An advisor – who had been added as a party to excessive fee litigation, only to have those claims dismissed – now finds itself back in “play.”
The suit – brought by participants in plans of New York University (NYU), and one of the first excessive fee suits filed against university 403(b) plans by the law firm of Schlichter, Bogard & Denton (August 2016) – alleged that the university, as employee retirement plan sponsors, breached their duties of loyalty and prudence under ERISA by “… causing plan participants to pay millions of dollars in unreasonable and excessive fees for recordkeeping, administrative, and investment services of the plans.”
Moreover, that they breached their fiduciary duties by selecting and retaining numerous high-cost and poor-performing investment options compared to available alternatives, which they claim “substantially reduced the retirement assets of the employees and retirees.” They also charged that employees paid excessive recordkeeping fees in addition to selecting and imprudently retaining funds which the plaintiffs claim have historically underperformed for years, and raised a claim unique to the 403(b) suits that the use of multiple recordkeepers, rather than a single recordkeeper “… caused plan participants to pay duplicative, excessive, and unreasonable fees for plan recordkeeping services.” The plaintiffs alleged that NYU’s imprudence resulted in losses totaling more than $358 million to the plans, which had more than $4.6 billion in combined assets.
Suit, Cases
That suit – we’ll call it Sacerdote I, as the court did – against NYU alleging violations of ERISA in connection with two retirement plans sponsored by NYU (the details can be found here).
The district court dismissed most, though not all, of the causes of action – at which point the plaintiffs filed a new suit (which, as the court did, we’ll call Sacerdote II) against a variety of affiliates of NYU and Cammack Larhette Advisors, LLC, “alleging substantially the same claims as those in Sacerdote I, including the dismissed claims.” Cammack, of course, is independent investment management company that was hired by NYU to provide investment advice on the retirement plans.
But then, the district court (again) dismissed the claims – this time all of the claims – against all of the NYU-affiliated defendants (including Cammack), on the grounds that a plaintiff (in the words of the court) “has no right to maintain two actions on the same subject, against the same parties, at the same time.” That district court concluded that even though Cammack and the other defendants in Sacerdote II were not defendants in Sacerdote I, “all of them were in privity with defendant NYU in Sacerdote I because they had a sufficiently close relationship with NYU and their interests were aligned with those of NYU.”
Now the plaintiffs appealed this – but only the dismissal as it pertained to Cammack. And the court here (Sacerdote v. Cammack Larhette Advisors LLC, 2d Cir., No. 18-1558, 10/1/19) concluded that Cammack and NYU were notin privity – vacating the earlier decision with regard to dismissing Cammack from the suit.
Privity Pace?
So, how did they get to that conclusion? Well, the question – the so-called “privity rule against duplicative litigation” – according to the court was whether the claims against Cammack in Sacerdote II – which, it wrote, “are substantially similar to the claims against NYU in Sacerdote I” – should be barred by the rule against duplicative litigation on the basis of Cammack’s alleged privity with NYU.
The court first noted that, in order for the rule to be properly invoked, however, “the case must be the same” – and by that, leaning on a 100-year-old Supreme Court decision, Judge John M. Walker Jr wrote that it must involve the same parties (or at least represent the same interests), must be the same rights asserted, and the same claim for relief, and “the relief must be founded upon the same facts, and the title, or essential basis, of the relief sought must be the same.”
Judge Walker acknowledged that the “circumstances sufficient to invoke the privity rule have evolved over time.”
That said, noting that there is “no dispute” that the facts and legal claims asserted in the two cases are “substantially similar” and that there was no dispute that NYU and Cammack are different parties. “The question, therefore, is whether the district court erred in concluding that NYU and Cammack are in privity, such that the rule against duplicative litigation should apply to bar recovery against Cammack in Sacerdote II.
Here, though, Judge Walker noted that the bases for liability as to NYU and Cammack are not necessarily the same, that in fact it is “possible that one party could be found liable and the other not.” He goes on to explain that “Cammack’s potential liability arises from providing flawed advice to the Committee,” whereas “NYU’s [potential] liability would arise from failing to independently investigate the merits of the Plans’ investments, or failing to determine whether it was reasonable to rely on Cammack.”
‘Blame’ Gain?
In sum, Judge Walker noted that “a reasonable trier of fact could find that Cammack provided flawed advice to NYU and was liable for plaintiffs’ losses, while also finding that NYU reasonably relied on Cammack’s advice, notwithstanding its flawed nature. Conversely, a reasonable trier of fact could find that Cammack provided reasonably prudent advice to NYU, but that NYU imprudently rejected Cammack’s advice or failed to properly implement Cammack’s investment recommendations” – and that in either of those scenarios, “NYU and Cammack’s interests would surely diverge, to the point where it would be in each of their interests to place the blame on the other.”
He concluded that there “…is no allegation or evidence that Cammack agreed to be bound by the disposition of Sacerdote I, nor that Cammack assumed control over NYU’s defense in Sacerdote I, nor that Cammack is a designated representative or proxy of NYU” – and that, “no applicable statutory scheme expressly forecloses successive litigation by or against nonlitigants.”
“Thus,” he concludes, “the contractual and co‐fiduciary relationships between NYU and Cammack are insufficient to find the parties in privity.”
And so, it seems that the investment advisor could still be a target of litigation – even if the plan sponsor fiduciaries aren’t.
Stay tuned.
