Tag Archives: class action

Opening Shot Fired in the Fee Disclosure Wars

Star Wars had the Clone Wars, and a lawyer at the law firm of Perkins Coie may have marked the beginning of the Fee Disclosure Wars by filing a class action lawsuit against his employer challenging deductions from his paycheck for various items, including deductions made for “mandatory retirement”, contributions made on his behalf to the firm’s cash balance plan and 401(k) matching contributions made on his behalf to the firm’s 401(k) plan.

In an article by William Dotinga in the Courthouse News Service on May 8, 2012 – Lawyer Says Perkins Coie Makes the Staff Bear Its Costs – it says that the lawsuit filed by Harold DeGraff against Perkins Coie on May 4, 2012 alleges Perkins Coie failed to provide employees with accurate and itemized wage statements in violation of California labor laws, and seeks restitution, waiting time penalties, an injunction and damages.

Hat tip to the Courthouse News Service for providing a copy of the Complaint.

Mr. DeGraff joined Perkins Coie in 2007 according to a press release by Perkins Coie stating that “We are thrilled to have Harold on board” said Ed Wes, Menlo Park managing partner. “The strategic growth of our California practices through the addition of high-caliber lawyers will further enhance the legal services we can provide our clients.”

Even though the lawsuit was filed in federal court, it does not currently allege Perkins Coie violated any provision of ERISA. It will be interesting to see if the Complaint is amended after Mr. DeGraff opens his first fee disclosure statement because, if he is not happy about Perkins Coie deducting $859 from his paycheck in 2009 as his contribution to the Perkins Coie cash balance plan, he will probably not be happy when he learns how much of that $859 went to fees and expenses for maintaining and administering the plan.

A quick check of the 2009 Form 5500 Schedule C for the Perkins Coie Cash Balance Plan revealed the plan checked “Yes” on Line 1(a) and stated that the plan paid eligible indirect compensation to:

  • Columbia Wagner Asset Management LLC;
  • The Vanguard Group;
  • Rainer Investment Management, Inc.;
  • T. Rowe Price Associates, Inc.;
  • American Beacon Advisors, Inc.;
  • Harbor Capital Advisors, Inc.

Line 2(i) of the 2009 Form 5500 Schedule H states that the plan paid no administrative expenses, including no professional fees, no contract administrator fees, no investment advisory and management fees, and no other fees.

According to the 2009 Form 5500, the Perkins Coie Cash Balance Plan was originally effective on Jan. 1, 2005 and had 308 participants at the beginning of the 2009 plan year with a total of $23,658,856 in assets at the end of the 2009 plan year.

Today in ERISA History

March 29, 2007 – Milton Lily files a lawsuit against the fiduciaries of the Oneida Ltd. Employee Stock Ownership Plan, alleging that the plan’s fiduciaries breached their fiduciary duties under ERISA by: (1) failing to prudently and loyally manage the plan’s assets; and (2) failing to properly monitor the performance of their fiduciary appointees, and remove and replace those whose performance was inadequate. Specifically, he alleges that the plan’s fiduciaries knew or should have known that the plan’s investment in company stock was not a prudent retirement investment between May 28, 2003 to March 20, 2006 and that the fiduciaries acted imprudently by not preventing further investment in Oneida stock and not liquidating the plan’s existing holdings. The lawsuit grows to include participants and beneficiaries in the ESOP between May 28, 2003 to March 20, 2006 and whose accounts included investments in Oneida Ltd. common stock.

According to the complaint, between those dates, the plan held between 1.5 million and 1.8 million shares of Oneida common stock as the plan document required the ESOP to invest primarily in Oneida stock. During that time frame, Oneida suffered a number of setbacks which ultimately led to Oneida filing for bankruptcy protection on March 19, 2006. On May 28, 2003, Oneida common stock was trading for $9.80 per share. On March 20, 2006, Oneida’s stock was trading for $0.075 per share.

On Oct. 4, 2010, the judge approves a settlement of $1.85 million. After expenses of $55,965.06 to the participant’s attorneys, attorneys fees of $555,000 to the participant’s attorneys, case contribution awards, taxes and other expenses approved by the Court, the remaining amount is to be allocated among the class of participants and beneficiaries according to an allocation schedule approved by the Court.

(Note: the first couple of pages of the Complaint are an interesting read because they contain a list of information which the attorneys reviewed before filing this lawsuit, including Form 5500s. Around this time frame, there were a number of similar lawsuits filed, and settled, against similar companies. With the DOL’s Final 408(b)(2) Fee Disclosure Regulations taking effect on July 1, 2012, it will be interesting to see if these types of lawsuits over the failure to properly monitor fiduciaries become more prevalent due to the language of the regs.)

It’s Back to Trial Court for Kraft Foods 401(k) Participants

In an opinion that provides both a roadmap of what not to do, and a cautionary tale to other participants considering filing class actions against their plans, on April 11, 2011, the Seventh Circuit issued a decision in George v. Kraft Foods.  In George, et al.  v. Kraft Foods Global, No. 10-1469 (April 11, 2011),  current and former participants in the Kraft Goods 401(k) plan filed a class action lawsuit in 2006 against 7 fiduciaries responsible for administering Kraft Foods’ 401(k) plan, including Hewitt, who was the recordkeeper,  and State Street Bank & Trust Company, who was the plan’s trustee. 

The participants claimed that the fiduciaries breached the prudent man standard of care under ERISA section 404(a) (29 USC 1104(a)(1)) by paying excessive fees to the plan’s fiduciaries and by allowing the plan’s fiduciaries to mismanage two investment choices available to participants which held company stock funds.  Specifically, participants claimed that the fiduciaries breached their duty when they did not (1) eliminate unitization and the cash buffer and allow participants to own shares of Kraft stock directly, thereby eliminating both investment drag and transactional drag; (2) impose measures designed to reduce the number of participant-initiated transactions by imposing a trading limit that limited the number or frequency of trades participants could make, thereby reducing transactional drag; (3) paid Hewitt a higher than normal fee per participant; and (4) allowed State Street to keep float income. 

The district court granted summary judgment to Kraft Foods, and the participants appealed to the 7th Circuit Court of Appeals.  The 7th Circuit reversed the grant of summary judgment in part, and remanded the case back to the trial court.  The court affirmed the grant of summary judgment in favor of State Street.  The 7th Circuit also affirmed the trial court’s denial of participant’s motion to amend the complaint and include an expert witness.   

One of the issues before the 7th Circuit was whether the district court properly denied Plaintiffs’ motion to amend the complaint to add 21 defendants and additional claims regarding investment decisions made by the plan’s fiduciaries, including whether the plan used appropriate investment vehicles and whether the mix of investment choices were reasonable.  The 7th Circuit, stating that they might not have denied leave to amend the complaint if they had been in the district court’s position,  upheld the district court’s denial of leave to amend the complaint, reasoning that the district court had not abused its discretion in making the decision.  

Following the twists and turns of this part of the decision is what makes it such a good roadmap for future litigation.  

First, on Oct. 16, 2006, participants file the class action against Kraft Foods in the Southern District of Illinois.  The fiduciaries file a motion to transfer venue and move the case to the Northern District of Illinois.  During discovery related to the fiduciaries’ motion to transfer venue to the Northern District of Illinois, the 7th Circuit says the participants learned much of the information they wanted to include in their amended complaint.  The district court grants fiduciaries’ motion to transfer the case, and lawsuit moves to the U.S. District Court for the Northern District of Illinois on March 26, 2007, a little more than 5 months after it was filed by the participants.

Once the lawsuit reaches the Northern District of Illinois, the trial court conducts various hearings on discovery and scheduling.  During these hearings, the 7th Circuit notes that neither party requested a deadline for joining parties or amending pleadings.  Ultimately, this failure is part of what dooms the participants’ request to amend the complaint.  

Following the classic discovery pattern of overwhelm and obscure, the fiduciaries provided an overwhelming number of documents to the participants during discovery, and on January 31, 2008, participants moved the court for an extension of time to complete discovery due to the overwhelming number of documents provided to them by the fiduciaries, which the trial court granted. 

Then, on March 21, 2008, the participants filed a motion to compel discovery because the fiduciaries had provided redacted copies of certain documents and the participants wanted the unredacted versions of those same documents.  The trial court granted this motion.

On May 7, 2008, the participants filed their motion to amend the complaint to add 21 defendants and the additional causes of action, which was denied by the trial court and this decision was affirmed by the 7th Circuit. 

As part of the cautionary tale provided by this case, the 7th Circuit applied the rule they stated last year in United States v. Lupton, 620 F.3d 790, 807 (7th Cir. 2010) which states that arguments raised for the first time in a reply brief are forfeited.  The 7th Circuit said that because the participants did not include any argument in their opening brief on appeal indicating that they were disputing the finding by the trial court that the participants knew about the facts that gave rise to their proposed amended complaint in 2006, they could not dispute it for the first time in their reply brief.  In the reply brief, according to the 7th Circuit, the participants said that it was access to the unredacted documents which they received as a result of the March 21, 2008, motion to compel discovery that provided sufficient information to file the motion to amend the complaint on May 7, 2008. 

In one of the ironic parts of the case, the trial court denied the participants’ motion to amend the complaint due to the prejudice the delay would cause the fiduciaries, stating that amending the complaint would thwart the discovery schedule which has already been postponed a number of times, due in part to the actions of the defendants in producing redacted documents and an overwhelming number of documents.

One of the claims not added to the lawsuit because the trial court did not allow the complaint to be amended was that the fiduciaries paid excessive fees to the managers of 2 actively managed funds which were provided as investment options to plan participants.  The court noted that actively managed funds are different than passively managed funds in that actively managed funds attempt to beat the market through the selection of securities included in the fund while passively managed funds, or indexing, simply replicate the performance of the market as measured by an index.  The participants’ position was that active management is of dubious value and therefore the plan should only have offered passively managed index funds to participants.  Again, because the motion to amend the complaint was denied, this issue was not included in the lawsuit.