The 2nd U.S. Circuit Court of Appeals has affirmed a lower
court’s ruling in Severstal
Wheeling Retirement Committee v WPN Corporation, a complicated but informative
example of retirement plan litigation that considered the extent of a plan
fiduciary’s duty to diversify investments, as well as the allocation of liability among plan managers.
By way of background, WPN Corporation and its lead executive
Ronald LaBow are named fiduciaries of two defined contribution plans sponsored
for the employees of a company called Severstal Wheeling Inc. The plaintiffs in
the initial suit include Severstal Wheeling Inc. Retirement Committee and other
named fiduciaries of the plans, who sued WPN and LaBow on behalf of the plans
for breaches of their fiduciary duties.
Until late 2008, according to case documents, the plans were
funded and maintained through a trust sponsored by the WHX Corporation. The combined
trust pooled the plans’ assets with assets from other employee benefit plans
sponsored by WHX. After Severstal Wheeling, Inc. separated from WHX, a portion
of the assets was transferred from the Combined Trust to a separate trust
holding the plans’ assets. Before and after the transfer, the plans were
managed by WPN, whose sole employee was LaBow.
The main charge of wrongdoing was that WPN and LaBow did not
put into action demands by the investment committee to diversify and otherwise
properly manage participant assets. According to the district court opinion, the committee testified
that LaBow’s account of whether and how the plans could be diversified was “an
ever evolving story of what could or could not be done” that “seemed to change
just about during every conversation.”
Crucially, the judge also found that governing documents did
not give LaBow and WPN the option of abdicating responsibility to the
retirement plans’ committee. LaBow argued that he met with several
impediments to diversifying the plans’ assets, including that not all assets
the committee wanted were available, that he was not given an investment policy
to guide him and that the custodian of the trust did not recognize his
authority to direct investments. The bench trial judge was persuaded by
testimony of several experts to reject these arguments, case documents show.
The court ordered the investment manager to pay the plans
$9,710,438, including disgorgement of the $110,438 paid in investment
management fees during the period, plus $5,305,889.74 as prejudgment
NEXT: Details from
the appellate decision
The appellate court’s summary decision explains that, in
late 2008, LaBow directed the treasurer of WHX to transfer all of the assets maintained
in an account managed by Neuberger Berman, LLC, from the combined trust to the newly
created Severstal trust. On November 3, 2008, the entire contents of the
Neuberger account, an undiversified portfolio comprised of mostly energy
stocks, were transferred to the Severstal Trust.
“LaBow and WPN argue that this transfer did not violate
ERISA,” the appellate decision states. “But the district court’s finding of
liability was not based only on the transfer itself; rather, the district court
held that LaBow breached his fiduciary duties by selecting the Neuberger
assets—an undiversified portfolio of energy stocks—as the only assets to be
transferred to the Severstal Trust, and did so without informing the committee
before or after the transfer what investments had been transferred, with the
knowledge that Neuberger Berman was not going to manage the assets, and without
taking any steps to ensure the ongoing prudent management of the assets.”
The appellate court explains LaBow and WPN’s challenge to
these determinations largely turns on the district court’s assessment of the
evidence and its credibility determinations as to expert testimony.
However, it is “within the province of the district court as
the trier of fact to decide whose testimony should be credited,” the summary
order contends, “and we are not allowed to second-guess the district court’s
credibility assessments … Because LaBow and WPN have not asserted any arguments
that suggest, let alone confirm, that the district court’s factual findings are
clearly erroneous, we have no basis to set aside the district court’s ruling.”
Appellants additionally argued that the district court erred
in finding that they had been granted management control and authority—and thus
were fiduciaries under Section 3(21)(A)(iii) of ERISA—because LaBow could not
have exercised such authority had he attempted to do so.
“Even assuming that the inability to actually exercise control
over assets could present a defense to a finding that a person is a fiduciary
under Section 3(21)(A)(iii)—which requires only the grant of discretionary
authority, not its actual exercise, see Bouboulis
v. Transp. Workers Union of Am., 442 F.3d 55, 63 (2d Cir. 2006)—the
district court made explicit factual findings rejecting that argument at trial.
None of Appellants’ arguments indicate that those findings are clearly
The full appellate decision is available for download here.