DB Investment Suit Cleared for Trial

November 9, 2007 (PLANSPONSOR.com) - A federal judge has cleared the way for a legal battle between a defined benefit plan sponsor and its former investment manager over whether the plan was too heavily invested in certain stocks.

U.S. District Judge Louis H. Pollak of the U.S. District Court for the Eastern District of Pennsylvania denied requests from both Alco Industries and Wachovia Corp. to rule in their favor, based on the legal issues involved and without taking additional testimony.

In his ruling,Pollak found that both Alco and Wachovia had provided expert testimony supporting their opposing arguments on whether Wachovia’s investment strategy for Alco’s plans had been prudent. Wachovia handled the defined benefit plan’s investments for the Cranbury, New Jersey home décor importer from 1989 to 2002.

The dispute began with Alco’s 2004 lawsuit in which the company charged Wachovia with violating its duties under the Employee Retirement Income Security Act (ERISA) by failing to diversify the plan’s equity holdings.  By concentrating on the technology, media, and telecommunications industries, Alco alleged, Wachovia ended up causing the plan significant investment losses.

align=”left”>Alco claims that the breach began in July 1999 when it adopted a formal investment policy statement that called for the plan assets to be “well-diversified” and spread among small-, mid-, and large-cap stocks. Wachovia, on the other hand, according to the ruling, claimed it employed the same investment strategy from at least 1996 and that Alco understood and approved of that strategy. Judge Pollak then noted, “According to Wachovia, then, the breach—ifthere was one, which it of course denies—began no later than 1996.”

align=”left”>This apparent contradiction – Wachovia’s position that no breach occurred, but if it did, it did so some three years earlier than Alco argued – was acknowledged by the court.  “It may seem bizarre for Wachovia, while strenuously denying any breach, to argue in the alternative that the breach began earlier than plaintiff asserts. But the reason is simple: the disputed strategy was apparently quite profitable in the heady 1990s, and only became unprofitable during the so-called “dot com bust” and “telecom meltdown” of 2000 – 2001.  Under well-settled principles of trust law, defendants are entitled to offset profits from a single, continuous breach of trust against losses flowing from that same breach, so Wachovia has a significant interest in showing that any breach began well before the market turned sour in 2000.”

align=”left”> Expert “Opinion”

Pollak also turned away demands from both sides that he prevent their opponents from introducing certain evidence from expert witnesses including Alco’s objections to a Wachovia witness who the court said was prepared to offer testimony that Wachovia’s investment strategy, when measured over a five-year period, produced better returns than a benchmark diversified portfolio.

The court also rebuffed Wachovia’s request to throw out Alco’s lawsuit as having been filed beyond ERISA’s time limits. According to Pollak, ERISA requires that fiduciary breach claims be filed before the earlier of six years after the date of the last action constituting the breach of duty and three years after the plaintiff had actual knowledge of the breach.

Pollak asserted that the first step in deciding whether an ERISA fiduciary breaches the duty of prudent investment is to determine whether the investment portfolio was sufficiently diversified. If it wasn’t, the next question is whether the plan fiduciary can prove that its investment strategy was nonetheless prudent, the court said.

Pollak’s ruling in Alco Industries Inc. v. Wachovia Corp.,   E.D. Pa., No. 04-6090, 11/5/07 is  here .