Southwest's Fiduciary Breach Case Against Brinson Goes Forward

February 2, 2007 ( - U.S. District Judge Sidney Fitzwater of the U.S. District Court for the Northern District of Texas has refused to dismiss a lawsuit brought by two Southwest Airlines Co. 401(k) plans which claims an investment manager serving the plans breached its fiduciary obligations by investing in Enron Corp. debt.

The court said that it was not able to dismiss claims against Brinson Partners Inc., which administered one of the funds that was an investment option for the two 401(k) plans, on whether it violated investment policy rules, and therefore its fiduciary duties. Fitzwater did not make a decision on whether the investment manager agreement was the only relevant plan document, or if other documents, such as the investment policy statement, qualify as Employee Retirement Income Security Act (ERISA) documents.

The court also denied Brinson’s request to move the case to the Northern District of Illinois, saying that the court may not transfer a case where the result is merely to shift the inconvenience of the venue from one party to another.

Brinson purchased a $3,107,000 Enron unsecured bond in October 2001, with a maturity date of August 1, 2002 and also purchased an unsecured Enron loan participation for $55 million. Both of the options plummeted in value when the energy giant collapsed, causing significant loss to the Brinson fund.

Southwest claims that Brinson breached its fiduciary duties by not following the rules that govern the airline’s 401(k) plans, alleging that the plan barred it from purchasing an unsecured bond with a maturity date that exceeded 91 days.

The airline also argued that the $55 million Enron loan participation was “an illiquid, complex investment, unrated by any credit rating agency, and involved an additional layer of credit risk over a normal loan, including not only the risk that the issuer would default, but that the seller would as well.” Southwest also said that Brinson did not get the approval it required from a fund adviser before purchasing the loan participation.

Southwest alleged that Brinson disregarded its own internal investment controls because it was seeking to become a Tier-1 bank to Enron, and Enron would only do business with firms that extended it credit. Southwest estimates that the business Brinson wanted to do with Enron amounted to between $10 million and $15 million in investment banking fees per year. Brinson counters that because it is not an investment bank, it would not have benefited from the fees.

The airline also charged that Brinson pulled $400 million of its own funds out of Enron when the company began its fall, but left the Southwest funds in.

Brinson contends that its investments followed its investment policy.

According to the opinion, the test of prudence under the ERISA is “one of conduct, and not a test of the result of performance of the investment,” making the focus of the inquiry on how Brinson acted in its “selection of the investment, and not whether his investments succeeded of failed.” Brinson, however, argues that at the time of the investments, the market was unaware of Enron’s troubles and the stock prices were stable.

The case is Southwest Airlines Co. Profit Sharing 401(k) Committee v. UBS Global Asset Management (Americas) Inc., f/k/a Brinson Partners Inc., N.D. Tex., No. 3:06-cv-0747-D, 1/29/07.