Court Limits Wachovia's Defenses in Suit over Mortgage-backed Investments

The lawsuit alleges that the pension funds’ fixed-income portfolio lost more than 50% of its value, or $60 million, during 2008 due to imprudent investment in the mortgage-backed securities and collateralized mortgage obligations.

The U.S. District Court for the District of New Jersey first struck down Wachovia’s defense that the pension funds’ complaint failed to state any claim upon which relief could be granted, saying this defense was previously addressed and rejected in its earlier decision denying Wachovia’s motion to dismiss the case.

The court granted the pension funds’ motion to strike Wachovia’s affirmative defense in which it argued that the funds’ claims were barred, in whole or in part, by fiduciary breaches committed by some of the pension funds. Wachovia argued that it executed the investment directions of the pension funds and that if there was any breach by Wachovia, that breach should be mitigated or negated by the pension funds’ own fiduciary breaches.

However, the court said this defense did not agree with the Employee Retirement Income Security Act (ERISA), which establishes individualized liability for fiduciary breaches. The court noted that any fiduciary duty owed by the pension funds with regard to the management of the funds’ assets was to the funds themselves and the funds’ beneficiaries, not to Wachovia.

The court also struck Wachovia’s affirmative defense in which it argued that the funds’ claims should be barred because their investments in the fixed-income fund benefited during periods of rising markets more than they allegedly were damaged during a period of declining markets. The court said the plans’ net investment performance was “inconsequential to a determination of liability or damages under ERISA.” According to the opinion, “if liability is established, the Court must look to how the Plans’ investments would have performed in the absence of a fiduciary breach.”

Finally, the district court granted the pension funds’ motion to strike Wachovia’s affirmative defense that the funds’ claims were barred because Wachovia and the other defendants had complied with “all disclosure requirements” and had informed the plans of their investment risks, saying this defense was vague and did not provide the plans with sufficient information.

The district court rejected three other motions by the funds. It said Wachovia’s defense that the funds had “assumed the risk that any investment of any sort could result in loss” would be a viable defense for Wachovia if discovery revealed that the pension funds had consented to Wachovia’s investment strategy.

In addition, the court found Wachovia’s defense that the funds themselves were liable for any losses due to their failure to accurately and timely disclose and inform Wachovia regarding the level of investment risk the funds were willing to accept was legally sufficient to the extent that Wachovia alleged that it relied on the plans’ risk disclosures in determining the proper investment strategy.

The court also refused to dismiss Wachovia’s affirmative defense that the funds’ claims were barred under ERISA because they were seeking compensatory damages, saying that while ERISA Section 502(a)(2) allows for compensatory damages to remedy fiduciary breaches, it is too early in the litigation to determine whether the funds would be entitled to compensatory damages.

The case is Trustees of the Local 464A United Food and Commercial Workers Union Pension Fund v. Wachovia Bank N.A., D.N.J., No. 09-668 (WJM), 11/24/09.