Economic Damages from ERISA Portfolio Mismanagement

The Issue

One of the largest employee retirement funds in the country at the time with nearly $1b in assets under management.

The fund managers were alleged to have violated their fiduciary duty to maintain proper diversification in the fund by allowing one particular security to make up more than 25% of fund value and up to over 40% of fund value by mid-2015.

There were also allegations against the retirement fund managers of failure to prudently divest the security when accounting irregularities became publicly known in late 2015.

DMA Economics Role

DMA was brought in to calculate how pension fund investors were harmed by the alleged breach of fiduciary duty in failure to adequately diversify the portfolio and prudently divest a particular security when its accounting irregularities became public.

DMA also assisted the client in engaging Richard Marin, a seasoned portfolio manager who could opine on the proper level of portfolio diversification and the time period when the security should have been divested.

DMA was asked to calculate damages to retirees based on simulated but-for portfolio values assuming the fund managers did not violate their fiduciary duty

DMA simulated fund performance under four alternative portfolio management strategies to calculate but-for performance and fund value had the fund not violated their fiduciary duty.

• Maintain below 25% of portfolio value for any individual stock throughout the retirement plan’s existence, then divest the entire position of the stock in question when the fund actually divested the stock in Spring 2016.

• Maintain below 25% of portfolio value for any individual stock throughout the retirement plan’s existence, then divest the entire position of the stock in question when accounting irregularities became known and causation experts testified it would have been prudent to do so in the Fall 2015.

• Divest down to 25% when advised to do so by investment advisory committee who noted their concern that the fund was not adequately diversified then divest the entire position of the stock in question when accounting irregularities became known and causation experts testified it would have been prudent to do so in the Fall 2015.

• Divest down to 25% when directed to do so by investment advisory committee who noted the immediate need to diversify, then divest the entire position of the stock in question when accounting irregularities became known and causation experts testified it would have been prudent to do so in Fall 2015.

DMA’s Approach – Rigorous Analysis Clearly Communicated ®

DMA calculated the value of the portfolio less the value of each but-for simulated portfolio to assess damages for the fund as a whole under each of the four scenarios.

Aggregate damages were calculated to be nearly $300 million under the most accepted scenario.

Damages were then allocated to each retiree based on a month-by-month basis their monthly account balances relative to the value of the fund as a whole.

Damages were calculated as of June 2016, when defendants ceased to manage the pension fund and brought forward to 2020 based on pre-judgment interest.

Using this approach DMA was able to calculate damages for over 400 individual fund investors.

The Result

Arbitrators have concluded that DMA’s calculations were rigorous and clearly communicated and accepted the damages calculations for over 90% of investors.

Thus far, almost every retirement fund investor has been able to recover damages which DMA Economics calculated to be nearly $300 million for all retirement account investors.

Donald M. May PhD, CPA, Managing Partner at DMA Economics, LLC, possesses over 30 years of Valuation and Economic Damages experience. He implements a broad range of damage analyses and valuations for clients, including billion-dollar investment funds under SEC investigation as well multi-national firms involved in intellectual property disputes, consumers in product mislabeling cases, and small to mid-sized businesses involved in complex commercial litigation.

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