Finding disagreement on the calculation of damages – and disagreeing with the assumptions presented – in the long-running excessive fee case of Tussey v. ABB, a federal court judge has directed the parties to try again – and spelled out how to do it.
After remand from the 8th Circuit, Judge Nanette K. Laughrey of the U.S. District Court for the Western District of Missouri had ordered each party to propose the proper method for calculating damages on Tussey's mapping claim for the breach of the duty of loyalty. They were also instructed to identify additional evidence needed to supplement the trial record, if any.
In Tussey v. ABB Inc. (2017 BL 443690, W.D. Mo., No. 2:06-cv-04305-NKL, order on damages calculation 12/12/17), Judge Laughrey rejected both parties’ proposed calculations. In her order, Laughrey stated that the proper method of calculating damages is to compare the performance of the Wellington Fund with the relevant Freedom Funds between 2001 and 2007, rejecting the plaintiff’s argument that there is one calculation of damages for ABB’s decision to remove the Wellington Fund from the plan platform, and a different and additional calculation of damages for mapping the assets into the Fidelity Freedom Funds.
“ABB’s breach of the duty of loyalty was for removing the Wellington Funds and mapping them into the Freedom funds,” she explains, going on to note that while they are separate acts, “the breach of the duty of loyalty would not have been found as a matter of fact if only one event had occurred.”
Compare Ability?
The defendants had argued that measuring any portion of the losses by comparing the returns from the Freedom Funds with what the plans would have earned from the Wellington Fund was “necessarily inappropriate because it involves “an apples-to-oranges comparison.” Laughrey cited language from the appellate court that acknowledged that the funds are designed for different purposes, but that “the point of the comparison here would just be to determine, as a factual matter, the effect of owning one fund rather than the other,” while leaving the ultimate determination of the “measure and amount of the plans’ losses” to the district court.
Drawing on those comments, Laughrey noted that therefore, “…using Wellington as a comparator is not foreclosed by the law of the case,” and that “using Wellington as a comparator is well within the range of this Court’s authority on remand to resolve the measure of the plan’s losses and fashion the remedy best suited to the harm.”
Laughrey rejected ABB's argument that the proper measure of damages is a comparison of the rate of return that plan beneficiaries actually received from the Freedom Funds, with the returns they would have received in a comparable target-fund family in the marketplace. “The losses for breaching the duty of loyalty in mapping the Wellington assets into the Freedom Funds cannot be measured by asking what the losses would have been had a loyal fiduciary mapped the assets into a different fund,” she wrote, noting that that would not work to “restore the Plan to the position that it would have occupied but for ABB’s breach of the duty of loyalty,” and going on to explain that, “ABB did not make an imprudent investment; it made a disloyal investment decision.”
Laughrey further rejected ABB’s argument that a comparison of the performance of the Wellington Fund and the Freedom Funds was prohibited by earlier 8th Circuit opinions, citing instructions from the appellate court when it remanded the case for consideration.
How We Got Here
In this case the plans in question offered participants a menu of options for investing the money in their accounts, noting that the plan’s investment policy statement said the plans would offer investments in three “tiers,” organized by how much active involvement they demanded from investors, including one that offered several “managed allocation” funds. John Cutler, Jr., the director of the committee’s staff, thought those “managed allocation” funds should be target-date or lifecycle funds. He opted for the Fidelity Freedom Funds and suggested removing the Vanguard Wellington Fund, although that raised the question of what to do with the money participants had invested in it – roughly $123 million (8.4% of the total assets in the plans). The ABB fiduciaries decided to map this money into the Freedom Funds, though participants whose money was mapped to a Freedom Fund remained free to choose a different investment option (or options) at any time.
‘Forward’ Thinking?
Judge Laughrey did note that the question of how to bring any damages up to date remained, in view of the time that has elapsed since the original calculation of damages and the date of any final award of damages for the mapping claim. She noted that the plaintiffs had proposed comparing the rate of return between the Wellington Fund and the Freedom Funds between 2007 and the present to bring the damage award up to date, or alternatively to use the S&P 500 rate of return as the comparator, but rejected both “because Tussey never asked for future damages when the Complaint was filed.” Nor did they do so during the trial.
Indeed, she noted that “Tussey never claimed damages beyond 2007, nor is the Court aware of any basis for claiming future damages in an ERISA case such as this,” and that while she recognized the “burden of the delay in this matter,” she could not award damages after 2007 because of the delay in the post-trial proceedings. “Because no one has proposed a specific method of bringing the measure of damages forward using prejudgment interest, the Court will not address that issue in this order,” she wrote.
Laughery also held that ABB’s arguments concerning the lack of evidence to support a damage award using the methodology adopted by the Court were premature. “When submitting proposed findings of fact and conclusions of law, the parties can make their respective arguments concerning the evidence, its sufficiency, and the respective burdens of proof under ERISA, as informed by trust law," she wrote. "The Court in this Order only selects the method of calculating damages; it does not resolve any of these other issues.”
Finally, while she noted that both parties have requested to supplement the record, Laughery rejected those requests, explaining, “The methodology adopted by the Court was before the Court at the time of trial. Neither party can say they did not have the opportunity to present all their evidence at the time of trial to support or oppose Tussey's damage calculation.”
Laughrey then directed the parties to file proposed findings of fact and conclusions of law on the issue of damages for Tussey's mapping claim, by Jan. 12, 2018, “consistent with the methodology adopted by the Court in this Order.”
Damaged ‘Goods’?
The calculation of damages in this case has been a long-standing issue as it has bounced its way up to the U.S. Supreme Court and back. After a 2012 trial, the district court awarded the participant-plaintiffs $21.8 million plus attorneys’ fees of $12.9 million – a judgment subsequently vacated in part by the 8th Circuit in 2014. On remand, the district court held that the fiduciaries, despite being liable for breaching their duties, didn’t have to pay for the damages caused. However, upon appeal from that U.S. District Court for the Western District of Missouri – Jefferson City, the 8th Circuit determined that the lower court “mistook” its direction to “reevaluate” how the participants might have been injured for a “definitive ruling on how to measure plan losses, and as a result entered judgment in favor of the ABB fiduciaries despite finding they did breach their duties.”
The district court had previously awarded the participants $21.8 million against the ABB fiduciaries for swapping the Wellington and Freedom Funds, $13.4 million for the ABB fiduciaries’ other breaches, and $1.7 million against the Fidelity defendants on a float claim, plus attorneys’ fees of $12.9 million from all the defendants jointly and severally. (Fidelity would eventually be cleared of liability by the appellate court.) The defendants appealed, and the appellate court vacated the finding of breach for changing the investment options, going so far as to caution that “the original award for switching the funds was ‘speculative’ and exceed[ed] the ‘losses to the plan[s] resulting from’ any fiduciary breach.”
