Attorneys from the law firm of Schlichter Bogard & Denton, which arguably could be said to have started the flood of Employee Retirement Income Security Act (ERISA) excessive fee litigation against retirement plans that has been going on for more than a decade, has been sanctioned by a federal judge for its “reckless” lawsuit.
The case of Obeslo v. Great-West Life & Annuity Insurance Co. and Great-West Capital Management was a consolidated shareholder derivative action under Section 36(b) of the Investment Company Act (ICA). The lawsuit alleged that the fees charged by the defendants violated Section 36(b), which prohibits fees that are “so disproportionately large that [they] bear no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” Three of the plaintiffs had invested in Great-West funds through employer-sponsored retirement plans or individual retirement accounts (IRAs).
U.S. District Judge Christine M. Arguello of the U.S. District Court for the District of Colorado ruled in favor of Great-West on August 7, finding that plaintiffs did not meet their burden of proof and “they did not establish that any actual damages resulted from defendants’ alleged breach of fiduciary duty.” Great-West filed a motion for sanctions on September 1.
In her order granting Great-West’s motion for sanctions, Arguello pointed out that before the trial in the case began, the defendants’ motion for summary judgment called into question testimony from the plaintiffs’ expert witness. His “theories regarding damages were in conflict with non-binding, but well-established, caselaw and the legislative history of the ICA,” the defendants said. The defendants moved to strike the witness as an expert witness, but Arguello denied the motion, noting that he met the minimum legal requirements to offer his opinions at trial. Still, Arguello observed that caselaw suggested that some of the witness’ opinions were factually inaccurate.
“In spite of the red flags that defendants and the court raised with respect to [his] opinions, plaintiffs proceeded to trial, relying on [him] as the sole means of calculating the amount of damages they allegedly suffered. When he testified, [the expert witness] was thoroughly discredited. For instance, he went as far as admitting that some of his opinions were implausible and ‘probably shouldn’t have [been] included’ in his report. His complete lack of credibility as to the element of damages dealt a fatal blow to plaintiffs’ case,” Arguello wrote in her order.
She added that: “Any experienced plaintiffs’ counsel, who objectively assessed the merits of this case, should have anticipated that result.”
Arguello also pointed out that the plaintiffs recognized in their response to the defendants’ motion for sanctions, that “no plaintiff who has pursued a claim under Section 36(b) of the Investment Company Act has ever won in the 50 years of that section’s existence.” So the plaintiffs’ counsel “knew they were facing an uphill battle from the outset of this case.”
Even if she overlooked the plaintiffs’ failure to recognize the flaws in the expert witness’ opinions, Arguello said sanctions under U.S. Code Section 1927 would still be warranted. Section 1927 says, “Any attorney … who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses and attorneys’ fees reasonably incurred because of such conduct.” In her August ruling, Arguello said, “even though they did not have the burden to do so, defendants presented persuasive and credible evidence that overwhelmingly proved that their fees were reasonable and that they did not breach their fiduciary duties.” In her order granting the motion for sanctions, she said if the plaintiffs’ attorneys objectively reviewed the evidence in this case, that fact would have been as obvious to them as it was to her. “At that point, the prudent course of action would have been to voluntarily dismiss the case,” she said.
Making all these matters worse, Arguello said, was that the plaintiffs’ decision to continue through trial was driven by the attorneys. She said the law firm “manufactured this case,” placing a newspaper ad seeking individuals to join the suit. Arguello pointed out in her order that the named plaintiff testified at the trial that when she reviewed her retirement account during the relevant period, it “was making money every time. It kept going up, which is what I wanted.” In addition, none of the other testifying plaintiffs indicated that they were unsatisfied with Great-West’s services prior to joining the suit.
Arguello noted that each plaintiff stood to gain a relatively small amount if they prevailed at trial, but their counsel stood to gain tens of millions of dollars. “Thus, it is reasonable to deduce that plaintiffs’ attorneys had a strong incentive to continue to litigate, even when it became clear that they should not,” she wrote in her order.
Arguello found the attorneys personally liable for the defendants’ “excess costs, expenses and attorney fees reasonably incurred from the period beginning on the first day of trial and ending on the date the defendants filed the motion for sanctions.” She said the total fees and costs shall not exceed $1.5 million.