A new excessive fee suit makes a series of unusual (and unusually detailed) claims regarding fiduciary malfeasance—including the failure to adequately monitor the plan’s retirement plan advisor.
The suit—brought by plaintiffs Marcia G. Fleming, Casey Freeman, David Guyon, Anthony Loscalzo, Patrick Roseberry, and Julio Samaniego on behalf of the $730 million Rollins, Inc.[i] 401(k) Savings Plan and on behalf of all similarly situated participants and beneficiaries of the Rollins Plan—makes a series of claims regarding fund selection in violation of the plan’s investment policy statement, alleges that the IPS was inappropriately amended to focus on performance rather than fees, and includes a large number of criticisms about the plan’s investment advisor, including fund choices designed to line his pockets with revenue-sharing.
In fact, the 74-page suit (Fleming v. Rollins Inc., N.D. Ga., No. 1:21-cv-05343-ELR, 12/30/21) alleges that Rollins and its Administrative Committee’s actions produced an estimated $50,000,000 in damages, and that “Rollins and the Administrative Committee’s votes and actions in retaining and following the advice of their advisor … caused more than $7,000,000 in damages due to the selection of the Oakmark Equity and Income fund to replace the Dodge & Cox Balanced fund.”
Case History
The same lead plaintiff (and one of the law firms) was involved in a suit filed against Rollins roughly two years ago. That suit was dismissed by Judge Eleanor L. Ross of the U.S. District Court for the Northern District of Georgia because the plaintiff then had failed to challenge the plan’s fee levels through the internal appeals process. Judge Ross did, however, leave open the option to file a new complaint in the future.
Sure enough, there followed that filing of administrative claims as called for by the plan in December 2020—claims that the suit says were denied by the Administrative Committee on March 1, 2021, appealed on March 9 of that year, and then finally denied on May 6 by that Administrative Committee, leading to this suit.
As for that suit—filed on behalf of the aforementioned plaintiffs by Sharman Law Firm LLC and Pels Law Firm—has an extraordinary level of detail supporting their allegations. Not “mere” tables of ostensibly comparable funds and disparate expense ratios, but citations from exhibits that are said to be minutes of various committee meetings. Minutes that, in many cases, seem to acknowledge concerns and verbatim comments about specific fund holdings that were allegedly retained by the plan’s committee long after those concerns were expressed.
Advisor Scrutiny
But the suit also claims that the Administrative Committee failed to investigate advisor Sean P. Waggoner and his relationship with the covered service providers (CSPs). Further, they claim that he had a history of bad dealings (that should have been discovered), that he changed firms in order to secure/retain a certain level of revenue-sharing compensation, and that he advised the committee to select/retain funds that provided those revenue-sharing structures. More specifically, “upon information and belief, Waggoner failed to disclose his relationship with LPL to continue to receive LPL’s broker-dealer related securities revenue held at Prudential” (e.g., finder’s fees, SEC Rule 12b-1 and/or “sub-transfer agency” fees), and soft dollar pay, including “potentially a large bonus for selling certain American Funds.
“As responsible Plan fiduciaries, Rollins and the Administrative Committee knew or should have known that their ‘SERVICE CODE 27’ (‘Investment Advisory (Plan’) representative was not adequately licensed with the firm he claimed to be representing,” they claimed, and “Rollins and the Administrative Committee should have investigated Waggoner’s investment advisor license, especially after reviewing the investment advisory payees in the Form 5500 record.”
Had they done so, the plaintiffs note, “…they would have discovered that between 2006 and mid-2013, Waggoner was never licensed as an investment advisor for AIS and/or ARS,” and that “between March 2010 and May 2016, Waggoner participated in eight private securities transactions without providing notice to his firm, in violation of NASD Rule 3040 and FINRA Rules 3280 and 2010.” Moreover that “SEC records also show that, between June 2014 and January 2017, Waggoner failed to provide prior written notice to his firm about eight personal brokerage accounts, in violation of NASD Rule 3050(c) and FINRA Rule 2010.” And that “Waggoner was investigated for wrongdoing beginning in 2010 and was terminated from LPL on June 30, 2017, due to loss of management’s confidence.
“Based on Waggoner’s record of NASD and FINRA rules violations,” the suit continues, “Waggoner was not qualified to serve as a CSP to the Plan and/or to recommend investments affecting tens of thousands of workers’ assets in the Plan.” The suit notes that “had Rollins and the Administrative Committee reviewed the funds’ prospectuses and fee disclosures, they would have discovered multiple instances of conflicts of interest through finder’s fees from arrangements with his broker-dealers and fund companies.”
‘Simple Google Search’
Indeed, the plaintiffs claim that “Rollins and the Administrative Committee could have easily discovered the CSP’s regulatory and disciplinary matters” … by making a phone call to FINRA or the SEC, or by running a simple Google search for “Sean P. Waggoner.”
That wasn’t the only issue—the suit notes that “Rollins and the Administrative Committee also imprudently selected another investment fiduciary/covered service provider, James Bashaw and Bashaw & Co.,” and alleges that if they had, “…they would have discovered that he had a record of disciplinary actions, including alleged breach of fiduciary duty in June 1988,” and that he too was terminated from LPL for “(A) participating in private securities transactions without providing written disclosure to and obtaining written approval from the firm, (B) borrowing from a client, and (C) engaging in a business transaction that created a potential conflict of interest without providing written disclosure and obtaining written approval from the firm.”
On the revenue-sharing front, the suit claims that “this revenue sharing approach knowingly and deliberately selected by Rollins and the Administrative Committees was an investment expense that adversely affected the Plan’s mutual funds’ performance and income (yields)”—proceeding to detail the mechanics of the calculation and its alleged inequity among participants, and concluding that “…the Plan’s participants/beneficiaries’ revenue-sharing deductions and crediting amounts also varied dramatically by each fund chosen and kept by Rollins and its Administrative Committee.”
‘Preferential Treatment and Improper Monitoring’
Ultimately, the plaintiffs allege that the defendants’ “preferential treatment and improper monitoring processes” were responsible for:
- Allowing Prudential and other conflicted CSPs to improperly influence fund selection and retention decisions.
- Adopting a monitoring process that relied upon subjective opinions of conflicted fiduciaries and CSPs to determine whether to remove a fund.
- Selecting and retaining for years Plan investment options with unreasonable expenses and poor performance relative to other investment options that were readily available to the Plan, such as low-cost passively managed funds or the least expensive available share class of actively managed funds with a long-standing history of outperformance.
- Including investment funds with expense ratios far in excess of other options available to the Plan, such as institutional share class mutual funds and collective trust funds.
- Providing numerous actively managed funds with much higher fees compared to index funds, which resulted in significant underperformance to lower-cost higher-performing investment alternatives that were readily available and appropriate.
What This Means
Too early to say what the court will make of this one, but as noted above, there is an extraordinary amount of detail here, including more than 200 pages of exhibits (committee meeting minutes and the like), and plenty of links to public materials regarding the advisors in question. It is, as was the original filing, extensive in its depth and detail.
That doesn’t mean, of course, that the arguments will prevail—but it’s worth keeping an eye on...
[i] Rollins is an Atlanta-based pest control company with subsidiaries including Orkin Inc. and Western Pest Services.
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
