DOL Targets Imprudent Margin Investing

The Department of Labor’s Employee Benefits Security Administration (EBSA) filed a complaint in federal court against a Tennessee profit-sharing plan over allegedly imprudent margin investing that triggered plan losses.

The EBSA names Ditch Witch Equipment of Tennessee Inc., former owner Aubrey Needham and the Ditch Witch Equipment of Tennessee Inc. Profit-Sharing Plan as defendants in the complaint, filed with the U.S. District Court for the Eastern District of Tennessee, Knoxville Division.

The text of the complaint alleges that in 2005, defendant Aubrey Needham entered the company’s profit-sharing plan into a margin agreement account which allowed him to make plan investments on margin. Needham began purchasing stock warrants as plan investments, and as a result of purchases on margin, the plan’s margin account had a negative balance of more than $500,000 by the end of 2005.

To satisfy the margin calls, the EBSA says Needham liquidated other plan investments in various mutual funds. In late 2006, Needham had liquidated all of the plan’s mutual fund investments and all plan assets were invested in stock warrants of a publicly traded company, Star Maritime Acquisition Corp (SMAC). In April 2007, Needham liquidated the SMAC stock warrants and began purchasing stock warrants of another publicly-traded company, Health Care Acquisition Co., which became PharmAthene Inc. In August 2007, 100% of the plan assets were invested in PharmAthene stock warrants, and plan assets remained solely invested in PharmAthene stock warrants and stock through April 2009. As a result of the plan’s investments in PharmAthene, the plan suffered net losses totaling at least $359,770, the EBSA says.

The complaint charges Needham with failing to give appropriate consideration to whether the investments or investment course of action was reasonably designed to further the purposes of the plan. Needham is also charged with failing to take into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action. The defendant also failed to appropriately consider: the composition of the plan’s investment portfolio with regard to diversification; the liquidity and return of the portfolio relative to the anticipated cash flow requirements of the plan; and the projected return of the portfolio relative to the funding objectives of the plan.

The EBSA’s complaint seeks a court order requiring the defendants to restore all losses to the plan, including interest, and to disgorge any benefits or profits received by any plan fiduciaries as a result of fiduciary violations. The complaint also seeks to remove defendants from their positions as fiduciaries with respect to the plan, and permanently bar them from serving as fiduciaries for, or having control over the assets of, any employee benefit plan subject to Employee Retirement Income Security Act.

The full text of the complaint (docket number 3:14-cv-00171) is available here.