J.P. Morgan Retirement Plan Services, and related entities including J.P. Morgan Chase & Co., have been hit with an ERISA class action by participants who invested in the now defunct American Century Stable Asset Fund (“ACSAF”). The name of the case is Knee v. J.P. Morgan Retirement Services and it was filed two days ago in the Southern District of New York.
The complaint was filed by two plaintiffs who are participants in two different 401(k) plans that offered the ACSAF. The plaintiffs invested in that fund and allege losses recoverable under ERISA because of self-dealing by J.P. Morgan.
Factual Background Allegations
- JP Morgan (and related entities hereafter “JPM”) has been and remains a significant minority shareholder in American Century Companies the parent of American Century Investments (“ACI”).
- By 1998, JPM acquired a 50% interest in American Century’s recordkeeping arm Retirement Plan Services, Inc. (“RPS”). They shared the cost of operating RPS.
- In 2003, a Revenue Sharing Agreement was signed by American Century and JPM giving full control over RPS to JPM. This is the entity we all know now as JP Morgan Retirement Plan Services (“JPMRPS”).
- Under the Revenue Sharing Agreement and thereafter, JPMRPS continued to provide services to both JPM and ACI retirement investment product funds and the 401(k) plan sponsors and participants who invested in those funds.
- JPMRPS and the other JPM entities were at all relevant times an ERISA fiduciary to the 401(k) plan sponsors and plaintiff participants invested in ACSAF.
ERISA Breach Allegations
- JPMRPS embarked on a course of conduct in which it wrongfully lured and enticed ACSAF plan sponsors away from the ACSAF and into JPM’s Commingled Stable Value Asset Income Fund as well as into JPM’s separate Stable Value Funds.
- Throughout this course of conduct, JPMRPS knew full well that such conduct would damage ACSAF and investors in it like plaintiffs, but that it would benefit itself.
- JPMRPS, through its actions, was able to influence, manage and control fund selection for 401(k) plans and participants invested in ACSAF and move many plan sponsors to JPM’s Stable Value Funds.
- Ultimately, ACSAF was so totally decimated by JPM’s conduct that it was no longer economically viable for ACSAF to exist at all, and JPM caused what remained of that fund to be merged or otherwise become part of the Commingled Stable Value Fund on September 14, 2007.
- The purpose of this campaign was due in part to American Century turning down JPM’s attempt to purchase the ACSAF.
American Century Wins $373 Million Arbitration against JP Morgan
All of the above is alleged despite the fact that the Revenue Sharing Agreement between ACI and JPM required JPM to give equal importance as house funds to both ACI products and JPM products, including an agreement that for plans above $50 million, JPM stable value products would be selected for offering, and below that amount, the ACSAF.
ACI was obviously not pleased with this scenario, and in July 2009, initiated arbitration proceedings against JPMRPS and related entities. Am. Century Inv. Mgmt., Inc. v. J.P. Morgan Invest Holdings LLC, No. 58 148 Y 00220 9 (Am. Arb. Ass’n). In the arbitration complaint, ACI alleged that in violation of the Revenue Sharing Agreement and in bad faith, JPM embarked on a successful plan to (1) take over American Century’s Stable Value accounts to decrease ACSAF’s value for ultimate acquisition, (2) increase JPM assets under management and resulting fees to JPM entities, and (3) decrease the amounts due to ACI under the Revenue Agreement.
The arbitrators found in favor of ACI finding as true much of the factual underpinnings of the case being filed by the plaintiffs in Knee. In its 72-page Award (attached as an Exhibit to the Complaint in Knee) dated August 10, 2011, the arbitrators sustained ACI’s claim and awarded it $128,297,668 plus interest in the amount of $4,334,000, for a total award of $132,631,688, for JPM’s breach of the Revenue Sharing Agreement as part of a larger $373 million award. The arbitration award received significant media coverage and JPM paid the award to ACI.
The plaintiffs in Knee are now filing their claim as participants in the stable funds at issue to try and recoup the losses they allege they accrued because of JPM’s alleged actions.
Whitley v. J.P. Morgan Chase
Plaintiffs allege that their case relates to a case filed in April of 2012, that I admittedly was unaware of until today, Whitley v. J.P. Morgan Chase. There, the complaint alleges that:
- JPM inappropriately invested their many stable value funds in mortgage assets that were far too risky for the stated and/or reasonable objectives of such funds.
- JPM unlawfully failed to properly diversify the asset base of the stable value funds when it invested through the JPM Intermediate Bond Fund and Pension Trust Funds, including the Private Placement Mortgage Fund, a substantial percentage of their assets in the mortgage assets.
- After receiving repeated warnings about the weakness of the mortgage market and acting on such warnings when its own funds were at stake, JPM continued to hold vast amounts of mortgage assets known to it to be risky and illiquid in the stable value funds.
- Without meaningful hedging or use of other available loss-avoidance and risk management strategies that could have otherwise protected the retirement investors in the Class from the financial harms complained of herein, JPM violated the duty to diversify.
- JPM unlawfully disguised and failed to disclose to plan participants the true loss in value of the mortgage assets that it had wrongfully and unlawfully sold to the Stable Value Funds and the impact of those positions on their yield.
The plaintiffs in Whitley compare their claims to the case filed against State Street by Prudential Retirement because of risky mortgage backed assets. In re State Street Bank & Trust Co. Fixed Income Funds Inv. Litig., 842 F. Supp. 2d 614 (S.D.N.Y. 2012). (Prudential filed the case as the fiduciary acting on behalf of its client plans that invested in the Street Funds at issue). There, the court found after trial that State Street Bank and Trust violated ERISA, and held that the class’s damages, exclusive of interest and attorneys’ fees, equaled approximately $77 million. Prudential had alleged that State Street Bank and Trust’s investing of its purportedly conservative enhanced bond funds in unduly risky mortgage assets violated its ERISA duties of care, skill, prudence, and diligence, as well as its ERISA duty of diversification. The parties later settled.
The Whitley case remains active and has also been added to our ERISA Litigation Index. The Whitley court has recently granted the plaintiffs’ motion to file a second amended complaint at the end of this month. We will update that case as it progresses.
To my knowledge, this is the first major case filed against JP Morgan Retirement Plan Services who is a huge player in the retirement plan world. Here are our thoughts on this new case being filed:
First, we are beginning to see a wave of cases that simply cannot be ignored by the greater plan sponsor and provider community. The tentacles are reaching out to affect you whether you like it or not. To our readers who are plan sponsors or providers with plans that have invested in any of the above mentioned funds during the relevant time period, you need to review these cases carefully and monitor their progress. The plaintiffs in both cases, Knee and Whitley, are seeking to represent your plan’s participants as gigantic class actions. We’re talking potentially thousands of plans. This is a big deal. (You may want to consult with your ERISA counsel if you have one. If you don’t, I know of many good ones. Call me and I will help you figure out how to find one.)
Second, if you continued to offer these funds or continued to recommend these funds after the events alleged above, you should probably have a good reason why you did. This should have been an affirmative decision and it should have been documented. This is true regardless of whether the plaintiffs in these cases can prove their allegations. Whether we like it or not, there has been enough information in the public sphere about these funds to raise the issue of a further need to investigate by a fiduciary responsible for selecting them. I believe it qualifies for what is termed a “material change in circumstances” to the investment. If you need help with instituting better governance procedures that include a system for monitoring funds and/or documenting fiduciary process decisions, then call me. We specialize in helping ERISA fiduciaries implement best practices and I personally draw upon my previous experience in litigating fiduciary breach cases where many of these very issues have been raised.
Third, while complaints typically don’t contain detailed damages calculations, it seems that one here in the Knee complaint would have been helpful to understand quantitatively how the plaintiff class was harmed. A comparison of performance of the ACSAF to other stable value products? Data on outflows? How the damages they are seeking here compare to the damages paid in the arbitration case? It is entirely unclear the magnitude of damages being alleged.
Fourth, these cases represent a new breed of ERISA fiduciary breach cases where class actions are being filed seeking to represent hundreds (or thousands) of plans or participants in hundreds (or thousands) of plans. One such case where a class was certified of basically every plan client of the provider just finished their third day of a month long bench trial in the District of Connecticut in Healthcare Strategies v. ING Life Insurance and Annuity Co. Other such cases seeking this new breed of certified class include the float cases filed against Fidelity.
Fifth, although not relevant in anyway, it is interesting that the Whitley case alleges a stable value fund was too risky, where the claim against Lockheed Martin recently allowed to go forward as a class action by the 7th Circuit, alleges the stable value fund was too conservative.
Bottom line conclusion: you need to have a good fiduciary process in place to select and monitor the funds in your plan. When situations like those alleged in the Knee and Whitley cases pop up, you must be able to show that you considered the material change in circumstances and did so in the best interest of your plan’s participants. Again, if you need help instituting a good fiduciary process, we are only a phone call away.
We will continue to monitor these two cases and all others being tracked in the ERISA Litigation Index.