A federal judge has given the plaintiff in an excessive fee suit an “incomplete” – but left the door open for a another shot.
This time the defendant is Invesco – a suit, filed a little more than a year ago by participant-plaintiff Diego Cervantes in the U.S. District Court for the Northern District of Georgia (Diego Cervantes v. Invesco Holding Co. (US) Inc. et al., case number 1:18-cv-02551), alleged a number of issues that have been raised in similar lawsuits: that defendants failed to use their leverage as a large plan to reduce costs for the benefit of plan participants, and that they offered inferior performing proprietary retail shares (which benefited the sponsoring company) rather than better performing institutional class shares. Cervantes also had issues with how the plan’s self-directed brokerage account was structured (“to restrict participants’ choices” to ETFs affiliated with Invesco).
Six Count
In considering the motion to dismiss (Cervantes v. Invesco Holding Co. (US), Inc., 2019 BL 365039, N.D. Ga., 1:18-cv-02551-AT, 9/25/19), Judge Amy Totenberg in the U.S. District Court for the Northern District of Georgia outlined six counts:
- By “stacking” investment options with either a majority (55%-68%) or totality of Invesco-affiliated options
- Failing to monitor other fiduciaries of the plan who “inadequately performed their fiduciary duties” and by failing to have a process in place for that monitoring
- Engaging in prohibited transactions (the Invesco plan sponsor defendants with the Invesco investment manager defendants), costing plan participants “millions of dollars in the form of higher fees and lower returns on their investments”
- Engaging in prohibited transactions because Invesco investment management executives “received financial benefits” for increasing assets under management (creating a “strong personal incentive” to steer participant balances toward Invesco-affiliated investments)
- The plan sponsor fiduciaries and investment management group “knowingly participated in each of the fiduciary breaches, and therefore are liable for each other’s breaches in addition to their own…”
- The Invesco investment management defendants – even as non-fiduciaries – are “still subject to liability under ERISA…” because they “would have known” that the other defendants were fiduciaries, and that the knowledge possessed by senior executives appointed by Invesco would be imputed to Invesco
‘Insufficient’ Funds?
Judge Totenberg acknowledged that “choosing poorly performing funds or generally alleging excessive fees is insufficient to state a claim,” because “lawful and prudent decisions may have the same result as unlawful and imprudent decisions…”. More importantly, she noted that – “with the exception of one fund, the Amended Complaint fails to plausibly plead underperformance.”
She noted that “for most of the challenged funds, Plaintiff provides benchmarks for some years, but not others,” and that for some of the funds, “Plaintiff pleads that the funds were ranked in the bottom percentage of the given fund’s investment category, but does not plead the ranking for each year in the Class Period.” She went on to note that “The Court cannot say that this spotty pleading provide[s] a sound basis for comparison…”. Judge Totenberg also took issue with what she said was a “mixed” annual performance record of the funds in question, and that while the Amended Complaint was “full of references to ‘excessive fees,’ with the exception of one fund, Plaintiff does not plead anything about the fees or expense ratio of any of the funds at all.”
Pause Button?
That said – she noted that the Plaintiff’s allegations that during the class period 55%-68% of all plan investments were affiliated with Invesco, and that, as of Dec. 31, 2016, 81% of investments by Plan participants were in Invesco-affiliated funds “give the Court pause” – and that those allegations are “further concerning considering Plaintiff’s allegations regarding the limitation of access to non-Invesco affiliated funds.” However, she declined to say that the Plaintiff here had “plausibly alleged” that this was the result of any breach of duty. “Perhaps there is a ‘there’ there, perhaps not,” she wrote, noting that in light of the Plaintiff’s request to amend their complaint “and the possibility that ‘a more carefully drafted complaint’ could state a claim, the Court must give Plaintiff the opportunity to try.”
As for the second, fifth and sixth counts on a failure to monitor, co-fiduciary liability, and non-fiduciary participation in fiduciary breach, since the plaintiff hadn’t yet alleged enough to state a claim for the underlying breaches, Judge Totenberg granted the motions to dismiss these – but with “leave to amend.”
Similarly, on the issue of standing to bring suit based on the SDBA (which the plaintiff allegedly never participated in), Judge Totenberg said that she was “unable to reach the question of standing,” because he had failed to state a claim of his own for breach of fiduciary duty. The same determination was made on the prohibited transaction claims – basically, the failure to sufficiently plea the case.
And on a final note, with regard to a challenge based on the 3-year statute of limitations (based on receipt of plan materials that the Invesco defendants claimed provided disclosures about the level of fees charged), Judge Totenberg said that the defendants “must show more” than a knowledge of the transactions themselves, invoking the “actual knowledge” question now before the U.S. Supreme Court in another case.
All in all, Judge Totenberg granted the Invesco defendants’ motion to dismiss – but granted the plaintiff an opportunity to amend his suit/complaint.
In other words, it’s not over yet.
