Compliance December 28, 2009

Consultant Claims He Wasn’t Paid for Pension’s Suit against Smith Barney

The self-proclaimed “Sam Spade of Money Management” is taking a former client to court.
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According to the Palm Beach Post, attorney-turned-scam-detector Edward Siedle claims he was hired by the pension board of the Delray Beach police and firefighters to investigate suspicions that it was being duped by Salomon Smith Barney, which oversaw its $120 million investment portfolio from 1995 to 2006 (see “Smith Barney Fails to Remove Pension Case from Court”).

The lawsuit, filed last week in Palm Beach County Circuit Court, claims that the pension board didn’t pay Siedle for work that helped it launch a $9 million lawsuit against its investment consultant. 

Siedle, president of Benchmark Financial Services, claims that information he uncovered during his four-year investigation was used by the pension board to sue Smith Barney in November 2008 (see “City Pension Board Seeking Settlement from Broker on Trading Fees”).

In the lawsuit now pending in U.S. District Court, the board claims Smith Barney “intentionally, recklessly or negligently” mismanaged the fund and misrepresented how much the board was making on its investments. “[It] painted a rosier picture of the fund’s performance than was actually true,” according to the federal lawsuit.

The suit also accuses Smith Barney of self-dealing, claiming that the firm used its position as the pension board’s money manager to become a broker so it could collect commissions on the pension board’s investments. The board is seeking the return of the more than $9 million it would have made had Smith Barney managed the portfolio properly. It is also asking the firm to return fees it paid for services that weren’t performed.

However, in his lawsuit, Siedle said much of the information was uncovered during his investigation—and that he is owed $945,750. For its part, Smith Barney has repeatedly denied the claims in the pension board’s lawsuit.

Compliance December 28, 2009

Principal's Hold on Real Estate Fund Sparks Lawsuit

After imposing a withdrawal queue on distributions from a real estate fund, The Principal Financial Group now finds itself targeted with a participant lawsuit.
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According to an update on the Keller Rohrback Web site, the complaint alleges that Principal breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by managing the investment of the retirement assets in the Property Account “inconsistently with the Property Account’s stated objective to maintain adequate liquidity to provide for daily withdrawals.”  

The Seattle-based law firm filed a complaint in the United States District Court for the Southern District of New York on behalf of plaintiff/participant Dennis P. Mullaney “and a group of investors in the Principal U.S. Property Account (the ‘Property Account’), a real estate separate account managed by Principal.”  The Property Account is an open-end, commingled, separate account fund invested primarily in real estate holdings. 

On September 26, 2008, Principal imposed a withdrawal freeze, closing the Property Account to withdrawals. Mullaney, a participant in the Judicial Title Insurance Agency LLC Incentive Savings Plan, in November 2008 requested a withdrawal from that Property Account, but “was informed that Principal would not comply with this request,” and was subsequently “informed that he was placed into the Withdrawal Queue.”  

The Queue 

For its part, Principal has described the move to “apply a contractual limitation which delays the payment of withdrawal requests and provides for payment of such requests on a pro rata basis (a ‘Queue’) as cash becomes available for distribution, as determined by Principal Life,” as being in the best interests of fund shareholders. On March 31, 2009, the outstanding balance in the queue was $1,035.5 million (24.0% of the net asset value of the account), according to the Principal U.S. Property Account First Quarter 2009 Performance Report. 

In its first quarter 2009 performance report on the fund, Principal noted that, “to date, cash generated from property cash flow, the sale of assets, and investor contributions has been utilized to reduce the debt obligations of the Account and maintain compliance with all investment guidelines and debt covenants”—and noted that “distributions to investors in the Queue are unlikely to occur before late 2009 and will depend primarily on the ability to sell properties at prices consistent with the best interest of all Account investors.”“Focus on Liquidity”

Keller Rohrback said that Principal offered the Property Account to retirement plans throughout the country as a “low risk” retirement savings option with a “strong focus on liquidity.”   Moreover, the law firm said that “by preventing ERISA plans and plan participants from withdrawing their money from the Property Account, Principal forced these investors to sustain staggering losses as the assets in the Fund declined in value.”

“Accordingly, Plaintiff alleges that Principal, as the investment fiduciary for the Property Account for ERISA retirement plans throughout the country, and Principal’s employees who were responsible for managing the assets invested in the Property Account, breached their duties of prudence, loyalty, and exclusive purpose under ERISA § 404(a) by recklessly and imprudently investing the assets of the Property Account in a manner contrary to the stated objectives of the Property Account,” according to Keller Rohrback.

The case is Dennis P. Mullaney, et al. v. Principal Global Investors, et al.  A copy of the complaint is available here.

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