Adviser Not Liable for Plans' Bad Investment

A federal appellate court found a registered investment adviser for two pension plans was not a fiduciary for those plans.

In the case of Tiblier v. Dlabal, the 5th U.S. Circuit Court of Appeals affirmed summary judgement in favor of Paul Dlabal by the U.S. District Court for the Western District of Texas. The district court concluded that Dlabal had not violated the Employee Retirement Income Security Act (ERISA) because he provided plaintiffs with written disclosures regarding the investment risks of a particular investment that went sour. The appellate court said it need not address that issue because it concludes Dlabal was not a fiduciary as defined by ERISA. 

In its opinion, the appellate court noted that in order for the defendant to be considered a plan fiduciary under ERISA, the following conditions would have to take place: “(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.”

The 5th Circuit found, “the plaintiffs have not provided any evidence indicating that Dlabal had the authority or control contemplated under subsection (i).” It added that whether the plaintiffs gave Dlabal discretionary authority or control over the plans is irrelevant because it is undisputed that Dlabal did not exercise that authority with respect to the only transaction at issue in the case.

The court said Dlabal is not considered a fiduciary because he did not receive a fee from the plans in connection with the particular investment mentioned in the lawsuit, but rather he received compensation from a third party. While Dlabal was entitled to a recurring annual fee from the plans for this particular investment, he instead chose to take a portion of the commission that Adageo paid to a third-party broker/dealer used to make this private placement investment. "Under our binding precedent in American Federation of Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance Society of the United States, this third party commission is not a fee under §1002(21)(A)(ii)," the court said.

Finally, the court noted the plaintiffs concede that the third prong of the fiduciary test does not apply as Dlabal “played no part in the administration of the plans.”

The lawsuit and subsequent appeal were filed by Eric Tiblier and his wife Susan Tezlaff. The two had employed Dlabal as an investment adviser for their personal investments and for the two pension plans established for Tiblier’s cardiology practice. One investment proposed by Dlabal was the corporate bonds of an oil and gas startup company named Adageo Energy Partners. 

In 2010, Adageo ceased making interest payments to the bonds. In 2012, Tiblier and Tezlaff filed their suit, claiming Dlabal and CACH Capital Management, the firm with which he was affiliated, breached their fiduciary duty under ERISA, including by transfer and self-dealing. In essence, plaintiffs alleged that the Adageo bonds were an unsuitable investment for the plans’ funds, and that Dlabal made multiple oral misrepresentations to plaintiffs in violation of his fiduciary duties.

The ruling by the 5th Circuit can be downloaded here.