Compliance November 13, 2023

United Airlines Sues Advisers for ‘Scheme’ to Defraud 401(k) Pilot Participants

A lawsuit filed in Minnesota federal court claims an independent advisory deceived participants by taking loans from their accounts for ‘personal gain.’

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United Airlines Inc. and its retirement plan committee have filed a complaint against an independent advisory for an alleged scheme to defraud retirement plan participants through a personalized retirement account, according to court filings.

United alleges that Keep Safe Investments LLC, J&K Connect LLC and adviser Krisi Berge had, “unbeknownst to plaintiffs, and contrary to the terms of the plan,” taken loans from the retirement accounts of participants in the United Airlines Pilot Retirement Account Plan for “personal gain.”

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The advisers allegedly obtained more than $1.5 million, charged as “investment management fees,” before United was alerted to the scheme and shut it down, according to United Airlines Inc. et al. v. Keep Safe Investments LLC et al., filed in the U.S. District Court for the District of Minnesota on November 7.

“Through this arrangement, and by falsely representing the amounts to the Plan as fees, Berge, KSI, and J&K obtained control over Plan assets to which they were not entitled, with the intent to use those assets for their own gain,” the complaint states.

The advisers were working with participants who had each opened a self-directed brokerage account called the Personal Choice Retirement Account, provided to the plan via Charles Schwab, according to the court filing. Any deductions for advisory fees from the accounts were earmarked only for advisory services related to participant assets, the plaintiffs wrote.

But the advisers, according to the filing, had participants agree to a “management fee” which they then used to “fund a loan from the participant to J&K” for a term of up to five years, unless rolled to a longer term. J&K would then pay the participant 10% annual interest on the principal for the duration of the loan, at which point the principal and interest would be returned to the participant as a “management fee reimbursement.”

On December 6, 2022, Schwab notified KSI, along with participants who had hired them, that the firm was being dropped as an approved provider, according to the complaint.

On December 12, United and the retirement plan committee informed Berge, KSI and J&K that it had “become aware that amounts charged to the plan as management fees appeared excessive for those services, and that they had further been made aware that some or all of the ‘management fees’ charged to the Plan had actually been used to fund loans to J&K in violation of the Plan’s terms.”

The plaintiffs are seeking to “restore all plan assets to the plan” along with legal fees, damages and “all profits earned by defendants” through use of the plan assets. They are also seeking a trial by jury.

Schwab was not named in the suit as a defendant.

KSI did not respond to request for comment.

The United Airlines Pilot Retirement Account Plan had $11.8 billion in assets under management and 15,404 participants as of 2022, according to Form 5500 filings.

The airline and committee are being represented by attorneys from Nilan Johnson Lewis PA and Seyfarth Shaw LLP.

Compliance November 13, 2023

New Bill Would Require Private Fund Disclosures for Chinese Investments

Senators seek to stymie Americans’ retirement savings being invested in China and other "countries of concern."

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Senators from both parties introduced the Disclosing Investments in Foreign Adversaries Act last week. The bill would require private funds and their advisers to disclose investments in “countries of concern,” specifying China, Iran, North Korea and Russia.

Senators Bob Casey, D-Pennsylvania, and Rick Scott, R-Florida, are the original sponsors of the bill. Both senators expressed concern that Americans’ retirement savings are being invested in China and other countries seen as adversaries: “Currently, private equity, hedge funds, and venture capital firms can invest Americans’ savings and pensions in China without the American people’s knowledge,” stated a release from the senators.

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Scott also expressed concern about the portfolios of other institutional investors: “Without the ability for the U.S. public to monitor investments made by large private equity and venture capital funds in foreign economies, American states, municipalities, universities, unions, and pension funds could unknowingly be investing in the United States’ economic competitors like China and Russia.”

If passed, the bill would require private funds such as hedge, private equity and venture capital funds to disclose annually their holdings in these countries. Advisers to those funds would have to do the same on forms PF and ADV. The disclosures would need to include the percent of that fund’s assets held in countries of concern, the entities in which the funds are invested and the purpose of those investments.

The Securities and Exchange Commission would be required to use those specific disclosures to issue public summaries of those investments on an annual basis.

Though the bill targets four countries, it is one of many specifically intended to curtail investment in China, especially in industries considered critical to U.S. national security, and is framed as such by its sponsors.

Scott, for his part, has introduced at least two other bills requiring special disclosures related to Chinese investment. The Transaction and Sourcing Knowledge Act, introduced in March, would require public firms to disclose any business dealings in Xinjiang Province and any transactions with restricted Chinese companies. The Simply Automatic Filing Extensions Act, also introduced in March, would require public companies to disclose any financial support they receive from China and any positions held currently or previously by their directors with the Chinese government or Chinese Communist Party.

The administration of President Joe Biden has also tightened restrictions this year on investing or doing business with several of the same countries as the bill targets. Early in November, the Department of the Treasury increased sanctions on individuals and organizations providing Russia with technology and equipment from third countries that aid the Russian military.”

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