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Latest Proprietary Fund Suit Settlement Has an ETF Twist


The terms of a settlement between Invesco and a participant in its 401(k) plan have been announced—and there’s an interesting twist we haven’t seen before.

The suit, filed in 2018 by participant-plaintiff Diego Cervantes in the U.S. District Court for the Northern District of Georgia, 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. 

For all that boilerplate argument, this suit was unusual in that it contrasted the number of investment options available in the Invesco plan with the 10-15 options available in the typical 401(k) plan. The Invesco plan had approximately 150 to 205 options, which the plaintiff suggested was a result of the defendants “indiscriminately dumping Invesco mutual funds, ETFs, and other investment products into the Plan in breach of their fiduciary duties,” and that the “large number of options made their selection by Plan participants confusing, especially since the Plan offered multiple share classes (with different fees and performance results) of numerous funds.” While this argument has been raised with some regularity in the university 403(b) lawsuits (where, admittedly, the number of funds available has been significantly larger than in a typical 401(k) plan), this is the first time this writer recalls it being an issue with a 401(k) plan.

Another issue—perhaps related—is that the plaintiff also had issues with how the plan’s self-directed brokerage account was structured (“to restrict participants’ choices” to ETFs affiliated with Invesco).

Settlement Terms

The headline is that the parties have agreed to a settlement of $3,470,000.00 in cash. The March 9 settlement agreement notes that the plaintiff’s own damages expert calculated maximum recoverable damages to be approximately $4,427,541.00—and that 78.37% recovery is actually much higher than you see with most of these settlements. 

Additionally, the plaintiff’s counsel “intends to seek an award of attorneys’ fees in an amount up to 33% of the Settlement Amount and expenses in an amount not to exceed $200,000, plus interest on both amounts.” The choice of the “Intends to seek” language is important, as none of the settlement is final until approved by the court, and while 33% is comfortably within the range of compensation for these contingency fee cases, there have been issues where the court(s) expressed concerns.

The settlement also calls for an incentive award for plaintiff Cervantes of $5,000 to be paid from the settlement fund—a figure that, if anything, is at the low end of the range for these cases (although this case has moved to court and settlement much faster than many do).

However, what’s interesting here is that in addition to the cash payment, Invesco has agreed to modify the plan’s self-directed investment account so that plan participants can purchase shares of non-proprietary ETFs in addition to the proprietary ETFs that were made available to participants during the Class Period. This was one of the concerns raised in the initial lawsuit. 

Making the Case

Finally, a standard element in these agreements—designed to persuade the court to approve the settlement—is to not only present how much time and effort has gone into the deliberations, but also to emphasize how uncertain a decision in favor of the plaintiff would be. Typically, in cases of this type, there are citations to the multiple (and varied) cases in the genre, and cases where other defendants have prevailed are cited frequently. 

Here, however, the plaintiff had his own set of losses on the way to trial to name, explaining that “the Court has already dismissed the amended complaint in connection with Defendants’ motion to dismiss. While the Court provided Plaintiff with leave to amend, there was a substantial risk that the second amended complaint would not have cured the deficiencies identified by the Court. Furthermore, even if Plaintiff were able to address the Court’s pleading concerns, he faced considerable risks and expenses in litigating the case.”

The agreement goes on to explain that “…to prove his claims Plaintiff would need to rely extensively on several expert witnesses for analysis of key issues. Each expert’s testimony would be critical to demonstrating Defendants’ liability, as well as damages, and the conclusions of each expert would be hotly contested at trial. If, for some reason, the Court determined that even one of Plaintiff’s experts should be excluded from testifying at trial, Plaintiff’s case would become more difficult to prove.” The settlement goes on to state that even then, “there would remain significant hurdles to proving liability or even proceeding to trial”—including, apparently, the defendants “strenuously” disputing that they did anything wrong and “hotly” contesting the investment alternatives listed in the complaint by Plaintiff, concluding that, “at minimum, Defendants may have been able to raise serious issues of fact that would have rendered a favorable verdict for Plaintiff highly uncertain.”

All of which may now be moot that the parties have come to an agreement.

What This Means

This is, of course the latest financial services company to agree to settle such claims, joining SEI ($6.8 million), MFS ($6.875 million), Eaton Vance ($3.45 million), Franklin Templeton ($4.3 million), BB&T ($24 million), Jackson National ($4.5 million), Deutsche Bank ($21.9 million), American Airlines Group Inc. ($22 million), Allianz SE ($12 million) and TIAA ($5 million). Those decisions stands somewhat in contrast to the cases involving American Century and, more recently, CenturyLink, that chose to go to court—and won. 

The issue of proprietary ETFs was unique to this case—and was resolved in the proposed settlement. The concerns about the number of funds, or the dominance of proprietary funds, were not addressed—nor in other recent settlements (it should be noted in other recent settlements where the plaintiffs were represented by other counsel) was there any requirement regarding changes in process or procedure regarding plan administration of fund selection. Those factors (or the lack thereof) may well have played a role in being able to come to a relatively straightforward settlement in this case.

Although, as we know, the settlement decision is often one based on time and money, rather than merit.