Merrill Lynch Settles Suit with Small 401(k) Class

Having lost its attempt to dismiss the charges, the broker-dealer has struck a settlement.

The settlement in Fernandez v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (S.D. Fla., No. 1:15-cv-22782-MGC, motion for preliminary approval of class settlement filed 6/8/17) was reached after two years of litigation. It will make class members whole, according to an unopposed motion for preliminary approval of class settlement filed last week in federal court in Florida. According to the settlement, it “includes accounts that were incorrectly excluded from the Remediation and gives the Settlement Class Members additional millions in disgorged profits – even after attorney’s fees, expenses, taxes, and Plaintiffs’ Case Contribution Fee are deducted.”

Make no mistake – this settlement agreement is a document written by the plaintiffs, and even if unopposed in recommendation by the defendants, it presents only one side of the case.

The deal features a “corrective remediation payment” totaling at least $8.8 million (“equal to the deficient remediation payments and interest sought by Plaintiffs from the outset”) and a “disgorgement payment” of $16.2 million. Class counsel will request attorney’s fees equal to 35% of the settlement payment, or $8.75 million.

The settlement agreement notes that “through a discovery effort that included six motions to compel, 11 depositions taken or defended, and a review of more than 125,000 pages of documents, and dozens of complex spreadsheets” the plaintiffs “in consultation with a data scientist they retained confirmed that the shortfall amounted to millions of dollars in unremediated sales charges and unpaid interest.”

Most of the mutual funds available on Merrill Lynch’s retail platform offered waivers on up-front sales charges for retirement plans; however, the firm failed to apply those waivers. Employee investors who purchased mutual fund shares through the plans in the program did not purchase the shares directly from the mutual fund companies, but rather Merrill Lynch aggregated all purchases from its clients nationwide and then dealt with mutual fund companies on what Merrill Lynch refers to as an “omnibus basis.” However, while the mutual fund companies agreed to waive their up-front sales charges for Class A shares purchased by retirement plan investors, the plaintiffs alleged that because Merrill Lynch made purchases on an “omnibus basis,” the mutual fund companies did not know when purchases made by Merrill Lynch were being made for the benefit of retirement plan investors unless Merrill Lynch specified that the purchases were being made for retirement plan investors eligible for the sales charge waiver, the retirement plans bought the higher cost retail class fund shares.

Merrill Lynch ultimately made a total remediation payment of $79 million, one voluntary and one pursuant to the Letter of Acceptance, Waiver and Consent with FINRA.

A year later the plaintiffs filed suit against Merrill Lynch, “believing the remediation to be insufficient, and after unsuccessfully attempting to determine the method by which their remediation was calculated.” The suit, brought by trustees of the LAAD Retirement Plan and the LAAD Corp. S.A. Money Purchase Retirement Plan (two retirement plans that held accounts with Merrill Lynch) sought – in addition to a complete remediation – “disgorgement of profits derived by Merrill Lynch.”

The plaintiffs alleged that Merrill Lynch violated its fiduciary duties by not acting solely in the interests of LAAD plan participants and beneficiaries, and by dealing with the plan assets in its own interest for its own account(s). For its part, Merrill argued that it was not an ERISA fiduciary and that the plaintiffs’ claims were securities, rather than ERISA claims. Merrill subsequently filed a sworn declaration that it had uncovered a unique error that applied only to the calculation of a portion of the LAAD Plan’s remediation payments.

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