Breaking – Cigna and Prudential Settle Excessive Fee Lawsuit for $35 Million

Today, June 21, 2013, the parties in Nolte v. Cigna Corp. filed papers indicating they have settled their lawsuit and are now seeking approval of the district court. Key defendants in the case are Cigna Corp. and Prudential Retirement Insurance And Annuity Company (PRIAC). In total, they have agreed to pay to plaintiffs $35 million and have agreed to substantive affirmative relief. A copy of the motion seeking settlement can be found here. The settlement agreement is attached to the motion as Exhibit A.

The Nolte case was filed in March of 2007 by current and former participants in Cigna’s own in-house 401(k) plan and was stayed pending the outcome of the 7th Circuit decision in Hecker v. Deere. The judge allowed the case to move forward and in September 2011, the plaintiffs filed their fourth amended complaint. The following quote from the plaintiffs’ class certification motion gives a good overview of plaintiffs’ allegations:

Broadly, Plaintiffs contend that their employer CIGNA Corporation and its officers, employees, and subsidiaries operated Plaintiffs’ 401(k) Plan not for the exclusive benefit of Plan participants as ERISA requires, but instead as a profit center for CIGNA’s business by taking unreasonable fees from participant accounts, using its own funds, never putting Plan services out for competitive bids, and engaging in prohibited transactions with Plan assets. Indeed, Plaintiff’s 401(k) Plan was the flagship and largest 401(k) plan in CIGNA’s Retirement Division, which it sold in April 2004 to Prudential Financial Inc. for over $2 billion. Despite their retirement assets providing seed capital for CIGNA’s retirement business, Plan participants received none of the profit CIGNA received from the sale. A vital component of that sale was a secret “gentlemen’s agreement” between CIGNA and Prudential under which CIGNA secretly committed to keep Prudential on as the fee-earning fiduciary of the Plan for at least three years after the sale, to get a higher sale price for itself and to ensure Prudential would benefit from the profits generated by the unreasonable 401(k) Plan fees paid by participants. Even though CIGNA remained a Plan fiduciary, it allowed Prudential to continue taking unreasonable and prohibited fees from Plan assets. Prudential, which became a fiduciary to the Plan upon closing the sale, commenced doing the same thing CIGNA had done—using its own funds, not putting services out for bids, taking grossly excessive fees, determining what its own fees are, and engaging in prohibited transactions with Plan assets.

A significant part of plaintiffs’ claims had to do with an investment of over $1 billion in stable value assets invested in Cigna’s general account, a practice the plaintiffs alleged was imprudent and self-serving. Generally, the allegations here resemble those in other cases that have previously settled, such as Kanawi v. Bechtel Corp., Martin v. Caterpillar, Inc., and Will v. General Dynamics Corp, which all involved in-house plans and self dealing.

In settling a case such as this, the parties seek to have the case certified as a class action for purposes of the settlement. Here, the proposed settlement class is defined as:

All persons who, at any time between April 1, 1999 and May 31, 2013, inclusive, had an account in the Cigna 401(k) Plan, as well as their beneficiaries, alternative payees or attorneys-in-fact who are or become entitled to any portion of such an account; provided, however, that the Class shall not include; (a) any Defendant, or member of the Investment Committee or the Administrative Committee betweenApril 1, 1999, and May 31, 2013, and as to each person within the scope of clause (a), his/her immediate family members, beneficiaries, alternate payees or attorneys-in-fact.

Plaintiffs were represented by Schlichter, Bogard & Denton, which will seek to have $11,666,667 in fees and $1.2 million in costs approved by the district court and taken from the gross settlement fund. This is the largest settlement, by nearly double, that has ever been obtained in an excessive fee lawsuit by the firm, although the judgment in Tussey v. ABB, Inc. was slightly higher.

Cigna was represented by Morgan Lewis & Bockius, LLP and Prudential was represented by O’Melveny & Myers, LLP.

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