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Fiduciary Responsibility

 

Unions File ERISA Claims Against Investment Firm, Members File Against Trustees

 

By Tom Alkire

Monday, October 16, 2000

 

PORTLAND, Ore. - Nine union pension and benefit trusts filed a collective claim against a local investment firm alleging a number of violations of the Employee Retirement Income Security Act of 1974 (Hazzard v. Capital Consultants, LLC, D. Ore., No. CV 00-1338, 9/29/00).

 

The action was filed Sept. 29 in the U.S. District Court for the District of Oregon. Also in late September, two participants in the Oregon Laborers-Employers pension and benefit plans filed an action against trustees of the plans (Miller v. Clinton, D.Ore., No. CV 00-1317, 9/26/00).

 

And on Oct. 10, seven participants in the Office and Professional Employees International Union, Local No. 11, filed an action against the trustees of their retirement plan (Schultz v. Kirkland, D.Ore., No. CV00-1377, 10/10/00).

 

The three actions are the latest developments in the unfolding litigation surrounding the Sept. 21 seizure by the federal government of assets of Capital Consultants, LLC, a local investment fund management firm (27 BPR 2341, 9/26/00). The U.S. Department of Labor and the Securities and Exchange Commission both filed lawsuits against Capital Consultants and its owners for alleged violations of ERISA and the Securities and Exchange Act. The government also appointed a permanent receiver for the company.

 

Capital Consultants manages more than $1 billion for 340 clients, most of which are pension trust funds and individuals, according to court documents. At least 60 of the clients are primarily union-sponsored pension, health and welfare plan clients governed by ERISA, according to a statement from the Labor Department's regional office in Seattle. The union plans lost over $100 million and the department said in a statement that it hopes its action will restore these losses.

 

The most recent actions by a number of the union trusts also makes many of the same allegations as did the federal lawsuits and they also seek to restore losses to the trusts. Specifically, the action by the nine union trusts alleged that Capital Consultants defrauded the trusts of $90 million. The action seeks a return of the assets and profits from the wrongful acts.

 

The suit by the trusts charged that Capital Consultants misled the trusts into believing their funds were prudently invested. In fact, the suit charges, Capital Consultants secretly schemed to give away the collateral of the company that it had made loans to from the trusts' money.

 

The suit claimed that Capital Consultants loaned $160 million in client funds beginning in 1995 to Wilshire Credit Corp. through the firm's cash collateralized note program. Wilshire acquired and serviced consumer loans purchased from third parties. Capital Consultants represented to the trusts that the note program was a low risk investment, the suit charged.

 

Near the end of 1998, Wilshire had margin calls from its creditors. Assets in the cash collateral account were released to pay the creditors, a breach of fiduciary duty, the suit charged. These actions and others at the time were not disclosed to the trusts, the suits alleged.

 

The suit charged that Capital Consultants loaned an additional $71 million of clients' money to various entities that purportedly purchased the $160 million loan to Wilshire.

 

The suit alleged a number of violations under ERISA including fraud, breach of fiduciary duty, negligence and unjust enrichment. The trusts involved in the suit include the United Association Union Local 290, Plumber, Steamfitter and Shipfitter Industry Pension Plan, 401(k) Plan and Trust and Health and Welfare Plan and Trust; the Office and Professional Employees International Union, Local No. 11 401(k) Retirement Fund and Health and Welfare Trust; the Signatory Employers-Idaho Laborers Pension Trust Fund; and three plans of the Oregon Laborers-Employers -- the Defined Contribution and 401(k) Plan, the Health and Welfare Trust Fund and the Pension Plan and Trust.

 

The second lawsuit, Miller v. Clinton , was filed by two participants in the Oregon Laborers-Employers plans against the plans' 15 trustees. The suit seeks class action status for at least 15,000 persons, a declaration that the trustees breached their fiduciary duties, an injunction removing them from office and appointing independent trustees, an injunction prohibiting any distributions from their plan accounts and an order requiring them to pay back losses resulting from their breaches, estimated to be $25 million.

 

"The defendant trustees ignored a cardinal rule of investing -- if it sounds too good to be true, then it probably isn't," the suit said.

 

The lawsuit traced the loans made to Wilshire through Capital Consultants and the additional loans made after the bankruptcy of Wilshire. A prudent person would not have gone along with such a scheme, the suit alleged. For example, Capital Consultants represented to the trustees that even though the Wilshire loan carried a high interest rate, that it did not carry a significantly higher level of risk than government securities or money market funds.

 

"A prudent person would not have believed these representations and/or would have carefully investigated them," the suit said.

 

The suit said the trustees breached their fiduciary duty by investing plan assets imprudently, that they failed to exercise their independent judgment regarding investment advice and that some of the trustees were influenced by subsidized hunting and fishing trips from Capital Consultants.

 

The third lawsuit, Schultz v. Kirkland, was filed by seven participants in the 401(k) retirement fund of the Office and Professional Employees International Union, Local No. 11 against the plan's 11 trustees. It makes many of the same allegations of imprudent management and breach of fiduciary duty as the other lawsuits and seeks class action status for at least 3,200 persons. The suit seeks to restore an estimated $8 million the fund lost in the wayward investment schemes.

 

In addition, the suit singled out a well-known Oregon labor leader for accepting favors from Capital Consultants that may have influenced his judgment as a plan trustee. Gary Kirkland is the chief executive officer of Local 11 and a plan trustee. His son, Dean Kirkland, was a leading salesman and officer with Capital Consultants, the suit said. This family connection has played an important role in Gary Kirkland's decision to retain Capital Consultants as an investment manager, the suit said.

 

Moreover, during 1997 Gary Kirkland accompanied his son and other officers of Capital Consultants on two fishing and hunting trips to Alaska, the suit said, adding that Capital Consultants paid for all or part of Gary Kirkland's expenses.

 

By January of this year some of the trustees had begun to talk about replacing Capital Consultants as the plan's investment manger, or at least reducing the amount of the assets under its control, the suit said. Gary Kirkland opposed all such proposals, the suit said. He could not be reached for comment.

 

Like the Laborer's action, Local 11's suit seeks a finding of a breach of fiduciary duty on the part of trustees and an order making up for the losses resulting from their breaches, including forfeiting their plan accounts. The suit also seeks to remove the trustees and appoint independent trustees.

 

Another Local 11 trustee, Wally Mehrens, executive secretary of the Columbia Pacific Building Trades Council, said the trustees launched an investigation of Capital Consultants a number of months ago.

 

"Capital Consultants was not forthcoming or forthright in the information requests," Mehrens told BNA. While a defendant in the Oct. 10 case, Mehrens is a plaintiff in the Sept. 29 filing by the nine union trusts. He said he favored the trusts' lawsuit as a way of trying to recoup its losses due to misrepresentations by Capital Consultants.

 

Copyright © 2000 by The Bureau of National Affairs, Inc., Washington D.C.


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