Retirement Plan Trustee not Responsible for Adviser Fraud

May 20, 2011 ( – A federal appeals court has ruled that UMB Bank is not responsible for losses to retirement plan accounts from investments directed by participants’ investment adviser.

The 6th U.S. Circuit Court of Appeals ruled that the two doctors from the Toledo Clinic failed to create a genuine issue as to whether UMB concealed material non-public facts regarding adviser Bill Davis’s fraud. In addition, the court noted the doctors do not contend that they were subject to improper influence or were legally incompetent.   

The court found that consequently, the doctors exercised “independent control in fact” over their accounts.  

The court rejected the Secretary of Labor’s argument in an amicus brief that the doctors’ losses were not “the direct and necessary result” of their control of their investments. The Secretary says that those losses resulted instead from UMB’s alleged cover-up of Davis’s fraud. The court said the Secretary also gives little more than complaint cites in support of its theory, “which it should know is not enough to avoid summary judgment.”  

According to the opinion: “The reality is that the doctors chose Davis as their advisor, gave him a blank check to invest their money, and then directed UMB to value their investments at cost, without investigation. Those decisions caused the doctors’ losses. UMB’s conduct falls within the § 1104(c) safe harbor, which means that the district court was right to grant summary judgment to UMB on the doctors’ claims.”  

Doctors David Tullis and Michael Mack both lost substantial amounts of money from their pension accounts because their investment adviser, Bill Davis, was a crook. UMB Bank was the trustee of those accounts. The doctors allege that UMB knew that Davis was a fraud years before that information became public, and assert that UMB violated its fiduciary duties under the Employee Retirement Income Security Act by not telling them so.  

UMB responded that it did not know about Davis’s fraud any sooner than the doctors did, and that it falls within ERISA’s safe-harbor provision for participant-controlled accounts (29 U.S.C. § 1104(c)).  

According to the opinion, the doctors chose to have individually directed accounts which allowed them to choose which assets they invested in, with no limitations on the types of assets they could pick. To purchase an asset, the doctors would sign a directive telling UMB what to do. These forms expressly disclaimed UMB’s liability for the transaction.  

In spring 2003, a federal district court ordered Davis’s company, Continental Capital, to cease operations. It turned out that Davis had been defrauding the doctors and that many of the assets in their accounts were worthless. Tullis suffered over $500,000 in losses, Mack close to $1 million.  

The 6th Circuit’s opinion is here