Case Against Novant Health Settles Early for $32 Million

In the second settlement agreement filed in less than a week by the law firm of Schlichter, Bogard, & Denton, the parties in Kruger v. Novant Health have agreed to settle the case and have sought approval from the court in the Middle District of North Carolina. Defendants have agreed to pay $32 million and have agreed to very significant affirmative relief. Counsel for the plaintiff’s will seek no more than $10,666,666 in attorney’s fees and $95,000 in costs.

Novant Health, Inc. is a non-profit hospital system based in North Carolina. We broke the story on this case in March of 2014 when the plaintiffs filed their federal lawsuit accusing the fiduciaries of the multiple plans run by Novant of breaching their fiduciary duties by (1) allowing excessive fees to be paid to the plans’ broker, D.L. Davis & Company, Inc., (2) allowing excessive fees to be paid to the plans’ recordkeeper Great West, and (3) including more expensive share classes for all of the plans’ mutual funds.  (see Plan Sponsor Sued over $6 million Paid to Broker). More specifically, the complaint alleged that the broker, in just a few short years, had their compensation increase from about $800,000 to as much as $6 million as the assets of the plans drastically increased. In mid September, the district court denied the defendants’ motion to dismiss, allowing the case to move forward.

It is uncommon, but not unheard of, for excessive fee cases to settle so early in litigation before any type of dispositive motion is filed or class certification is sought. According to filings by the parties, shortly after the complaint was filed, the parties exchanged thousands of documents and entered into early mediation. All defendants in lawsuits are entitled to their day in court, but the severity of the allegations by the plaintiffs may have had a strong influence on the early settlement.

For example, the plaintiffs alleged in the complaint that Davis had an extensive business and land development relationship with Novant Health, including companies owned, controlled, or substantially invested in by Mr. Davis, which entered into land development projects and office building leasing arrangements in the greater-Winston-Salem area with Novant Health. Davis was also accused of providing Novant Health a gift in excess of $5 million by a Davis-owned development company, East Coast Capital, just as the company announced the plans of a large business development known as the Southeast Gateway, which included Novant Health occupying 40,000 square feet of this office development for a call center.

Whether these allegations are true or not, the extensive affirmative relief agreed to by the parties demonstrates their plausibility. During the four settlement period, the defendants have agreed to:

  1. conclude a comprehensive request for proposal (“RFP”) competitive bidding process, conducted and led by an outside consultant, for recordkeeping, investment consulting and participant education services for the Plans;
  2. engage a mutually agreed upon Independent Consultant to assess the adequacy of the RFP process and assess Defendants’ anticipated selection of service providers for the Plans;
  3. ensure that Plans’ administrative service providers are not reimbursed for their services based on a percentage-of-plan-assets basis;
  4. review all current investment options in the Plans and revise the investment options, as needed, ensuring that those options are selected or retained for the exclusive best interests of the Plans’ participants;
  5. the Independent Consultant reviewing the investment option selection process and provide recommendations, if necessary;
  6. the Independent Consultant conducting an annual review, for four years, of Novant’s management of the Plans;
  7. removing Davis, and related entities, from any involvement with the Plans;
  8. removing Davis and related entities from Novant employee benefit plans;
  9. not enter into any new real estate or business relationships with Davis and related entities;
  10. not offer any Mass Mutual investments in the Plans or any other investment that provides compensation to Davis and related entities;
  11. provide accurate communications to participants in the Plans;
  12. not offer any brokerage services to the Plans; and
  13. adopt a new investment policy statement to ensure that the Plans are operated for the exclusive best interests of the Plans’ participants.

According to the settlement agreement, the Independent Consultant will be Innovest Portfolio Solutions, LLC based in Denver, CO. It does not suggest how or why they were retained. Additionally, the defendants will retain an independent fiduciary to approve the settlement, but the agreement did not specify who that party will be.

Our Thoughts

As discussed above, no allegation is proven true until a court of law decides so (and then years later an appeals court agrees). But where there is an abundance of smoke, there is usually fire. And the early settlement of this case suggests that the plan fiduciaries were engaging in conduct that did not meet the stringent standards of ERISA. While the allegations of real estate deals and money payments are dramatic, the fiduciary of the average plan can look to this lawsuit and settlement as an example that ERISA requires you to act in the best interest of plan participants at all times. That often involves hiring conflict free experts and regularly reviewing a plan’s investments and service provider arrangements.

Spano v. Boeing Excessive Fee Case Settles for $57 Million

Yesterday, November 5, 2015, the parties in Spano v. Boeing Co. filed for court approval of a Settlement Agreement that was finally made public. Earlier this year in August, the case was settled in principle on the first day of trial but the terms of the settlement were not disclosed.

We have now learned that the defendants have agreed to a $57 million payment. Schlichter, Bogard, & Denton, attorneys for the plaintiffs, with court approval will receive $19 million in attorney’s fees and $1,845,000 in costs. (For a review of the claims at issue in the case, see our earlier post Court in Boeing Excessive Fee Case Rules for Plaintiffs, Sets Trial Date.)

The following are some selected terms of the settlement:

  1. The plaintiffs agreed to a sweeping release of claims.
  2. Boeing agreed to hire an independent fiduciary to approve the settlement, assumed in the settlement agreement as Gallagher Fiduciary Advisors unless another is agreed to by the parties.
  3. If a technology sector strategy fund remains as a core option in the Plan, Boeing shall obtain an opinion and recommendation of an Independent Investment Consultant on the question of whether and how to provide participants access to a technology sector strategy as a core option. The Independent Investment Consultant is assumed as Mercer, Aon Hewitt or Towers Watson under the settlement agreement unless another is agreed to by the parties.
  4. The agreement acknowledged that Boeing has a cash target for their company stock fund, and have hired a fiduciary to monitor the cash levels.
  5. The remaining amounts in the settlement fund after paying for attorneys fees and costs and other costs associated with the settlement, will be allocated as follows:
    1. 50% to the Recordkeeping Class
    2. 20% to the Mutual Fund Sub-Class
    3. 15% to the Technology Fund Sub-Class
    4. 10% to the Company Stock Fund Sub-Class; and
    5. 5% to the Small Cap Fund Sub-Class.

Our Thoughts

This is a very significant settlement for the plaintiffs in this case, as it is second in gross amount only to the settlement of the Lockheed Martin excessive fee case earlier this year.  One notable thing different about this agreement, however, is the lack of substantial affirmative relief that is normally agreed to by the defendants in such a suit. The settlement agreement does not explain why it is missing.





Additional Thoughts on the Latest Tussey v. ABB Decision: Fiduciary Lessons Aplenty

As we covered in our last post, the district court’s latest decision in Tussey v. ABB found ABB breached their fiduciary duties but imposed no monetary damages on a procedural technicality. The moral victory for the plaintiffs, however, can still prove to be instructive for other fiduciaries responsible for the selection and monitoring of plan investments. Based on this case, past case law, as well as Department of Labor publications including the most recently issued Field Assistance Bulletin 2015-02, there are six basic obligations a fiduciary must consider when selecting and monitoring investments including:

  1. Engage in an objective, thorough and analytical search,
  2. Avoid self-dealing, conflicts of interest, or other improper influence,
  3. Consider the risk associated with the investment versus alternatives,
  4. Consider ALL costs in relationship to services provided,
  5. Ensure the investment is diversified to minimize the risk of large losses, and
  6. Consult with experts when that expertise is lacking.

Not adhering to this six step process, ultimately resulted in a finding of a breach. According to the court, “ABB’s inconsistent explanations for removing the Wellington Fund and mapping its assets to Fidelity Freedom Funds, the fact that ABB took a substantial part of the PRISM Plan’s assets and put them in an investment that was so new that ABB needed to make an exception to the IPS, and Fidelity’s explicit offer to give ABB a better deal if the Wellington assets were mapped into the Fidelity Freedom Funds” were all reasons cited for the court’s conclusion that ABB was conflicted when it chose to replace Wellington with Fidelity Freedom Funds. Had ABB adhered to the six step process, the outcome would likely have been different because documentation showing compliance with ERISA’s fiduciary duties would have been in place to exonerate ABB.

So what is the lesson here for other ERISA fiduciaries? If you are faced with the opportunity to reduce costs by using proprietary investments, consider documenting your reasons to adopt proprietary funds by answering the following questions:

  1. Are we using proprietary funds?
  2. Are we replacing an existing fund with a proprietary fund?
  3. Have we selected proprietary funds based on the standards and criteria established in the IPS?
  4. If an exception is necessary to use a proprietary fund, should we change the IPS standards and criteria permanently?
  5. Are we using a proprietary fund because it is in the best interests of participants or because it reduces the cost to the Plan Sponsor?
  6. How are we accounting for any additional revenue sharing from the use of the proprietary funds?

It is worth noting that case law has not prohibited the use of proprietary funds, the collection of revenue sharing, or the payment of plan expenses from plan assets. However, fiduciaries must understand that the use of proprietary funds creates an opportunity for additional liability issues to arise that must carefully and deliberately be addressed.

On Remand, Tussey v. ABB Defendants Found to Breach ERISA but Win on Procedural Technicality

Yesterday, July 9, 2015, the district court in Tussey v. ABB ruled on the issues remanded from the 8th Circuit’s mixed decision last year. While the court found the ABB defendants breached their ERISA fiduciary duties, the court ultimately held the ABB defendants victorious because the plaintiffs failed to provide damages calculations consistent with the 8th Circuit’s narrow mandate.

The district court began its decision with a summary of its task on remand:

The Eighth Circuit remanded this case for application of the Firestone abuse of discretion standard to the Defendants’ decision to remove the Vanguard Wellington Fund from the PRISM Plan and transfer its assets to the Fidelity Freedom Funds.

As a recap, the 8th Circuit is one of the first circuit courts in the country to hold that ERISA fiduciaries deserve deference with regard to violations of ERISA 404 and/or 406:

Like most circuits to address the issue, we see no compelling reason to limit Firestone deference to benefit claims. “‘Where discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court except to prevent an abuse by the trustee of his discretion.’” Firestone, 489 U.S. at 111, 109 S.Ct. 948 (quoting Restatement (Second) of Trusts § 187 (1959) (alterations omitted)). “This deferential standard reflects our general hesitancy to interfere with the administration of a benefits plan.” Layes v. Mead Corp., 132 F.3d 1246, 1250 (8th Cir. 1998). Given the grant of discretion in this case, the district court should have reviewed the Plan administrator’s determinations under the Plan for an abuse of discretion.

The district then reanalyzed the conduct of the ABB fiduciaries. The court held the ABB fiduciaries breached ERISA’s fiduciary duties when they improperly eliminated the Vanguard Wellington Funds from their plans and replaced it with the Fidelity Freedom Fund lineup. The district court found that this move was motivated by the goal of increasing revenue sharing to Fidelity in order to make large profits on the 401(k) plans, which benefited ABB by keeping hard dollar recordkeeping costs low (which ABB was responsible for) and also keeping the corporate plans with Fidelity at below market pricing.

[T]he Court finds it more likely than not that ABB decided to remove the Wellington Fund and map its assets into the Fidelity Freedom Funds to benefit ABB. The Court cannot say this was its sole motivation. Lifestyle funds were coming into vogue at this time and the Wellington Fund had a short period when it did not perform as well as it had previously. However, given the procedural irregularities including the strong performance of the Wellington Fund during the time period specifically identified in the IPS, ABB’s inconsistent explanations for removing the Wellington Fund and mapping its assets to Fidelity Freedom Funds, the fact that ABB took a substantial part of the PRISM Plan’s assets and put them in an investment that was so new that ABB needed to make an exception to the IPS, and Fidelity’s explicit offer to give ABB a better deal if the Wellington assets were mapped into the Fidelity Freedom Funds, the Court is confident that ABB was conflicted when it chose to take the Wellington Fund assets and put them into the Fidelity Freedom Funds. The Court finds that there are too many coincidences to make the beneficial outcome for ABB serendipitous, particularly considering the powerful draw of self-interest when transactions are occurring out of sight and are unlikely to ever be discovered.

The district court then discussed the Firestone abuse of discretion standard:

Given all these factors, the Court finds that ABB abused its discretion when it removed the Wellington Fund and mapped its assets into the Fidelity Freedom Funds. It is more likely than not that but for its conflict of interest, ABB would not have made the same decisions.

The district court then discussed the narrow interpretation of how damages should be calculated as declared by the 8th Circuit, which stated:

On remand, the district court should reevaluate its method of calculating the damage award, if any, for the participants’ investment selection and mapping claims. See Peabody v. Davis, 636 F.3d 368, 373 (7th Cir. 2011) (clarifying in an ERISA case that “[t]he method of calculating damages is reviewed de novo; the calculations pursuant to the method are reviewed for clear error”). First, the district court awarded the amount that participants who had invested in the Wellington Fund presumably would have had if (1) ABB had not replaced the Wellington Fund with the Freedom Funds, and (2) the participants remained invested in the Wellington Fund for the entire period at issue. In light of the IPS requirement to add a managed allocation fund, it seems the participants’ mapping damages, if any, would be more accurately measured by comparing the difference between the performance of the Freedom Funds and the minimum return of the subset of managed allocation funds the ABB fiduciaries could have chosen without breaching their fiduciary obligations.

Ultimately, the district court found that the plaintiffs failed to present the damages calculations as required by the 8th Circuit:

Plaintiffs argue that this method for calculating damages is wrong, citing precedent that suggests that the proper measure of damages would be the prudent alternative that provides the largest damages unless the breaching fiduciary sustains their burden of proof to establish that a lower yielding award is justified. See Dardaganis v. Grace Capital Inc., 889 F.2d 1237, 1244 (2d Cir. 1989) (“the District Court should presume that, but for the breach, the funds would have been invested in the most profitable of the alternative and the errant fiduciary bears the burden of proving that the fund would have earned less than this amount.”); see also Donovan v. Bierwirth, 754 F.2d 1049, 1056 (2d Cir. 1985) (“Where several alternative investment strategies were equally plausible, the court should presume that the funds would have been used in the most profitable of these.”); see Roth v. Sawyer-Cleator Lumber Co., 61 F.3d 599, 602 (8th Cir. 1995) (citing Bierwirth with approval). But even if the Court assumes that the performance of the alternative target fund that had the highest rate of return would be the proper measure of damages, Plaintiffs have presented no evidence of what that figure would be. Given that the Eighth Circuit has suggested a measure of damages, the Court finds that measure persuasive and Plaintiffs have failed to present evidence of the only measure of damages that the Eighth Circuit has tacitly approved. Therefore, Plaintiffs have failed to satisfy their burden of proof on the issue of damages.

Our Thoughts

Without a doubt, the outcome of this decision has been driven by the unique procedural aspects of the case, rather than substantive ones. For ERISA fiduciaries that might take comfort, don’t. The plaintiffs bar will adapt and the proper damages calculations as required by the court will be presented in all cases in the future. But even these plaintiffs may still get another bite at the apple, as they have every right to appeal the case again to the 8th Circuit, which must hear it, and even the district court stated:

If the Court has misread the Eighth Circuit, its decision is subject to de novo review and can be corrected on appeal.

ERISA fiduciaries should instead carefully study the court’s description of what it held were breakdowns in the fiduciaries’ process in analyzing and selecting investments, as well as handling their own conflicts of interests and fees paid to providers. There are very clear lessons to be learned.



Supreme Court Declines to Hear “Would Have” vs. “Could Have” ERISA Case

The United States Supreme Court has been busy lately as today, Monday June 29, 2015, marks the end of the 2014-2015 term. Although much has been written about the multiple high profile cases decided in the last week, the Court also published an extensive list today of cases they have agreed to hear next term and those they will not hear. On the NO list was an important ERISA fiduciary breach appeal from the 4th Circuit Court of Appeals called Tatum v. RJR Pension Committee. For those interested in reading the extensive briefs, the website SCOTUSblog is an excellent resource.

In a nutshell, this case was about what to do when a fiduciary has breached their duty of prudence by failing to put in place a prudent process to evaluate an investment decision. Can the defendant avoid liability by arguing that the result would be the same even if they had a prudent process in place (i.e. the ultimate decision was still substantively prudent)?

Here, it was the decision of whether to keep or eliminate Nabisco stock in the RJR 401k plan after the company split into two. The plaintiffs alleged that the defendants met for just about an hour and only considered their own liability in deciding to eliminate the stock. Ultimately, the stock price bounced back 200% and the participants in the plan missed out on these gains.

The 4th Circuit concluded that the defendants failed to have a prudent process because they failed to consider the best interests of the participants. The question then becomes, once you’ve shown a failure of procedural prudence, what can the fiduciary prove to show they still made the right substantive choice?

The defendants wanted a standard that would have allowed them to put on evidence that a prudent fiduciary COULD have made the same decision. The plaintiffs, and ultimately the 4th Circuit, supported a standard where the defendant must show that a prudent fiduciary WOULD have made the same decision. Hence, the Could Have vs. Would Have issue.

As explained simply to me by one of the attorneys representing the plaintiffs, Brendan Maher of Stris & Maher, the Could Have standard is essentially proving that if you surveyed 100 prudent fiduciaries, 1 of them would make the same decision. The Would Have standard would require proving that 51 of 100 would make the same decision. Simply, the Would Have standard gives the defendant no benefit of the doubt.

In declining to hear the case, the Supreme Court probably took into consideration a brief from the Solicitor General and the Department of Labor that argued the 4th Circuit got the decision right and that the Court shouldn’t hear it.

Our Thoughts

From a strict legal perspective, the opinion of the 4th Circuit is only valid for those courts that reside in that circuit. The Supreme Court’s denial to hear it does not make it the law for all other circuits. But the overall lesson is applicable to all fiduciaries.

If you fail to have a prudent process in place to make fiduciary decisions, you will have a very high bar to overcome to show you still made the right decision. Imagine a blind monkey throwing a dart at a wall with every mutual fund in the world on it. It’s possible that the monkey hits the “World’s Best Mutual Fund” assuming one exists. In this hypothetical, it’s easy to argue the monkey shouldn’t be held liable as the plan could not have invested in a better fund. But in reality, there are many “prudent” investments that can be made available in a plan. What if the monkey hit a fund that ranks in the top 20%? The top 40%? The top 60%? The answer becomes harder.

Simply put, fiduciaries should not be “shooting from the [monkey] hip” and trying to make good substantive choices without the time and effort needed to know whether the decision is good or bad. There is no good substitute for a good prudent process. Instead, there are only bad substitutes that involve expensive lawyers and expensive expert witnesses trying to prove you didn’t commit monkey business. Choosing the latter over the former is…bananas.