Filed in a Memphis US District Court by trustees of Corky’s Bar-B-Que Inc.’s employee benefit plans, the suit seeks class action status accusing the defendants of violating the Employee Retirement Income Security Act (ERISA) and the Racketeer Influenced and Corrupt Organizations (RICO) Act.
The suit said the defendants proposed a flat fee structure for Corky’s employee benefits plan under the understanding that overall fees would be reduced. However, after trustee signed the new agreement in 1998, they claimed it contained many hidden charges that put total plan fees above the level before the new agreement.
Named as defendants of the suit are NCFC subsidiaries First Mercantile, NBC and First Mercantile Capital Management Inc, in addition to First Mercantile’s CEO Kenneth Lenoir and the company president Bryan Scot Lenoir.
First Mercantile, who became administrator of Corky’s profit-sharing and 401(k) plans in 1995, had an initial agreement with the company to charge 2.10% of assets in plans whose money was placed with stock investment managers and lesser percentages for fixed-income and guaranteed investment contract (GIC) accounts.
However, in May 1998, First Mercantile proposed a flat fee structure of 1.49% for equity accounts, 0.95% for fixed-income accounts and 0.49% for plans using GICs.
Corky’s trustees claim that First Mercantile officials created the impression that those were the only fees being charged, when in reality other “undisclosed” charges and fees pushed the real cost back to or above the pre-1998 levels.
The suit claims the Lenoirs’ proposed the new agreement as a means of attracting a financial institution to buy their company at a substantial premium. NCFC was that buyer, acquiring the firm in 2000 for $35 million in cash and stock.
Further, the suit alleges that NBC officials knew or should have known about the overcharges and silenced employees who tried to alert managers to them.
Once word got out about the fee structure, First Mercantile officials tried to get plan clients to sign a new agreement as an “update” to their files that, in effect, would have ratified the previous fee setup.
However, NCFC spokeswoman Eileen Sarro said the agreements were sent out in October after First Mercantile managers decided some client information and agreements were out of date and lacked documentation on trustee fees.
“First Mercantile sent to all affected customers a letter explaining that they had been charged additional fees for trust services that were not included in existing documentation and requesting that they sign a new customer agreement,” which included acceptance of past and future fees, she said.
Planned Got “Sauced”
According to the allegations, since Corky’s trustees signed an agreement with a new fee schedule in late 2000, plan assets have declined $250,000.
Sarro said the banking firm ” considers the complaint to contain grossly inaccurate assertions, (and) grossly exaggerated damages.”
The trustees are asking the court to rescind the investment contracts the plan participants have with First Mercantile and for the company to make restitution of $775 million for losses suffered by the plans during the past four years, in addition to repayment of the overcharges.
The potential damages could reach more than $1 billion, if the court agrees with the class-action request and if triple damages are awarded on the alleged fee overcharges, according to the report.