Compliance June 4, 2018

Invesco Latest Target of ERISA Self-Dealing Lawsuit

In a complicated complaint filed in federal district court, participants in Invesco’s retirement plan say they have been subject to disloyal and imprudent decisions made by conflicted plan officials.

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Invesco is the latest retirement plan services provider to become the target of a self-dealing lawsuit seeking relief under the Employee Retirement Income Security Act (ERISA).

The complaint was filed in the United States District Court for the Northern District of Georgia, Atlanta Division. The suit has a laundry list of defendants from across the Invesco organization, including individual officers and managers.

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Allegations leveled in the proposed self-dealing class action challenge vary widely and include many similar to other litigation. The plan is accused of offering too many investment options—nearly all of them affiliated in some way with Invesco—and of failing to use its leverage as one of the larger employer-sponsored retirement programs in the U.S. to negotiate for reduced costs for the benefit of plan participants.

Beyond these allegations, plan officials and Invesco leaders are accused of breaching their fiduciary duties by offering imprudent affiliated exchange-traded fund (ETF) investment products to participants. Further, the lawsuit alleges that the plan offered worse-performing retail shares instead of better-performing institutional shares.

The list of allegations goes on to suggest the firm added poorly performing proprietary mutual funds to the plan; that it offered imprudent Invesco-branded target-date funds (TDFs) with high expenses and poor performance; and that the plan fiduciaries erred in connection with offering collective investment trusts. In particular, plaintiffs call out the allegedly imprudent offering of the Invesco 500 Index Trust Fund, the Invesco Mid Cap Growth Trust, and the Invesco Diversified Dividend Trust. In all, the complaint lays out six proposed counts for breaches of fiduciary duty and prohibited transactions.

Summarizing their allegations, plaintiffs suggest defendants did not consider or act in the best interest of the plan and its participants throughout the class period.

“Instead, defendants put their interests before the plan participants by treating the plan as an opportunity to promote and generate fees from proprietary investment products offered by Invesco and its subsidiaries,” they allege. “During the class period, Invesco and the other defendants used plan participants as a captive market for Invesco’s proprietary investment products to benefit Invesco. Instead of engaging in a prudent process to find the best investment options for the plan, defendants simply loaded it with Invesco proprietary investment options.”

According to the complaint, during the class period, between 93% and 95% of the plan’s investment options were affiliated with Invesco. Many of the plan’s investment options performed worse and/or had higher fees than other comparable unaffiliated investment options, the complaint alleges.

“The utter lack of a prudent process followed by defendants is also shown by the large number and type of investment options offered in the plan,” the complaint states. “Even though the typical 401(k) plan offers between 10 and 15 investments the plan had approximately 150 to 205 options during the class period. Defendants indiscriminately dumped Invesco mutual funds, ETFs, and other investment products into the plan in breach of their fiduciary duties.”

The plaintiffs seek to establish that the large number of options made their selection by plan participants confusing, especially since the plan allegedly offered multiple share classes (with different fees and performance results) of numerous funds.

“Furthermore, several investment options exposed plan participants to an undisclosed liquidity risk as a result of their investments in another proprietary Invesco fund named the Invesco Short Term Investment Fund, which was fined $10 million by the U.S. Department of Labor for inappropriately using fund assets to artificially inflate the net asset value of that fund,” the complaint states. “Defendants acted in their own interests to the detriment of plan participants. Instead of carefully examining and selecting the most prudent investment options for the plan or prudently monitoring the plan to eliminate its poor investment options, defendants caused the plan to offer almost exclusively Invesco affiliated mutual funds, collective trusts, and ETFs enabling Invesco and its subsidiaries to earn lucrative fees and to increase its assets under management.”

To remedy these alleged fiduciary breaches and prohibited transactions, the lawsuit seeks to recover “all losses resulting from defendants’ breaches of fiduciary duty and other ERISA violations and restore to the plan any profits made by the fiduciaries or the persons and/or entities who knowingly participated in the fiduciaries’ imprudent and disloyal use of plan assets.”

Invesco declined to offer comment on the filing of the lawsuit, noting that it does not speak about ongoing litigation. The full text of the lawsuit is available here.

Compliance June 4, 2018

Plaintiff Loses Second Attempt at Stock Drop Suit Against Edison

A federal judge is allowing the plaintiff one last chance to make more context-specific arguments in her case.

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A judge has once again dismissed a lawsuit brought by an employee in Edison International’s 401(k) plan who alleges plan fiduciaries continued to offer company stock as an investment option in the plan when it was no longer prudent to do so.

The lawsuit was filed against the chief executive officer (CEO) of Edison and the vice president and treasurer of Edison who was also a member of the Trust Investment Committee. It was filed after Southern California Edison Company (SCE), a subsidiary of Edison International, was charged with “fraud by concealment” in a dealing with the California Public Utilities Commission. A settlement of the action apparently raised investors’ confidence in Edison, thus raising its stock price. However, a finding after the settlement that Edison failed to deliver certain communications, which was revealed in pieces over time, caused Edison’s stock price to fall.

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As in her first complaint, the plaintiff alleged in a second amended complaint (SAC) that as a result of SCE’s “materially false and misleading statements and omissions,” Edison’s stock price rose to more than $66 per share, and was trading at “artificially inflated prices during the Class Period.” The compliant says the stock price continued to correct as the truth emerged over the next few months.

U.S. District Judge John A. Kronstadt of the U.S. District Court for the Central District of California previously found the plaintiff failed to propose alternative actions that a prudent fiduciary would not have viewed as more likely to harm the fund than help it, as required by the standard in the Supreme Court’s ruling in Fifth Third v. Dudenhoeffer. The plaintiff alleged two alternative actions defendants could have taken: made corrective disclosures to the public, thereby allowing the market to cause the price of Edison stock to return to its true value; or amended the plan to suspend new investments in the stock fund—or remove the stock fund as an investment option altogether—until such time as it was no longer an imprudent investment. Kronstadt allowed the plaintiff to file an amended complaint with more context-specific proof.

More arguments in the SAC

In the SAC, the plaintiff says the vice president and treasurer of Edison should have understood the significance of the steady increase in implied volatility for the company stock—the greater the increase, the more volatile and risky Edison common stock was, and thus the more likely a stock-price correction would be harsher. She also argues that, “Had the overall trend in Edison’s implied volatility during the Class Period been in the opposite direction, [the vice president and treasurer of Edison] might have been able to make a reasonable argument that holding off corrective disclosure was the better option—the one likely to cause less harm to Plan participants—because the harshness of the stock-price correction was likely softening.”

However, the plaintiff contends the trend of increasing implied volatility was a clear signal that acting sooner to correct Edison’s fraud was likely to cause less harm than acting later would. According to the plaintiff, Edison’s declining bond price was another indicator of growing underlying corporate risk at Edison. She says this trend, combined with the trend of increasing implied volatility, was a clear indication to any prudent fiduciary that any stock-price correction that Edison experienced was going to be more severe as the bond price dropped and the implied volatility rose.

The plaintiff applied these arguments to the secondary option of closing the stock fund to new investments until the artificial inflation ended. “Given the increasing implied volatility and decreasing bond prices, as well as the reputational damage that a longer fraud would cause, a cessation of trading at an earlier time, even if it necessitated some public disclosure about the fact of the cessation, could not reasonably be believed to be likely to cause ‘more harm than good’ to Plan participants… Any stock-price drop that might have resulted from the temporary closing of the Stock Fund would be less than the stock-price drop that ultimately occurred after an unnecessarily prolonged and reputation-damaging fraud,” the complaint says.

However, Kronstadt found prudent fiduciaries in the same position as the defendants could have viewed both of the alternative actions as more likely to harm the plan than to help it. He found it insufficient that the SAC offers some “insight into how far the stock price would have dropped if disclosure was made earlier.” The plaintiff alleged that “[w]hereas on March 31, 2014, corrective disclosure would have resulted in, at worst, a $3 price correction, on January 30, 2015, the same corrective disclosure would have resulted in a potential $15 price correction because Edison’s stock was trading at $64.00.” But, Kronstadt said even if Edison’s stock price would have “dropped marginally as a result of a corrective disclosure, the net effect of that drop could have been substantial, causing substantial harm to plan members.”

Kronstadt also found the allegations in the SAC regarding inevitable harm do not withstand the “context-sensitive scrutiny” under Fifth Third, saying they are framed in a manner that could apply to any similar Employee Retirement Income Security Act (ERISA) claim. The allegations in the SAC regarding reputational damage are also generic, he said.

In addition, Kronstadt said the SAC doesn’t present any context-specific allegations that could plausibly support the allegation that a reasonably prudent fiduciary would not decide that, if the stock fund were closed to new investments until the artificial inflation ended, it would more likely cause harm than good to the fund. Citing the Supreme Court’s decision in Amgen v. Harris, the complaint says, closing the fund without explanation might be even worse: “It signals that something may be deeply wrong inside a company but doesn’t provide the market with information to gauge the stock’s true value.”

Kronstadt admitted that the Fifth Third standard is difficult to meet, noting that the vast majority of ERISA duty of prudence claims brought against employee stock ownership plans (ESOPs) since then have foundered on the pleading requirements. The plaintiff conceded that if her claim against the vice president and treasurer of Edison is dismissed then her claim against the CEO should be also, so Kronstadt dismissed the suit. However, he allowed the plaintiff one final chance to amend the complaint, no later than June 19.

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