Compliance April 10, 2009

President of Defunct Firm Accused of Stealing 401(k) Deferrals

The top official of a Horsham, Pennsylvania-based medical management consulting firm has been indicted in federal court on charges that he stole employees' retirement contributions.
Reported by

James K. Edler, Jr., former president of the now-defunct McFaul & Lyons Group, was charged April 1 with one count of theft from an employee pension benefit program, the Bucks County Courier Times reported. He is accused of taking more than $105,000 of employee salary deferrals to the firm’s 401(k) plan from April 2004 to April 2005.

The attorney who represents the 10 former employees whose pension contributions Edler is accused of stealing said Edler never put the money into the plan’s investments. The attorney said the former employees are also calling for the McFaul & Lyons Group to provide a 50% match on the contributions, according to the news report.

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According to the attorney, the discrepancy came to light when an employee contacted an official for the 401(k) plan and discovered the plan was not being funded. When the attorney filed papers seeking the money for the 10 employees, it triggered the involvement of the Department of Labor and U.S. Treasury Department, which investigated and brought their findings to the U.S. Attorney’s Office.

If convicted, Edler faces up to five years in prison and a fine of $250,000.

Compliance April 10, 2009

State Street Must Answer to Nuns

Already facing a number of lawsuits over subprime mortgage investments, State Street Corp. now has to face an order of nuns in court.
Reported by

The Sisters of Charity of the Blessed Virgin Mary have filed suit against State Street Corp., alleging the Boston-based firm lost more than $1 million of the nuns’ retirement savings by investing in derivatives and subprime mortgages.

According to the Boston Business Journal, in the complaint filed in U.S. District Court for the Southern District of New York, the Sisters claim in the spring of 2005 that State Street promoted investment in the Enhanced Dow Jones-AIG Commodities Futures Strategy, saying it was “a conservative investment strategy” and “remains unleveraged at all times.’

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The Sisters agreed to invest in the strategy with assets for the care of retired nuns in the sect. However, the Sisters allege State Street began adding leverage to the funds and invested in non-investment grade assets, including subprime mortgage backed securities and credit default swaps, in late 2006, unbeknownst to the Sisters.

A news report on the case in the Boston Herald says the order has 555 sisters in more than 20 states, but most are retirees who depend on the investment with State Street for retirement income.

The suit seeks damages equal to the amount of money lost in the fund as well as profits that would have been made if the money was invested according to the original strategy.

According to the Herald, Arlene Roberts, a spokeswoman for State Street, said the company is prepared to fight the lawsuit. “We will defend ourselves against inappropriate claims, including those who seek recovery of investment losses that arise solely from changes in market conditions,’ she stated.

Last year, the firm set aside a reserve of $625 million to deal with potential lawsuits involving some of its fixed-income strategies (see “State Street Names New SSgA Chief, Takes $279M Reserve’).

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