It sends chills up your spine. There, in less than 100 pages, is a tale of alleged corporate self-dealing and executive intrigue involving millions of dollars and thousands of people.
On page 6, it tells of a plot to create a profitable new business using hundreds of millions of employee pension fund money. On page 10, it tells how executives got special cash bonuses from the profitability of the business that used this money. On page 14, it starts to tell the story of the protagonists’ promising career and how it was derailed after he learned of the internal scheme to use pension and 401k money.
There’s more. On page 39, it tells how “tens of millions” of pension fund assets were pumped into an International Equity fund to keep it from collapsing as outside investors redeemed shares in the 1997-1998 Asian collapse. On page 64 the protagonist meets his boss in a hotel conference room where he is summarily fired and asked for the keys to his office, on grounds of “insubordination”— only six days after receiving a raise, bonus, and positive review from the President and CEO of the company.
A novel by John Grisham or Paul Erdman?
Not at all.
This is real life. It’s the pleading in a recently filed lawsuit, available as a PDF file at www.newyorklifesuit.com. First filed last October as a wrongful termination suit on behalf of James A. Mehling, a former Vice President of New York Life, it was amended and refiled two weeks ago as a class action subject to treble damages under the Racketeering Influenced and Corrupt Organizations Act (RICO).
Filed by a consortium of three law firms (Sprenger & Lang, PLLC in Washington, D.C. and Minneapolis; Stief, Waite, Gross, Sagoskin, & Gilman in Bucks County, Pennsylvania, and Sandals, Langer & Taylor in Philadelphia), the suit is one of a collage of suits filed since last fall that allege misuse of money in employee pension, 401(k), and profit sharing plans.
One is against First Union and Signet Bank for expensive investment changes in employee 401k plans; another is against SBC for changes in profit sharing plan holdings that cost participants more than $1 billion in lost capital gains.
The basic charge in the Mehling suit is that New York Life, wanting to get into the mutual fund business, got into it by using assets in employee pension plans. The suit alleges that the insurance company took millions of dollars out of pension plan funds and transferred them to newly created institutional mutual funds.
A few years later, the suit alleges, New York Life did the same thing with its 401(k) plan, taking money from low cost funds and transferring it to proprietary MainStay funds.
In both instances, the suit alleges, the cost of managing the money increased. Without the employee money, the suit alleges, New York Life would have lost millions operating its mutual fund business and executives associated with the fund business would have lost their bonuses.
New York Life legal counsel Steve Saxon, a partner with Groom, a Washington D.C. based law firm said, “We think they’ve misunderstood who we are and how these plans work.”
George Trapp, Executive Vice President of New York Life, said, “We’re outraged at the lawsuit. In a DB (defined benefit) plan the benefit is derived from the final average pay and years of service. The company contributes the money and supports the plan. It was overfunded by $21 million in 1991 and was overfunded by $900 million at the end of 1999. Over that time the company didn’t contribute a single dollar to the plan. We find it somewhat amazing that anyone would contest that.”
Mr. Saxon and Mr. Trapp also deny the higher cost allegations, citing a comparison of MainStay fund expenses with Morningstar averages for comparable funds.
“That’s ridiculous.” Russ LaBarge commented. “If you’re talking about a plan in the hundreds of millions you don’t use Morningstar as a source for comparable fees.” Mr. LaBarge is a principal at Strategic Capital Investment Advisors, an investment consulting firm in Oak Brook, Illinois.
For New York Life the consequences of the suit, if lost, go far beyond the cost of any settlement. One possibility is that the company could be barred, under ERISA (the Employee Retirement Income Security Act) from acting as a fiduciary, essentially black balling it from the money management business.
“It has a chilling aspect.” Mr. Trapp said. “… Who will want to start a defined contribution plan if they could face this kind of litigation.”
How will it end?
The only thing certain is that it won’t be over any time soon. Regardless of outcome, however, the growing number of lawsuits around 401k and 403b plans means that all plan sponsors had better pay attention to the cost of products in their plans.
The litigation light is on.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: olia danilevich
(c) Scott Burns, 2022