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The U.S. Supreme Court agreed on June 28 to review Thole v. U.S. Bank. Oral arguments are not yet
scheduled. (AP file photo)

SCOTUS accepts Minnesota pension case

 By: Kevin Featherly  July 10, 2019 0

The U.S. Supreme Court will hear a Minnesota case that could determine whether negligent
private pension-fund fiduciaries can be held to account in civil court for plan shortages—even
if they somehow scramble to maneuver plans back into the black in mid-litigation.

The lawsuit, Thole v. U.S. Bank, is a class action filed by a group of retired U.S. Bank
employees. It accuses their former company of drastically mismanaging their pension
portfolio between 2007 and 2010, needlessly deploying a high-risk/high-reward investment
strategy that at one point drained the fund of almost $750 million.

The Supreme Court will hear their appeal of a 2017 U.S. 8th Circuit Court of Appeals opinion,
which went against them. That ruling characterized U.S. Bank’s pension-fund mess as the
result of “a relatively modest but allegedly imprudent investment.”

The retirees have backing from the Trump administration. In May, Solicitor General Noel
Francisco filed an amicus brief urging the U.S. Supreme Court to take up the case.

Francisco described it as an important case that involves a question “that arises with some
frequency.” His brief asserts that the litigants had standing to file both under Article III of
the U.S. Constitution—which the 8th Circuit did not consider—and under ERISA laws.

The Court of Appeals was wrong, the solicitor general wrote, to rule that plaintiffs lacked
statutory standing to sue under the Employee Retirement Income Security Act of 1974.

If you’re taken aback to hear the solidly pro-business Trump administration siding with a
group defined-benefit pensioners suing a major financial institution, plaintiff’s attorneys do
not share your sense of surprise.

“I think basically it was such an egregious example of pension mismanagement that it was
hard for any administration to endorse the 8th Circuit’s ruling,” said Michelle Yau, a partner
at Washington, D.C.-based law firm Cohen Milstein, one of the firms representing plaintiffs.

The U.S. Supreme Court agreed on June 28 to review the case. Oral arguments are not yet
scheduled.

Equities strategy
Plaintiffs say U.S. Bank’s fiduciaries invested all their pension assets into equities—largely
stocks—with no hint of portfolio diversification. About 40 percent of the assets went into a
mutual fund that, at the time, was controlled by parent company U.S. Bancorp.

That move allowed the company both to profit from the fund through artificially generated
fund-management fees and to attract more investors, plaintiffs argue.

U.S. Bancorp later sold its mutual fund manager, FAF Advisors, Inc., to another company,
Nuveen Asset Management, L.L.C., which also is named in the suit but which was dismissed
by the court.

Plaintiffs allege that the bank’s risky strategy benefited its stockholders. Before the economy
collapsed in 2008, some of the company’s stocks were sold at inflated prices, according to
court documents. That’s because the company, for a time, reported higher revenues—thus
higher stock values—when the pension fund’s investments briefly generated income.

Plaintiffs filed suit in late 2013, seeking an injunction to halt what they call the company’s
“100% percent equity” scheme. Shortly after they sued, they allege, bank officials poured
$311 million of corporate money into the pension fund, leaving it suddenly over-funded.

That development led U.S. District Court Judge Joan Ericksen to rule the suit moot, because
plaintiffs had suffered no concrete injury. She added that there was no evidence the fund’s
cash big infusion had any connection to the civil case.

In a 2-1 ruling on Oct. 12, 2017, the U.S. 8th Circuit Court of Appeals upheld Ericksen. The
majority—Chief Judge Lavenski R. Smith and Judge Steven Colloton—ruled that federal law
does not permit pensioners to sue for fiduciary violations, once a plan is over-funded.

.
Citing its own McCulloch v. AEGON USA Inc (2009) precedent, the 8th Circuit added that,
because the pension fund is in the black and pensioners’ interests are protected, allowing the
suit to proceed might be the more damaging option.

“In fact, their ‘rights would if anything be adversely affected by subjecting the plan and its
fiduciaries to costly litigation brought by parties who have suffered no injury from a relatively
modest but allegedly imprudent investment,’” Smith’s opinion states, citing McCulloch.

Judge Jane Kelly dissented in part. She agreed that Nuveen couldn’t be sued; it wasn’t
involved at the time the investment strategy was instituted.

But she disagreed that plaintiffs suffered no injury and had no standing to sue to prevent the
company from ever again exposing their retirement money to such risk.

“The relief sought is not monetary, but injunctive, and the injury alleged is not speculative,”
Kelly wrote in her dissent. “Moreover, the complaint alleges that at least some of the
defendants continue to serve as plan fiduciaries and remain positioned to resume their
alleged ERISA violations.”

U.S. Bancorp declined to put its attorneys in touch with Minnesota Lawyer. Its policy is not to
comment publicly while litigation is pending, a spokeswoman said.

In its brief opposing the writ of certiorari, U.S. Bank argues that the 8th Circuit got it right
and that the Supreme Court should reject review. In part, that is because there is no
reasonable possibility the challenged investment practices would ever again be implemented,
they argue.

According to the brief, the episode boils down to a case of no harm, no foul—even assuming
there was fund mismanagement at one time. The entire fund was never in jeopardy, they
indicate.

“As this Court has observed,” the brief states, “‘[m]isconduct by the administrators of a
defined benefit plan will not affect an individual’s entitlement to a defined benefit, unless it
creates or enhances the risk of default by the entire plan.”

Far-reaching implications
Yau calls Thole v. U.S. Bank an important case with far-reaching implications. Some 37
million Americans have defined-benefit pensions of the kind offered by U.S. Bank, she said.
 That’s about $3 trillion in assets protected by ERISA law, she said.

That doesn’t even count millions of public-sector beneficiaries with similar retirement plans
who are not covered by ERISA, Yau said. Nonetheless, she said, because many government-
run plans operate under ERISA-style rules, their fiduciaries, too, are watching the case
closely.

Yau said U.S. Bank’s arguments and the 8th Circuit’s decision alike imply that, if fiduciaries
were to take money out of a plan and use it to buy lottery tickets, it wouldn’t matter as long
as enough cash was left over to pay out benefits.

“You don’t even get into the courthouse doors unless the plan is underfunded,” she said.
“Our case, I think, highlights that that can be manipulated.”

As Francisco points out in the amicus, as simple a factor as fluctuating interest rates could
shift a plan’s financial position from over-funded to underfunded and back in the span of
months.

To Yau, that means beneficiaries are put in a lose-lose position—they can’t sue to protect
their mismanaged assets unless they get the timing right. And even if they do, they’ll likely
to lose standing mid-litigation if the plan becomes overfunded—which is what precisely what
happened to her plaintiffs.

John Stokes is an associate in Stris & Maher’s Los Angeles office who also represents
plaintiffs in the case. He said the 8th Circuit took the wrong view when it insisted that injury
is possible only when a plan is in the red. If the U.S. Supreme Court adopts that view, he
indicated, the result would be perverse.

“There is significant risk that a whole bunch of misconduct is going to go unchecked,” he

said. “It just can’t be that, as long as there’s money left to pay out benefits, the fiduciaries
can just do whatever they want.”

ABOUT KEVIN FEATHERLY

Kevin Featherly, who joined BridgeTower Media in mid-2016, is a journalist and former
freelance writer who has covered politics, law, business, technology and popular
culture for publications and websites in the Twin Cities and nationally since the mid-
1990s.

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