Israel Shaked urges outside and corporate counsel to pay close attention to ERISA cases, adding “These lawsuits are greater in number, more severe and often accompany securities litigation filings, including class actions.”

A charter annual subscription rate of $695 provides unlimited access to the site, saves decision-makers countless hours of research time and offers otherwise hard-to-find intelligence about pension litigation issues. Users will find cases about a variety of topics such as prudence, duty to monitor, reasonableness of fees and plan design. Circuit commentaries written by and for attorneys are available and cover numerous retirement plan pain points that challenge sitting fiduciaries and their service providers. Assessing statistical patterns, evaluating case precedents, tracking fiduciary hot button issues by circuit, case type and time to settlement are just a few of the information tools you will find here.

For more information, visit

State Street Sets Aside $618 Million for Pension Lawsuits

New York Times reporter Vikas Bajaj writes that a State Street Corporation senior executive has been ousted due to sub-prime woes, and that the company has set aside "$618 million to cover legal claims stemming from investments tied to mortgage securities." (See "State Street Corp. Is Sued Over Pension Fund Losses," January 4, 2007.) 

Various other news accounts over the last few months name State Street as defendant in five separate pension-related cases. Plaintiffs' attorneys seek redress under the Employee Retirement Security Act ("ERISA"), citing allegations of fiduciary breach. Critics counter that proving bad faith on the part of investment managers (i.e. not acting "exclusively on behalf of plan participants") will be difficult. They further add that "sophisticated" pension funds should know better.

This blog's author predicts that caveat emptor will pop up in many cases to come. A legal outcome in the matter currently before NY jurists, with San Diego's pension plan going after former hedge fund Amaranath Advisors, goes to this very point (among others).

The stakes for defendants and plaintiffs alike are huge. Whatever happens in several of these big cases will open the door to a flood of similar lawsuits. If defendants are found culpable, it will be open season on service providers. Critical questions abound. Are money managers functional fiduciaries even when they disclaim such status? I wrote about this in my article entitled "Can Pension Clients Be Hazardous to Your Financial Healh?" (Mann on the Street, August 2007 and later reprinted in Journal of Pension Benefits, January 2007).

If defendants claim victory, pension investors will be seriously on the hook for ensuring that they fully understand the nature of their investments. Equally grave will be the need to demonstrate that a retirement plan decision-maker has fully vetted external money managers for risk controls, adequate disclosures and suitability in terms of permitted investment strategies.

Watch for more legal news.

Big Questions - Big Money - Big Consequences!

Plan Sponsors Win - Beneficiaries Over 65 Lose

In today's edition, New York Times reporter Robert Pear describes a recent action by the Equal Employment Opportunity Commission ("EEOC") that gives employers free rein to cut back benefits for persons 65 and older. (See "Many Retirees May Lose Benefits From Employers.") The rationale seems to be that, once eligible for Medicare, senior workers should transition fully or partially out of private benefit programs because they are otherwise covered. Quoting EEOC Chair, Naomi C. Earp, the goal is to encourage plan sponsors to continue voluntarily providing and maintaining health benefits. Premiums deemed "too high" and the fact that people are living so much longer than ever before is creating havoc with corporate bottom lines. As a result, "many employers refuse to provide retiree health benefits or even to negotiate the issue." In some cases, if they are unable to contain costs for benefits offered to older workers, companies may decide to cut back altogether. This means that younger workers would be exposed - no employer provided coverage, no Medicare.

According to the December 26,2007 Federal Register, the new policy protects plan sponsors from legal threats of age discrimination in the event that they create a two-class benefits program. The "Appendix to Sec. 1625.32--Questions and Answers Regarding Coordination of Retiree Health Benefits With Medicare and State Health Benefits" provides additional information. The upshot is that employers now enjoy flexibility to (a) provide retiree healthcare benefits “only to those retirees who are not yet eligible for Medicare" (b) modify, reduce or eliminate benefits upon an employee's 65th birthday and (c) decrease or eliminate health benefits for the spouse or children of a retiree of a certain age.  

How many companies rush to the door remains to be seen. As employers struggle to attract and retain good workers, including those with a bit of gray, providing or reinstating diminished benefits may come to pass. Only time will tell.

Pension Litigation - Investment Link

In "Pension Fund Litigation Could Slow Investments," New York Sun journalist Liz Peek quotes yours truly on the surge in pension lawsuits, notably those alleging breach of fiduciary duty. Attorney Stephen Rosenberg, and creator of a popular ERISA law blog, is likewise quoted as citing the Herculean challenge faced by plan sponsors. Charged with a bevy of everyday tasks, now added to the list is the need to familiarize themselves with increasingly complex instruments and investment strategies. The article suggests that "increased accountability could dampen institutional enthusiasm for alternative investments."

In contrast, a survey just released by Russell Investments finds a worldwide trend on the part of endowments, foundations and pensions towards continued allocation of monies to alternatives such as hedge funds and private equity funds. With increases expected by 2009 in most countries, the twin issues of risk management and valuation will become arguably even more important (though they have never been unimportant).

The next several years promise to be interesting ones, to say the least.

LaRue, Corporate Governance and the Next Pension Enron

In response to my query about Justice Roberts and his comment about a plan's SPD, ERISA attorney Stephen Rosenberg wrote "Susan Mangiero was taken by the discussion in the oral argument of what powers may or may not have been identified in the summary plan description appended to LaRue’s complaint. I took this discussion by the Justices to be part of an inquiry into what are the constraining parameters of a claim such as the one brought by LaRue." Go to Boston ERISA & Insurance Litigation Blog for additional discussion.

The Wall Street Journal's Law Blog had an interesting post on LaRue. (I included the link a few days ago and am including it here again.) Several folks commented in response, including this blog's author. See below for my response (with a bit of editing).

<< I concur with the Nov. 27 post by the ERISA Consultant. Pension governance is serious business for millions of individuals who are impacted by the decisions made by plan fiduciaries. Hopefully, the LaRue case (regardless of outcome) will prompt a vigorous debate about fiduciary issues - who has responsibilities for what tasks and how retirees are impacted if breach occurs. Shareholders should be paying attention to LaRue as well. Poor governance of retirement plans can have a material adverse impact on earnings. >>

As I have said many times and will no doubt say many more times, pension governance (broadly defined as best practices, applied to all retirement plan types) is an integral part of corporate governance. While this message is gaining currency, most experts in the fiduciary space assert that there is vast room for improvement. If you agree (and not everyone does), a critical question comes to mind.

What will it take for pension governance to be viewed as equally important as mainstream corporate governance issues such as (a) proxy voting (b) executive compensation (c) financial statement certification (d) internal controls and (e) agency conflicts between managers and shareholders?

Negative headlines about Enron and other troubled companies forced shareholders and lawmakers to pay attention. Do we need a pension meltdown a la Enron to force change in the retirement industry?

We would love to get your feedback on what you think will force pension governance to quickly climb the "high priority" list for organizations not already concentrating on such. Click here to drop us a line.


LaRue, ERISA and the U.S. Supreme Court

Inside the hallowed halls of the U.S. Supreme Court, pension history may be in the making. On November 26, 2007, justices heard the case of LaRue v. DeWolff, Boberg & Associates Inc. The long awaited outcome could put employers in the ERISA litigation spotlight as never before by allowing individuals to sue, one person at a time.

By way of background, Mr. James LaRue sought to have his employer switch his 401(k) monies from one mutual fund to another, in his attempt to migrate to "safer" investments. The plan administrator failed to make the change, allegedly costing LaRue an estimated $150,000 in lost profits. In August 1996, the United States Court of Appeals for the Fourth Circuit, in Richmond, Virginia denied LaRue an opportunity to seek redress, claiming that ERISA emphasizes harm to a plan in aggregate. The opinion reads:

<< In ERISA, Congress sought to provide fair and generous remedies for plan participants without imposing ruinous personal liability on plan fiduciaries. That balance pervades the statute, and it is not for us to readjust it. With respect, we think the Secretary’s view does recalibrate the balance, and we do not possess authority to modify plain statutory text, several Supreme Court decisions, and the corpus of circuit law on the subject. If the Department believes fiduciaries should face personal liability for every wrong alleged by individual beneficiaries, even in the absence of personal profit or misuse of plan assets, it will have to seek a forum other than this court. >>

This begs the question then as to how an individual plan participant can hold administrators and relevant parties accountable for mistakes. The import of this issue is huge. At a time when countless companies are terminating defined benefit plans and opting to offer 401(k) plans in their stead, anything that makes that strategy more expensive and/or troublesome could create pushback. If this occurs, employees are going to be under even more pressure to save for their retirement on their own. Add Social Security and Medicare woes, along with what some predict is an imminent recession, and Joe Everyman is likely to truly feel the pinch in a major way. On the other hand, employers fear an honest mistake that arguably opens the floodgates to costly litigation.

A read of the June 19, 2006 and August 8, 2006 LaRue opinions is instructive, as are the salient documents presented to the U.S. Supreme Court. Click here to download relevant files. Click here to read an informative overview provided by law professor Paul Secunda (who predicts a 6-3 victory for LaRue). One item in Secunda's text that struck me as notable is the line of inquiry by Chief Justice Roberts wherein he "points out that the SPD does not say administrators have to follow the investment directions of participants."  Reading these words catches one's breath. Is the honorable jurist suggesting that the Summary Plan Description ( a guiding document as regards the administration of the plan) preclude an asset allocation change? If so, how are employees to deal with market volatility or altered circumstances that mandate a different investment risk-return tradeoff? I await feedback from ERISA attorneys on this and other points.

Pay close attention when this opinion is rendered. It will make a difference! 

FAS 157 is Heeeeere!

As of November 15, 2007, those organizations who did not adopt FAS 157 early on will be obliged to disclose much more information about their "hard to value" assets and liabilities. Despite industry's attempts to forestall compliance for another year, the Financial Accounting Standards Board reiterated its intent to force implementation for financial assets and liabilities. Read "FASB Rejects Deferral of Statement 157 for Financial Assets and Liabilities" (November 14, 2007 FASB press release).

For those seeking a user friendly version of this new accounting rule, check out "A FAS 157 Primer" by Mark Gongloff (Wall Street Journal, November 15, 2007). Also check out "A Summary of Statement No. 157" on the FASB website. One important element of FAS 157 is the requirement that items be categorized as belonging to Level 1, 2 or 3 in order of ease of valuation with respect to observable prices (or lack thereof). Predictions abound that FAS 157 will force larger asset write-downs, creating jitters for pensions, endowments and foundations who invest in Level 2 and Level 3 sensitive funds. In a November 15, 2007 CNBC video, economist Nouriel Roubini warns of an impending global recession and a financial meltdown that could roil financial markets for months to come. He is not alone.

In "Why FAS 157 strikes dread into bankers - Just when we hoped the worst was over," William Rees-Mogg (The Times, November 12, 2007) cites research by financial analyst Martin Hutchinson. Financial giants such as Bear Stearns, Lehman  and J.P. Morgan Chase account for more than $100 bilion of FAS 157 Level 3 assets, requiring mark to model information not heretofore provided. The author adds "Even these figures may be understated, since the banks have themselves decided whether assets belong to level three or the more acceptable level two, and they have an interest in placing as little in level three and as much in level two as they reasonably can." Noteworthy is Hutchinson's analysis that Goldman Sachs has disclosed $72 billion of Level 3 assets. That number is relatively big or small, depending on the point of comparison - a $900 billion asset base but capital of $36 billion.

Lest pension decision-makers think they are immune from valuation issues, nothing could be further from the truth. Decision-makers for both 401(k) and defined benefit plans are squarely on the hook for vetting external money managers. This absolutely includes asking copious questions about managers' valuation policies and procedures. A poor job, or ignoring the issue altogether, is going to keep the plaintiff's bar busy indeed.

Pension Litigation Database Soon to Launch

We are seekng two or three additional beta testers, preferably attorneys. Please email us if you have an interest in learning more.

We plan to launch in just a few weeks. Click here to be notified of our official launch!

Statistics Save the Day for Louisiana Retirement Plan

Attorney Francis Pileggi, creator of the Delaware Corporate and Commercial Litigation blog, has an interesting post about a recent pension lawsuit. In Louisiana Municipal Police Employees' Retirement System v. Countrywide Financial Corporation, 2007 WL 2896540 (Del. Ch., Oct. 2, 2007), statistics played a central role in an option backdating case brought by the Louisiana Municipal Police Employees' Retirement System ("LAMPERS"). 

The court, citing the "close call" nature of the statistical evidence, nonetheless concluded in favor of the plaintiff. Pursuant to Section 220 of the Delaware General Corporation Law, LAMPERS will have some access to the financial records of Countrywide.

Click here to read this interesting October 10, 2007 post.

ERISA Litigation Calculus

Attorney Stephen Rosenberg, creator of the Boston ERISA & Insurance Litigation Blog, provides some interesting thoughts about legal trends. Citing yours truly about the surge in pension lawsuits, Rosenberg offers that courts will struggle with "new issues, or old issues under new fact patterns" with sheer numbers urging the judiciary to clarify. He adds that a pronounced switch from defined benefit plans to 401(k) offerings is likely to drive complaints, with plan participants demanding to know more about those individuals in charge of design and investment selection. Click here to read  "ERISA Number of Suits + Questionable Practices = X" (posted on October 10, 2007) and other analyses by this prolific writer.


Valuation Problems Are Going To Cost Plan Sponsors Big Time

This blog's author recently had the pleasure of addressing an audience of hedge fund compliance officers and auditors about valuation issues - a topic near and dear to my heart. As an accredited appraiser, a certified financial risk manager and someone who has worked with models and trades, I am fully aware (and in fact often tout) the inextricable relationship between risk analysis and valuation. Simply put, effective financial risk management does not occur in a vacuum but rather depends on reliable valuation numbers. GIGO (Garbage In, Garbage Out). If a fund manager relies on faulty information, the inevitable result is flawed process, including (but not limited to) inaccurate hedge size (if hedging occurs), imprecise performance reports, possible asset allocation or portfolio re-balancing mistakes, trading limit utilization problems and so on. 

From the investors' perspective, the trickle down effect can be costly. Any "issues" at the asset manager level directly impact fees paid by pension funds, their own asset allocation decisions, not to mention cash flow and funding status breach as possible forms of "valuation fall-out." Valuation is the proverbial four-letter word in investment risk management. Cause for consternation, valuation issues are often complex and demand rigor with respect to policy creation, implementation and review.

Being somewhat impolitic, yet wanting to convey an important message to an important audience of hedge fund professionals, I cited chapter and verse about valuation pitfalls from a pension fiduciary's perspective. Including the need to get private placement memorandums that address what and how the fund manager intends to assess the portfolio on a regular basis, I explained the rationale for use of an independent third party to either render opinions of value, or at the very least, conduct a valuation process check. Even when a hedge fund does not exceed the twenty-five percent ERISA money limit (pursuant to the Pension Protection Act of 2006), best practices abound for both the fund manager and the pension investors alike. Interviewing traders, along with the asset manager's Chief Risk Officer, about valuation policies and procedures is another good idea. If a fund has no functional risk manager, ask why. Interestingly, one person responded to my comments by declaring success at drafting sufficiently obtuse documents that would likely keep investor accusations at bay.

In today's Wall Street Journal, reporter Eleanor Laise tells readers that it's not just hedge funds caught in the valuation cross-hairs. Mutual funds have their own issues. For example, when a security is not frequently traded, multiple methods might generate disparate "fair value" estimates. Quotation quality runs the gamut from the use of stale prices to "accommodation quotes" offered by "friendly brokers." Time-of-day selection is another conundrum, especially in the case of non-U.S. securities or instruments such as highly customized derivatives. Laise adds that "valuation policies can vary substantially from fund to fund." In some situations, an independent outside firm provides prices. Elsewhere, internal models or broker-dealer quotes are used. (See "Funds Struggle with Pricing Pitfalls," Wall Street Journal, September 17, 2007.)

As I've written (and presented) many times before, plan sponsors who sit silently by, without grilling asset managers about their valuation policies and procedures, are asking for trouble. Pension fiduciaries have a duty to oversee external fund manager performance as relates to the stated risk tolerance and return goals. This includes a weighty discussion about price quotes, marking to market (or model) and provider quality. (Not being an attorney, plan sponsors should seek counsel for a precise assessment of their responsibilities.)

With new accounting rules on their way and a variety of significant valuation unknowns, subprime loan-related losses may look like a walk in the park. What we don't know can hurt!

Editor's Note:

Pension Governance, LLC has partnered with the National Association of Certified Valuation Analysts to develop a technical workshop on hedge fund valuation. Click here for a course description. Other programs are in the works. Click here to read more about our June 28, 2007 webinar about hedge fund valuation. (The recording and program materials are available for a modest fee.) If you want additional information about valuation training for your board, risk analysis or process checks, click here to drop us a line.




Prosecution of Former Pension Trustees Moves Forward

Voices of San Diego reporter Evan McLaughlin writes that the Fourth District Court of Appeal "upheld the district attorney's prosecution of six former pension board members." After several years of wending its way through the court system, allegations that trustees violated California's "conflict-of-interest law" will be heard. Charges emphasize "an agreement in 2002 that boosted the future pension pay of the defendants and thousands of other city employees in exchange for allowing the city to underfund the pension trust that year." Click here to read "DA's Pension Case Moves Forward" (September 7, 2007). Click here to read the ruling.

Regardless of the outcome, and acknowleging a presumption of innocence until proven guilty, a key take-away is that pension fiduciaries are absolutely on the hook. Not to be taken lightly, the job of retirement steward is a serious one. Civil and criminal penalties in the event of proven wrong-doing are possibilities. It's no surprise then that liability underwriters are fielding frequent calls for greater and more comprehensive coverage.

Can Pension Clients be Hazardous to Your Financial Health?

The following is an excerpt from an article written by Dr. Susan M. Mangiero and published in Mann on Wall Street (August 2007 issue). If you would like to receive a copy of the full text article, click here to send an email request.

<<Despite a recent study that all is okay in corporate pension land, changes are taking place to indicate otherwise. Preparing for lots of pension buy-out business, investment banks hire actuaries in droves. Swap trading desks similarly staff, anticipating a surge in liability-driven investing. CPA firms scurry to find qualified professionals who can handle the alphabet soup of new accounting rules. Even those who breathed a sigh of relief with the final enactment of the Pension Protection Act of 2006 (“the suspense is over”) acknowledge the beginning of the end of “the way things were.” Board members, CEOs and CFOs wait for the other shoe to drop, assuming that the sequel to FAS 158 will compel wide swings in earnings. Congress and regulatory agencies busy themselves with a flurry of investigations. On top of everything else, longevity is forcing plan sponsors to rethink how to cut costs without alienating productive workers. The only constant is change. For traders who embrace volatility, life is good. For those in search of stability, hang onto your hats.

With all of this tumult underway, a little noticed trend seems to be emerging that could make pension clients high risk for service providers - asset managers, brokers, bankers, administrators, custodians, advisors, consultants, auditors and ERISA counsel. At its simplest, there is a real question as to who has investment fiduciary responsibilities other than the plan sponsor. Some organizations wear the hat of “fiduciary” but charge steep fees to compensate for added liability exposure. Others disavow the role, going so far as to include text to that effect in their engagement letter. However, real questions remain. Will judges uphold the legitimacy of this stance or instead classify a service provider as a functional fiduciary against their will, thereby opening the door to claims of breach? If that occurs, asset managers, consultants and other persons peripheral to a plan sponsor get the worst possible outcome – increased liability exposure without compensation.>>

Down by the Bayou (Hedge Fund), Judge Says Too Bad

Alleging breach of fiduciary duty, plaintiff South Cherry Street, LLC cited failure of consulting firm Hennessee Group to do proper due diligence of the now defunct hedge fund, Bayou Group. In response, federal judge Colleen McMahon "granted a defense motion to dismiss the case, finding that Hennessee wasn't alone in being duped by Bayou." (Click here to read the August 3, 2007 Reuters article.)

As several related cases make their way through the courts, pay attention to how the judge rules. Some experts suggest that institutions could be asked to assume more responsibility for the investments they make, even after hiring a consultant.

If true, things are likely to change. After all, why hire someone else if ultimate responsibility stays with the plan sponsor? The import is considerable. Trustees and other internal fiduciaries who now look to outside experts will have to become more expert themselves. (We've long advocated for better fiduciary training and selection standards, whether an outside firm is employed or not. Click here to read a recent blog post on the topic.)

First Case to Try to Link ERISA with Option Backdating

In "Test case looms on backdating" (June 1, 2007), FEI journalists Jeffrey Marshall and Ellen Heffes write that a legal precedent may soon be set in the form of a class action case against builder KB Home. Many managers and board members who participated in backdating decisions and also act as company fiduciaries for the 401(k) plan are named in the lawsuit. Alleging ERISA fiduciary breach due to the backdating of stock options, plan sponsors and their attorneys await the outcome.

"If this case survives summary judgment, plaintiff's attorneys will be emboldened and bring more employees onto the class-action backdating bandwagon," suggests attorney John Gamble, with Fisher & Phillips, a labor and employment law firm. Marshall and Heffes caution that a post-Enron amendment of ERISA  increases punishment. "Individuals who are caught willfully violating ERISA face 10 years in prison and fines up to $100,000."

A few months ago, I predicted an ERISA litigation fallout if companies recommend stock for the 401(k) plan yet do not properly vet the process by which executives receive options. Click here to read "Will Executive Option Issues Drive the Next Wave of Pension Litigation?" by Susan M. Mangiero (Journal of Compensation and Benefits, March/April 2007).

This case is sure to attract attention.

Pension Fiduciaries - Time to Wake Up and Smell the Coffee, Part Three

In his pension blog, ERISA litigator Stephen Rosenberg recently wrote about the forthcoming legal battle between the San Diego County Employees Retirement Association ("SDCERA") and Amaranth Advisors, LLC. In response to an original complaint against the once mighty energy hedge fund, its high-power attorneys countered with a motion to dismiss. Claiming caveat emptor, defendants assert that the plan sponsor understood the risks and went ahead anyhow. Click here to read the original complaint and here to read the motion to dismiss.

How this case will be adjudicated is anyone's guess. Nevertheless, the outcome will be closely watched as it goes to the very heart of investment disputes by asking who bears responsibility.

In our kick-off of the Hedge Fund ToolboxSM webinar series on June 14, 2007, we heard from former FBI agent Mr. Ken Springer (now president of Corporate Resolutions) and senior attorney and former regulator, Rick Slavin (now partner of law firm Cohen and Wolf P.C.). Both gentlemen vigorously urged pension investors to undertake a background investigation of key principals, check documents and never shy away from asking tough questions. Springer added that "material non-disclosure of critical events in one's career" represents a major concern, along with the need to do additional follow-up to explain discrepancies. Late payment of credit card bills or a faillure to pay child support suggest carelessness with other people's money.

In his overview of case precedent and enforcement actions, Slavin offered that sloppy, obtuse or incomplete paperwork is usually the beginning of trouble. He reiterated that the use of outside parties does not absolve plan sponsors of their fiduciary duties. Oversight obligations remain.

Springer told listeners that Bayou's problems, pre-meltdown, were evident had investors carefully reviewed available facts. "Blatant conflicts of interest, overstating of employees' accomplishments, suits by former employees, suits filed by investors and even suits filed by hedge fund managers" should have caught investors' attention before money changed hands. Slavin suggests that we're in for a bumpy ride. "There is every indication that more litigation and enforcement is on its way."

Rosenberg agrees. "We are currently watching the rise of a pension/401(k) investment plaintiffs bar, clearly modeled after the securities litigation class action bar, ready and waiting to sue pension advisors and anyone else in the line of fire for excessive fees, poor investment choices, and anything else that affects returns in the plans." He adds that, "If the hedge fund’s lawyers are right, then aren’t the plan’s fiduciaries and other advisors potentially liable for breaching their own obligations to the plan and its participants to properly select and monitor plan investments? And if so, then their best defense should the newly forming class action bar come after them for this mess would be that, contrary to what the hedge fund’s lawyers say, they actually did full and complete due diligence, and therefore lived up to their obligations and cannot themselves be liable for the fact that the investment went south."

Wise words to remind us of the importance of good process!

If you are interested in purchasing the recordings of any webinars that have already taken place, click here. (Webinars are listed in chronological order.) Click here to register for any or all of the forthcoming webinars in this exciting new series. Speakers will address the roles of financial advisor and consultant on June 26. Valuation is the topic of the June 28 event.

401(k) Stock Drop Litigation - Back in Fashion Again?

Back from a somewhat relaxing weekend (I had to work part of the time), I opened my mail to find two publications, each with a front page article about 401(k) "stock drop" cases. Is it coincidental or a harbinger of next season's hottest trend in litigation?

According to "401(k) fee suits not soon to retire" by Amanda Bronstad (The National Law Journal, May 28, 2007), earlier filed cases focus on undisclosed fees levied by mutual funds. In contrast, more recent lawsuits look at fees charged for annuities while "others challenge the prudence of employers that invest in funds that charge high fees - even if they're fully disclosed to employees."

In "Stock-drop suits hitch 401(k) ride," writer Susan Kelly describes a resurgence in ERISA lawsuits (Financial Week, May 28, 2007) with companies of all sizes now vulnerable to allegations that stock in the 401(k) plan is a no-no.

Outcomes remain unknown at this time with federal judges in three cases having refused to dismiss (Kraft, Boing, Bechtel). Not all cases are home runs for the plaintiffs. As the National Law Journal article details, the federal judge in a case against Exelon Corp. "dismissed claims that excessive fees in a 401(k) plan caused investor losses." In the Northrup Grumman case, some of the defendants, "including the board of directors," were dismissed.

Along these lines, we think our forthcoming June 4 webinar on the topic of 401(k) plan governance is timely. Click here  to get more details and/or to register. We'll start at noon and end at 1:15 p.m. EST. The webinar is free to subscribers. The cost to non-subscribers is $125. Pension Governance, LLC is registered with CFA Institute as an Approved Provider of professional development programs. This program is eligible for 1.5 PD credit hours as granted by CFA Institute.

Topics to be discussed include the following:
  • Description of fiduciary duties under ERISA
  • Discussion of procedural prudence as relates to 401(k) plan selection of fiduciary advisors
  • Overview of safe harbor and selection of fiduciary advisor pursuant to the Pension Protection Act of 2006
  • Litigation trends in the area of investment fiduciary breach as relates to plan sponsors and service providers such as consultants
  • Fiduciary investment process for assessing 401(k) provider fees
  • Role of fiduciary advisor in providing financial education
  • Governance considerations with respect to selection of default investment 
  • Structural changes in money management industry in response to material shift away from defined benefit plans
  • Fiduciary advisor “red flag” practices such as soft dollar questions, revenue-sharing, limited disclosure.
Dr. Susan M. Mangiero, AIFA, AVA, CFA, FRM, president of Pension Governance, LLC will moderate an expert group of panelists to include:

  • Mr. Blaine F. Aikin, AIF®, CFA, CFP® - Managing Partner, Fiduciary360
  • Mr. David J. Bauer - Partner, Casey, Quirk & Associates LLC
  • Mr. David Vriesenga - Chief Rating Officer, Cefex - Centre for Fiduciary Excellence, LLC.
We hope you can join us for what is sure to be an informative and lively discussion!

Pension Plan Plaintiffs Cost Corporate Defendants With Opt-Outs

A recent trend in class action litigation circles is the pension plan opt-out. Choosing not to settle with the rest of the "class," several large institutional investors are getting recompense that reflects multiples of what they could otherwise receive.

Pension Governance contributing editor, attorney Kevin Lacroix talks about this significant shift in class action outcomes, citing a sea change in the cost of litigation. Click here for more information about Kevin's interesting article and here to read more about our first class team of contributing editors.

PG Editor's Note: We have just posted an interesting and complementary item to In "Predicting Corporate Governance Risk: Evidence from the Directors' & Officers' Liability Insurance Market," authors Tom Baker and Sean J. Griffith examine how liability insurance underwriters assess corporate governance behavior - and related expectations of risk - when pricing coverage. The authors also examine whether corporations are deterred by the cost of liability insurance, especially since "virtually all corporations purchase D&O insurance to cover the risk of shareholder litigation, and because virtually all shareholder litigation settles within the D&O insurance limits, the D&O insurance premium represents the insurer’s best guess of the insured’s expected liability costs." The authors conclude that governance factors such as culture and character are taken into account by insurance underwriters. Click here for more information.

Consulting Firm Pays $2.75 Million for Hedge Fund Recommendation

According to money management letter (April 9, 2007 issue), Rocaton Investment Advisors paid $2.75 million to the San Diego County Employees Retirement Association "for recommending Amaranth Advisors." The article also goes on to say that no information is forthcoming about whether Rocaton did anything wrong and whether this money is covered by professional liability insurance.

The reason for citing this article is not to put any one particular firm in the spotlight but rather to suggest that pension fiduciaries check with their appropriate counsel and do sufficient homework internally to make sure that everything that should be done is being done. This includes, but is not limited to, seeking answers to the following questions:

1. How much experience does a particular consultant and/or financial advisor under consideration have with respect to examining hedge funds or fund of funds?

2. Does the consultant and/or financial advisor have an adequate understanding of the hedge fund or fund of funds' use of leverage through short-selling and/or use of derivatives, if relevant? What is their systematic process for examination of leverage? How do they define leverage and does that comport with industry norms?

3. Has the consultant and/or financial advisor identified (and explained to plan sponsors) possible risk factors associated with a given hedge fund or fund of funds? Sector concentration, management style, specific ownership structure of the limited liability company or partnership, availability of risk analytics, stop loss triggers, primary and secondary plans for liquidation, valuation policy, redemption restrictions and use of side pockets are JUST the beginning.

We'll talk much more about the issue of investment risk review in coming days. Why? Plan sponsors are still on the hook for monitoring their monitors. It's simply not as easy as passing along a hot potato regarding due diligence to someone else.

P.S. There is a rumor that another pension consultant has offered recompense in conjunction with this hedge fund case. If true, could this be a trend in going after consultants and/or financial advisors in the event of losses?





Big Apple Pension to Bite Apple Inc Over Options

Alleging questionable stock option practices at technology giant Apple Inc, the New York City Employees' Retirement System ("NYCERS") will serve as lead plaintiff in a lawsuit filed a few months ago. Citing the Private Securities Litigation Reform Act of 1995 ("PSLRA"), NYCERS claims the largest financial interest in the lawsuit. (Click here to read the original filing and here to read "Recent Developments Under the PSLRA.")

According to Reuters (January 22, 2007), the NY fund's ownership stake is roughly one million shares or about $87 million in current value terms. Its 2006 Comprehensive Annual Financial Report shows $46.34177 billion as plan net assets as of June 30, 2006. While NYCERS equity exposure to Apple is large in absolute terms, it is small compared to the equity interests held by institutional investors such as Fidelity Management & Research (60,316,011 shares as of September 30, 2006) or AllianceBernstein L.P. (48,637,731 shares in second place). Click here to review ownership statistics, courtesy of Thomson Financial (and reprinted by the Wall Street Journal.)

The intent of this post is not to single out any one company nor to imply that the filing of a complaint supports any or all of the allegations. That's for the trier of fact to determine. What is important is to understand that executive compensation practices can (and often do) impact shareholder value. If the market interprets a particular practice as far removed from economic reality and/or regulators start sniffing around, defined benefit and defined contribution participants stand to lose a bundle. In order to reduce the likelihood of an adverse outcome due to investing in company stock, pension fiduciaries must carefully consider relevant risk factors. That includes the percentage of company stock already part of a particular plan (whether self-directed or not). See "Options, Pensions and the SEC" for additional comments about backdating and pension fiduciary duty.

With more than 120 companies being asked questions about their respective option practices, there is surely much more to say on this topic!

Options, Pensions and the SEC

It's hard to pick up a newspaper these days without reading some story about stock options - when they are granted, how often they are repriced, what portion of an executive's total compensation they represent and so on. What has authorities particularly busy is a fast-expanding review of practices such as option backdating and spring loading. As of December 31, 2006, the Wall Street Journal counts 120 companies on their option backdate list. Click here to view the options scorecard and learn about executive departures and various regulatory agency investigations.

The Free Dictionary defines backdating as "dating any document by a date earlier than the one on which the document was originally drawn up." Spring loading can mean either that "a company purposely schedules an option grant ahead of expected good news or delays it until after it discloses business setbacks likely to send shares lower." See "SEC eyes 'springloading'" as published by the New York State Society of Certified Public Accountants. In both cases, the idea is to inflate the value of the executive's stock option. (Experts remind that neither backdating nor spring loading is necessarily illegal per se, a conclusion that is best left to attorneys and regulators.)

These and other practices are important to pension fiduciaries and plan participants alike. Defined benefit plans sometimes invest in company stock. Defined contribution plan participants are often given a similar choice. Any problems with option grants, especially when they result in tax and/or accounting penalties, not to mention regulatory enforcement levies or litigation payouts, can do serious harm to an employee's retirement plan. From a fiduciary perspective, real questions could arise about the ex-ante assessment of company stock as a viable investment vehicle for a sponsored plan(s). Did an adequate due diligence review of risk factors that influence company stock price occur? Did pension fiduciaries sufficiently understand existing practices regarding executive compensation, including option awards? How often did pension fiduciaries assess option grant practices and/or inquire about industry norms, internal controls and likely impact on "shareholder" retirement plan participants?

For interested readers, the D&O Diary, authored by attorney Kevin LaCroix, has an excellent collection of articles about option backdating.

Option valuation is another topic with considerable import. Relatively new accounting rules in the form of FAS 123R set the stage for a vigorous debate about how to value employee and executive stock options (ESO's). Unlike shorter-term options that actively trade in ready markets, ESO's are more challenging to value for a host of reasons. Though a bit outdated with respect to regulations, readers may nevertheless find my article about option valuation of interest because it highlights the importance of having good inputs and an appropriate model. (Click here to read "Model Risk and Valuation," Valuation Strategies, March/April 2003.)

In a recent decision, the SEC notified Zions Bancorporation that its Employee Stock Option Appreciation Rights Securities (ESOARS) is "sufficiently designed to be used as a market-based approach for valuing employee stock option grants for accounting purposes under Financial Accounting Standards (FAS) No. 123R." According to Zion's press release, it is their intent to assist other public companies in valuing ESOs. I took a quick look at their site and plan to read more. Certainly a mechanism that facilitates marketability is a step in the right direction. After all, the coming together of willing buyers and sellers, under ideal circumstances, permits a flow of information that should result in the "right" price.

Editor's Note:
I am currently writing an article about option backdating as it relates to pension fiduciaries.

Life of a Benefits Manager Heading Into 2007?

An homage to Norwegian painter Edvard Munch (born on December 12, 1863) Google's same day banner is reprinted herein. A reminder perhaps that 2007 is sure to create some agita for more than a few benefits managers and other related decision-makers?

Here are a few reasons for upset:

1. New pension accounting rules for companies

2. New OPEB (other post-employment benefit) accounting rules for municipalities

3. Forthcoming derivative accounting rules for public funds, similar to FAS 133 for companies (Remember that derivatives are getting more attention as possible elements of a liability-driven investment strategy.)

4. Anticipated Congressional oversight hearings about pension funds, 401(k) fees and hedge funds

5. Stated SEC consideration of rule changes as they apply to alternative investments (and possible impact on pension funds investing in hedge funds)

6. Proposed Form 5500 disclosure rule changes regarding service providers, fees and other elements of pension investing

7. Continued taxpayer upset regarding the cost of municipal benefits and a desire for lower property and state income taxes

8. Continued escalation in pension litigation

9. Continued focus on plan design and expected impact on an organization's cash flow

10. Continued focus on the Sarbanes Oxley - ERISA (corporate governance-pension governance) link

11. Anticipated guidance about default options for defined contribution plans (and related fiduciary impact)

12. The remaining 900+ pages of the Pension Protection Act of 2006

13. Projected worsening of the Social Security situation and likely impact on financing of the "three-legged" stool

14. Continued longevity patterns (good for retirees but expensive for employers)

15. Projected lower interest rates that increase liabilities

16. Anticipated pressure on asset returns

17. International pension woes and possible contagion for the U.S.

18. Predicted health care benefit cost increases that make pensions pale in comparison

19. Continued need to attract and retain scarce pool of talented workers with good benefits while keeping costs low

20. Continued scrutiny from ERISA and D&O liability insurance underwriters (and related impact on coverage and cost of coverage)

The good news is that there are lots of possible solutions but make no mistake. The new year will definitely entail major changes and challenges for all.

Compliance and Litigation Remain Hot Button Issues

According to Fulbright & Jaworski partner and global chair of the Litigation Department, Stephen C. Dillard, fear may be appropriate with respect to all things litigation. In "Litigation Nation" (Wall Street Journal, November 25, 2006), Dillard describes results from their third Litigation Trend Survey, emphasizing an increasing upward trend in lawsuits here and abroad. "Even we were surprised by the volume and scope of legal actions across all major industries and regardless of company size."

Besides finding that "Some 89% of companies report being hit with at least one new lawsuit in the past year," companies stateside "face an average of 305 lawsuits pending world-wide." At the same time, "companies with sales of $1 billion or more" face an average of 556 cases, "with 50 fresh suits emerging each year for nearly half of these firms."

The cost of litigation is far from trivial. The survey cites corporate legal expenditures averaging $12 million, up from $8 million last year and with some industries - engineering and insurance - spending over $35 million.

Given the nature of this blog,, what caught my eye were the assertions that "more than half of the in-house counsel cited employment as their top litigation concern" and that "disputes over wages and hours can be brought as class actions in many jurisdictions, creating more waves of litigation."

Other press accounts about corporate lawsuits are similarly engaging.

According to the Chief Legal Officer Survey 2006, compliance and litigation are huge concerns. Conducted by Altman Weil, Inc. and LexisNexis Martindale-Hubbell, respondents lament that time and money used to fight and/or prevent lawsuits could not be otherwise used to grow the company.

New York Times reporter Paul B. Brown describes the concept of litigation funding companies in "What's Offline: Next, a Lawsuit Futures Exchange?" Citing Joshua Lipton in "Litigation 2006," Brown informs that hedge funds are researching the possibilities of investing now in anticipation of enjoying hefty case outcomes later on. That same supplement to the American Lawyer & Corporate Counsel includes a piece by Alison Frankel that offers insight about the globalization of litigation.

Lest you need more of a reminder that a sea change is upon us, consider the U.S. Appeals Court decision that found a fiduciary personally liable for nearly $180,000 due to losses realized by the International Brotherhood of Industrial Workers Health and Welfare Fund. In "Ruling highlights fiduciary need for hindsight", Reid and Riege attorneys David M.S. Shaiken and Eileen M. Marks describe the serious fallout from Chao v. Merino, 452 F.3d 174 (2d Cir. 2006), stating that the individual in question "was permanently prohibited from serving as a fiduciary or service provider to any employee benefit plan."

Other excerpts from the November 2006 Employee Benefit News article merit attention.

1. "The Court of Appeals' holding underscores how important it is for new plan fiduciaries to inform themselves thoroughly about a plan's operations, consultants and service providers with whom the plan has contracted. New fiduciaries should raise with co-fiduciaries any concerns about existing relationships after conducting their review.

2. The mere fact that an imprudent relationship predates a fiduciary's tenure does not shield the fiduciary from liability. The duties to be informed about plan business and to act prudently include a duty to be informed about, raise objections to, and protect the fund from any imprudent relationships that are in place with consultants and service providers when a fiduciary's term begins.

3. Plan fiduciaries may wish to review their and their plan's insurance coverage. ERISA plan fiduciary liability insurance covers claims against current and former plan trustees and, if they are named in the policy, plan administrators who have fiduciary duties. In case of a claim of breach of fiduciary duty, within the insurance policy's limits the insurer provides and pays for defense counsel, and indemnifies the plan fiduciary from liability, provided that the claim is not excluded from the policy's coverage."

Given the tsunami of litigation (with all indications that more is on its way), pension fiduciaries need to assess their personal and professional risk.

It's scary stuff indeed. Email us if you want to know more about our fiduciary and board training programs. If you are an attorney, ask to receive our complimentary pension governance kit.

Pension Disclosure and SEC Sanction

According to its website, the SEC sanctioned the City of San Diego "for committing securities fraud by failing to disclose to the investing public important information about its pension and retiree health care obligations in the sale of its municipal bonds in 2002 and 2003."

The SEC-issued Order "finds that the city failed to disclose that the city's unfunded liability to its pension plan was projected to dramatically increase, growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009, and that the city's liability for retiree health care was another estimated $1.1 billion.

According to the Order, the city also failed to disclose that it had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs, and that it would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut. The Order further finds that the city knew or was reckless in not knowing that its disclosures were materially misleading."

The Order makes for fascinating reading. For one thing, an eight percent assumed rate of return on investments was used "without regard to its actual historical rate of return." Some increased benefits were treated as contingent liabilities that were not reflected in certain liability calculations.

Some general observations ensue.

1. Assuming no fraud, a plan's actuarial report should be read in conjunction with any other disclosures about a plan. To the extent that there are differences, responsible fiduciaries must ask hard questions in order to reconcile the "tale of two pensions."

2. This is unlikely to be the last event of its kind. Does this put additional pressure on rating agencies and other watchdog groups to identify potential red flags before the fact, to the extent possible?

3. What is the future of public plan pension and health care benefits? Courtesy of Sean McShea, president of Ryan Labs, a recent Economist article about Other Post-Employment Benefits ("OPEB") augurs poorly for taxpayers in states adversely affected by a new government accounting decree. "Going into effect on December 15, the rule requires municipal government employers to "treat their health-care promises to workers the same way they already handle their pension obligations: by reporting on the total size of their future commitment, instead of just this year's cost." (See "The known unknowns, Economist, November 16, 2006)

4. The size of the liability is important as is the rate of growth in the liability, netted against the expected change in asset performance.

5. Plans in crisis will be tempted to reach for higher expected returns. Identifying and evaluating incremental risk is essential. A bad choice could exacerbate an already grave situation.

With Thanksgiving in the U.S. only a few days away, we'll have to think long and hard about why we are grateful in benefits land.

Pensions, Class Action Litigation and Oversight Role

Lest anyone think that pension plans are shrinking violets when it comes to corporate scandals, think again. During the recent two-day Institutional Investor Forum, public pension trustees learned about a variety of tools and techniques to preserve the capital invested in Corporate America. Topics ranged from hedge fund activism to settlement amounts and attorneys' fees, electronic discovery, the fiduciary mandate, investor recoveries in the case of bankruptcy and early detection of corporate fraud.

Billed as an educational event for fund trustees, administrators, executive directors, general counsel and other representatives of public funds, law firm Bernstein Litowitz Berger & Grossmann LLP has played host for a dozen years. Past speakers have included New York Attorney General Eliot Spitzer, New York Times financial columnist Gretchen Morgenson and SEC Commissioner Harvey Goldschmid.

Since the passage of the Private Securities Litigation Act in 1995, institutional investors continue to garner attention for their more active role in the class action process. Whether that has improved things is a point of debate.

In 2002, law professor Michael A. Perino published results of his examination of nearly 1,500 class action cases. In "Did the Private Securities Litigation Reform Act Work?", Perino questioned whether a greater number of filings reflected more corporate fraud or relaxed rules for filing.
More recently, Perino cited lower attorney fees as a result of public pension fund participation. (Click here to read "Markets and Monitors: The Impact of Competition and Experience on Attorneys' Fees in Securities Class Actions", St. John's Legal Studies Research Paper No. 06-0034, 2005.)

At a time when corporate scandals related to compensation loom large, pension trustees are unwilling to take a back seat. One questionable practice, option backdating, is causing real problems for some companies. As of late last week, the Wall Street Journal listed the investigative status of 115 organizations on its "Option Scorecard". In "Next Step in Stock Option Probes: 'Backdate' Lawsuits", reporter Amanda Bronstad, describes the billions of dollars at stake for pension fund plaintiffs. Many of the cases are filed as derivative suits, "allege breach of fiduciary duty and are filed by institutional shareholders on behalf of the company as a whole. They seek the return of the stock options."

No doubt we'll hear more about pension plaintiffs and class actions. Good, bad or indifferent, their size makes them real players, too big to ignore.

Legal professionals such as attorney Christopher J. Rillo write: "Backdating is not an illegal practice per se, provided that the disclosure, tax and accounting requirements are met. Companies have for legitimate reasons backdated stock options to provide additional incentive compensation to officers and employees. What has changed is that the disclosure, tax and accounting requirements were radically altered to require disclosure of back dating and additional taxation to both the grantor and the recipient." (Click here to read his September 2006 remarks as part of the symposium about D&O insurance.)

Pension Lawsuits

The Administrative Office of the U.S. Courts reports an increase in new Employee Retirement Income Security Act ("ERISA") case filings from 9,167 cases in 2000 to 11,499 cases in 2004. According to a March 2006 American Bar Association publication, about fifty stock-related lawsuits have been filed in the last two years, alleging employee benefit fiduciary violations and adding to a growing number of what some describe as "stock drop" actions.

The basic idea is this. Company stock is included as an investment choice for defined contribution plan participants. The stock falls in value. Employees suffer losses. Fiduciaries are asked to address whether: (a) their inclusion of company stock as an investment choice was appropriate (b) they conveyed accurate information about the company (c) they had put employees first or were influenced by conflicts of interest.

What has groups such as the Professional Liability Underwriting Society alarmed about the "startling" increase in these ERISA fiduciary breach cases? First, the amounts at stake are huge. Second, some experts suggest that it may be easier to bring suits on the basis of ERISA violations instead of securities fraud. (There is a lot written on this topic, including the requirements to become a lead plaintiff under the auspices of the Private Securities Litigation Reform Act of 1995, "PSLRA"). Third, various employee benefit reforms, expected out soon, could lead to financial restatements and unhappy investors.

Legal experts suggest that we're in for a bumpy ride. Negative headlines, excessive executive compensation (perceived or real), market volatility, a dramatic shift away from defined benefit to defined contribution plans and regulatory reform that could force write-downs are some of the many factors that will continue to put fiduciaries in the spotlight.

Expert Panel Addresses Financial Impact of Pension Crisis

Valuation and risk professional Dr. Susan M. Mangiero, CFA, AVA, FRM will moderate a panel of esteemed retirement plan experts at the forthcoming 42nd annual meeting of the Eastern Finance Association at the Sheraton Society Hill in Philadelphia on April 20 from 10:15 a.m. to noon. (The hotel is located at 1 Dock Street in Philadelphia.)

Months away from sweeping Congressional reform and accounting standards that will dramatically impact the financial health of Corporate America, a diverse and seasoned panel of experts will talk about plan termination, 401K plan design, pension governance, fiduciary compliance, ERISA litigation trends, liability-driven investing and pension risk management with respect to shareholder value and employee productivity and morale. With over $10 trillion and 100 million plan participants at risk, conference producer Dr. John Finnerty describes this presentation as "an urgent call to our 850 financial members who are helping finance leaders, at all levels, grapple with the real challenges that post-retirement benefits present". Moderator Dr. Mangiero concurs. "CEOs and CFOs alike are quickly realizing how vulnerable they are to pension problems that can force rating downgrades, invite litigation and higher regulatory compliance costs, increase the cost of capital and otherwise impede corporate growth. For more than a few companies, pensions have become a veritable albatross."

Panelists include Mr. I. Lee Falk, Senior Counsel (Morgan, Lewis & Bockius LLP), Mr. Wayne H. Miller, CEO (Denali Fiduciary Management), Mr. James V. Morris, Senior Vice President (SEI Global Institutional Group) and Mr. Norman Jackson, Deputy Regional Director (United States Department of Labor - Employee Benefits Security Administration's Philadelphia Regional Office).

The general public is invited. There is a nominal fee of $50, payable at the door. The Eastern Finance Association is a non-profit organization. Its members include college and university professors, officers of financial institutions and organizations, and others interested in finance and the objectives of the EFA. The Association sponsors The Financial Review, a journal that publishes original empirical, theoretical, and methodological research providing new insights into issues of importance in all areas of financial economics.