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Knowledge Isn’t ‘Actual Knowledge’

Litigation

A federal judge has approved the recommendation to certify a class in a proprietary fund suit—determining that even a “well-educated, well-informed, and careful investor”—might lack actual knowledge of fiduciary breaches.

The Suit

Image: Shutterstock.comThe participant-plaintiff in question here is one Brian Waldner, who brought suit in 2021 against Natixis Investment Managers, L.P., its Retirement Committee, and the committee members (here referred to as John and Jane Does 1–20). The suit claimed that the $440 million plan—which they said included more than 30 investment options (though they counted the suite of target-date funds as a single option) and somewhere between 12 to 15 proprietary options—used “high-cost proprietary mutual funds” that “led to participants incurring excessive fees, substantially more than the average of comparator funds with similar investment styles.” 

The suit also claimed that the plan’s proprietary funds “underperformed in comparison to prospectus benchmarks and other funds,” that the Natixis defendants “failed to prudently monitor and remove them out of self-interest,” and that the defendants “employed an imprudent and disloyal fund selection process through only adding proprietary funds to the Plan since 2014.” Oh, and that Natixis itself “failed to monitor the performance of its fiduciaries, such as the Committee and its members.”

The Case

Last fall Natixis had challenged Waldner’s ability to represent the class of participants allegedly injured here, claiming that by virtue of his background/knowledge provided him “actual knowledge” of the issues he raised in the suit—and at a point in time that barred the suit due to ERISA’s statute of limitations.[i]

Now, Judge Leo T. Sorokin of the U.S. District Court for the District of Massachusetts has approved Waldner’s ability to represent the class, accepting and adopting a “thoughtful and cogent” report and recommendation by Magistrate Judge Paul G. Levenson. So, what was in that report and recommendation?

Recommendation Background

The Natixis defendants had raised three objections to Waldner’s ability to adequately represent the class of participants allegedly impacted by their actions. More specifically, Judge Levenson noted that they had asserted that “(1) Mr. Waldner’s sophistication and his job responsibilities put him in a position immediately to recognize defects in the Plan’s investment offerings which—Defendants contend—triggered the running of the statute of limitations; (2) as a former Plan participant, Mr. Waldner has no personal interest in the ongoing governance of the Plan; and (3) having signed a termination agreement,[ii] Mr. Waldner faces defenses—waiver and release—that most class members do not.”

While Judge Levenson’s review of the issues consumed some 40 pages,[iii] he started by noting as “significant to the class certification question that Plaintiff does not profess to have direct knowledge of the processes that Defendants employed in selecting and retaining investment products for the Plan.” Judge Levenson acknowledged that “Mr. Waldner personally possesses considerable sophistication and expertise in the field of investment management. And his role at Natixis required intimate familiarity with Natixis’ investment products.”

Statute of Limitations

Waldner’s level of knowledge matters, in no small part because of the time window in which he was eligible to bring suit on behalf of the class. As Judge Levenson noted, “there are two different limitations periods that may govern ERISA claims, and the parties dispute which applies here. Plaintiff points to the general six-year limitation period, while Defendants point to the three-year period applicable to plaintiffs who have “actual knowledge” of an ERISA violation. If the three-year statute applies in the way Defendants urge, then all of Mr. Waldner’s claims are time-barred.”

With regard to that notion, the defendants had claimed that since Waldner was “an unusually sophisticated investor who was familiar with investment products generally and had specialized professional knowledge about Natixis’ products in particular” that he should be “deemed to have had ‘actual knowledge’ of the problems with the Plan’s menu of options from the time Mr. Waldner began participating in the Plan” and that that determination of his “actual knowledge” would have set the time period during which he could bring suit (statute of limitations) to three years. 

He further noted that Waldner acknowledged in his deposition that he reviewed fund prospectuses for all of Natixis’ domestic mutual funds, was “familiar with information about fees and expenses and fund performance over one, five, and ten years, and knew how the funds compared to benchmarks.”  Moreover, he had been involved in the creation and review of Natixis fund fact sheets, summary documents for investors and prospective investors that included information about fund fees and expenses, investment performance, comparisons to benchmarks, and statistical data about the funds.”

Interestingly enough, the Natixis defendants also argued that—as a plan participant—“Mr. Waldner carefully researched every Plan investment option before making his decisions about allocating his 401(k) assets,” and—in Judge Levenson’s words, “Defendants have established that Mr. Waldner was an exceptionally well-educated, well-informed, and careful investor.”

‘Actual’ Knowledge

However, the plaintiff argued that neither Mr. Waldner’s investing acumen nor his familiarity with the Natixis product line amounted to “actual knowledge” with regard to the alleged failures of prudence and loyalty. “As Plaintiff points out,” Judge Levenson continued, “there is no evidence to suggest that Mr. Waldner knew anything about the processes Defendants employed in selecting, monitoring, evaluating, and removing investment options from the Plan’s menu of choices.” He continued that, “Because Mr. Waldner was not privy to the actual selection process, Plaintiff contends, Mr. Waldner would not have known which competing products were actually available to the Plan, and on what terms. At most, Mr. Waldner knew that the end-result of the Defendants’ selection efforts was a menu which included a high percentage of proprietary funds.”

As Judge Levenson saw things “in the abstract, there are myriad gradations along the spectrum from ‘constructive knowledge’ to ‘willful blindness’ to ‘actual knowledge.’” But the particulars of this case easily place it at the “constructive” end of the spectrum. This is apparent from Judge Sorokin’s decision denying Defendants’ motion to dismiss. The reasoning in that decision illustrates vividly the distinction between (a) having enough information to allege facts that, taken together, support a plausible inference that the Defendants acted imprudently or disloyalty, and (b) having actual knowledge of such imprudent or disloyal conduct.”

Ultimately, he concluded that “the Complaint does no more than allege facts that—taken together—support an inference of misfeasance, and Defendants make no showing that Mr. Waldner knew anything more than what is alleged in the Complaint.”

“Evidence about Mr. Waldner’s general sophistication in investment management—a quality that undoubtedly was prevalent among employees at Natixis—simply does not equate to evidence that Mr. Waldner had actual knowledge of the sort that would trigger the three-year limitations period. He could not know whether the Committee selected investment options by diligently considering alternatives or whether they blindly threw Natixis products into the mix. He could not know whether the Committee heeded advice from its investment adviser, or whether they routinely disregarded such advice. He could not know whether the Committee entertained pitches from Natixis fund managers who hoped to place their products on the Plan menu, or whether they eschewed such lobbying.” And therefore, Judge Levenson concluded, “while Mr. Waldner may be more sophisticated than some other class members, in his lack of actual knowledge about how the Committee did business, Mr. Waldner is typical[iv] of the proposed class.”

What This Means

Ultimately, this is no more than the continuation of a case that the original judge (Sorokin) had already found to have made a case sufficiently “plausible” to move past a motion to dismiss to go to trial (and the discovery process that typically proceeds it). That said, it’s not often (ever?) that we see a situation where the plaintiff is said to have knowledge sufficient to both disqualify them as an injured party AND to have tolled the timing on the statute of limitations.

It's worth noting, however, that knowledge of the outcome isn’t equivalent to having “actual knowledge” of the process (or lack thereof) that led to that outcome.

 

[i] The challenge by Natixis stated that the plaintiff “was, and is, a sophisticated and experienced investment professional” is said to have “detailed knowledge of the Plan’s investment options, including every proprietary fund, every unaffiliated fund, and every fund in which he actually invested, including their fees and expenses and their investment performance,” as well as actual knowledge about other retirement plans, the investment options they offered, and other funds in the marketplace. The petition states that “he knew Natixis earned revenue from including proprietary funds in the Plan and believed it to be self-serving for Natixis to do so. Armed with this knowledge, he nonetheless affirmatively chose to invest 30% of his Natixis retirement savings in Natixis funds, and 70% in an unaffiliated Vanguard fund”—and “he knew and did this all in 2017, more than three years before filing the Complaint.”

[ii] Judge Levenson dismissed arguments that a termination agreement between Wauldner and Natixis upon his termination from the firm regarding subsequent lawsuits pertaining to his employment didn’t apply to this type of litigation (though he did question how representative of the class his having signed that agreement made him).

[iii] Including an outline of the issues upon which Judge Sorokin had—prior to this challenge—seen as making a sufficiently plausible case to move past the motion to dismiss. More specifically that (1) a large portion—over half by one measure—of the non-indexed investment options available to participants in the Plan were Natixis products; (2) nearly all options that were added to the Plan during the statutory limitations period were Natixis products; (3) the Natixis products that were included in the Plan menu are products that few other ERISA plans have selected; (4) some of the Natixis products that were made available to Plan participants had unusually high expense ratios; (5) some of the Natixis products that were made available to Plan participants under-performed, relative to comparable products offered by competitors; (6) there was a history of outflows from Natixis products in the market at large; and (7) investment results for three particular products offered to Plan participants showed periods of negative alpha”—although Judge Sorokin (as Judge Levenson recounted) noted that it was “only in combination that these circumstances suffice to make out a claim.”

[iv] That said, Judge Levenson did distinguish Waldner’s status as a FORMER participant, and as such stated that he did NOT have standing to bring claims for prospective relief; “he cannot show that he would face any future harm from the Defendants’ alleged violations of fiduciary duties.” And—rather than, as the plaintiff apparently suggested, to name independent fiduciaries to handle issues regarding prospective relief, Judge Levenson preferred certifying the class only with regard to the injuries Waldner could represent.

 

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