A federal district court has determined that an investment management firm and its only executive officer are liable for losses suffered by defined contribution (DC) plans as a result of non-diversification. 

The court ordered the investment manager to pay the plans $9,710,438, including disgorgement of the $110,438 paid in investment management fees during the period, plus $5,305,889.74 as prejudgment interest. 

U.S. District Judge Laura Taylor Swain of the U.S. District Court for the Southern District of New York found that the retirement plans’ investment committee did all it could do to try to get WPN Corporation and Ronald LaBow, WPN’s principal and sole executive officer, to diversify the portfolio of the trust that held the plans’ assets. According to the court opinion, the committee testified that LaBow’s account of whether and how the plans could be diversified was “an ever evolving story of what could or could not be done” that “seemed to change just about during every conversation.” 

She also found that governing documents did not give LaBow and WPN the option of abdicating responsibility to the retirement plans’ committee. 

LaBow argued that he met with several impediments to diversifying the plans’ assets, including that not all assets the committee wanted were available, that he was not given an investment policy to guide him and that the custodian of the trust did not recognize his authority to direct investments. Swain was persuaded by testimony of several experts to reject these arguments. 

Swain found credible the testimony of a fiduciary expert witness that a prudent fiduciary would have raised clearly with the other named fiduciaries any impediments arising from a perceived lack of authority that a custodian of DC plan assets of Severstal Wheeling Inc. (SWI) and its predecessors, the Wheeling Corrugating Company Retirement Security Plan and the Salaried Employees Pension Plan had asserted.

Swain agreed with the witness that even if LaBow’s authority was not recognized by a bank or other service provider, an investment adviser would normally test authority and, if a trustee failed to recognize that authority, the adviser would go back to the plan sponsor and say, “I’m responsible to achieve diversification. You’re not letting me do it for these reasons. Now, either you want me to achieve diversification, which is my responsibility, or you don’t. If you do, then do the necessary. If you don’t, find someone else.”

Regarding the lack of investment policy, the court found that the Severstal Retirement Committee had adopted a policy that was pre-existing with its former affiliate WHX, and had implicitly communicated this to LaBow. In addition, Swain agreed with testimony that diversified portfolios can be constructed in the absence of formal investment policies, and that investment managers themselves often provide investment policies if the plans they manage do not have one.

According to the court opinion, “LaBow should have, at minimum, presented a plan for diversification … communicated a process for accomplishing that diversification and, if the Severstal Retirement Committee failed to follow his advice, he should have communicated clearly that it was unacceptable to do nothing to diversify the plans’ assets and, if necessary, resigned.”

The court opinion also noted there were several diversification strategies LaBow could have used despite the perceived investment limitations and lack of investment policy.

NEXT: The case

The litigation arises from the transfer of certain employee benefit plan assets from a pooled employee benefit plan trust maintained by SWI’s former affiliate WHX (the Combined Trust) to a separate trust for the three SWI-sponsored plans. The terms of the WHX’s Trust Agreement with Citibank required Citibank, as Trust Custodian, to follow the directions of a designated Investment Manager—WPN and LaBow.

In 2008, Citibank informed the Combined Trust fiduciaries that it intended to withdraw as trustee of the Combined Trust and that the assets of the Severstal Plans had to be transferred to a new and separate trust and placed with a new trustee.

WHX and Severstal had reached an agreement as of September 30, 2008, that the Severstal Plans would receive a proportional allocation of the Combined Trust portfolio. However, LaBow discovered that it was not possible for the new Severstal Trust to receive a “slice” of each Combined Trust investment account because some investment vehicles had liquidity restrictions, which he surmised would have hampered the ability of the Severstal Trust to pay benefits. LaBow also asserted at trial that other Combined Trust investments could not be transferred to the Severstal Trust because they had minimum capital requirements that the Severstal Trust could not meet. WPN and LaBow advised the Severstal Retirement Committee and WHX Pension Investment Committee that the Combined Trust should transfer assets that had no minimum capital requirements and that could be liquidated right away.

LaBow advised WHX to transfer the entire contents of the Neuberger Berman Account—an undiversified portfolio principally comprised of large-cap energy stocks—to the new Severstal Trust on November 3, 2008, instead of cash or a diversified group of investments. Citibank made the transfer at WHX’s direction.

According to the court opinion, LaBow did not put a plan of management in place for the transferred assets, did not liquidate or reinvest those assets, and did not inform the Severstal Retirement Committee of the need for immediate attention to the management of those assets.

The assets of the Severstal Trust, concentrated in eleven energy-sector stocks until defendants liquidated those stocks on March 24, 2009, were undiversified as of the November 3, 2008, transfer and remained undiversified until July 16, 2009, when the retirement committee hired Mercer as investment adviser after firing WPN and LaBow.

In 2014, the Department of Labor filed suit on behalf of participants in the plan.