>US District Judge Catherine Blake of the US District Court for the District of Maryland ruled that Berkshire Life Insurance Co. failed to diversify assets in the two plans affiliated with two medical practices and racked up substantial fees and commissions by “churning” assets from one low-yielding investment to another, according to Washington-based legal publisher BNA
>After finding that Berkshire was a fiduciary, Blake noted that in 12 of the 14 years at issue in the case, 90% or more of the plans’ assets were invested in conservative income products and did not conform to the “modern portfolio theory.” The court also found that Berkshire did not invest the plan assets in an objectively prudent manner, since Berkshire did not investigate the merits of particular investment decisions. For example, the court said Berkshire required that substantial percentages of the doctors’ contributions be placed in life insurance policies without investigating their needs for life insurance. In addition, the court agreed with the doctors that Berkshire’s pattern of rapidly transferring plan assets constituted “churning and was not prudent investing.
>Since Berkshire’s breaches of fiduciary duty caused the losses to the plans, the damages are the difference between the actual value of the plans and the “value prudent investments would bear,” Blake ruled. To calculate damages, Blake said she would consider what asset mix a prudent fiduciary would have maintained for the doctors’ plans during the relevant time frame. Using this as a guide, the court found that a moderate asset mix of approximately 50% equity and 50% income would have been prudent. Applying this framework, the court awarded approximately $665,978 to Paul Meyer and $631,277 to Jorge Ordonez, doctors who had separate but affiliated medical practices.
The case is Meyer v. Berkshire Life Insurance Co., D. Md., No. CCB-99-1432, 3/31/03.
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