In the news lately, there have been reports of pension plans fighting back against investment advisers accused of breaching their duties of prudence and loyalty, in one case securing a settlement with their investment adviser for $642 million.
In the public sector, at least 25 investor lawsuits, predominantly by U.S. public pension funds, including those for Arkansas teachers, New York subway workers, and City of Milwaukee employees, have been filed against Allianz for a total of about $6 billion in damages. The losses stem from Allianz’s use of complex options strategies to generate returns for their $15 billion Structured Alpha funds.
When the coronavirus pandemic caused stock markets to tumble in February and March 2020, the levered Allianz funds could not withstand the sharp volatility and plummeted in value, in some cases by 80% or more.
Lawsuits & Arbitration Involving Investment Advisers
The Arkansas Teacher Retirement System was the first to file a lawsuit against Allianz in July 2020. Arkansas Teachers, which had $1.6 billion in three Structured Alpha funds at the end of 2019, accused Allianz of breach of contract, breach of fiduciary duty and negligence.
In its lawsuit it said it had lost $774 million. In February 2022, Arkansas Teachers approved a $642 million settlement with Allianz. Expecting more settlements to follow, the company has taken a $4.2 billion charge to cover settlements and related costs.
In the private sector, a New York federal judge recently confirmed most of a roughly $140 million arbitration award in favor of the New York State Nurses’ Pension Plan, upholding a finding that its former investment adviser, White Oak Global Advisors, violated the Employee Retirement Income Security Act when it entered into self-dealing arrangements with the plan.
Under the investment management agreement between the Plan and White Oak, the Plan gave White Oak sole, exclusive and full discretion over the management of the pension’s assets. White Oak then exercised that discretion by causing the Plan to invest in a pooled investment fund managed by White Oak that held fractional interests in loans that White Oak had arranged to be made to small businesses.
The Plan’s investment was subject to a “lock up” provision, which meant the Plan had no right to exit the fund unless agreed to by White Oak. The Plan had also agreed to indemnify White Oak for any wrongdoing. These terms had been agreed to by the Plan’s Chief Investment Officer who, after secret employment negotiations with White Oak, left to become the investment adviser’s vice chairman.
After the CIO’s departure, the Plan discovered both the lock-up provision and the indemnification agreement. The Plan promptly sought return of its investment in the fund. White Oak refused and the Plan launched arbitration proceedings against White Oak.
Finding that the fund’s lock up provision and indemnification agreement amounted to prohibited self-dealing transactions under ERISA, the arbitrator ordered White Oak to return the Plan’s investment – approximately $96 million in cash – plus 9% interest and to disgorge its investment management fees earned from the Plan’s assets. It also ordered White Oak to pay the Plan’s attorneys’ fees.
What Is the Significance of These Outcomes?
These cases indicate that investment advisers who engage in self-dealing and take outsize chances with retirement plan assets can have an adverse effect on pension funding. As these cases may be the tip of the iceberg, it’s simply too risky to passively trust your investment adviser to be loyal and prudent without conducting an independent investigation of your own.
Consult with Our Experienced Financial Services Litigation Team
If you have questions or concerns about your investment advisers, Sanford Heisler Sharp has a number of financial services and employment lawyers in San Diego and New York with extensive experience dealing with investment advisers and complex investments who can help evaluate whether you are receiving the quality of service required under the law.