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With Trial Looming, Excessive Fee Suit Parties Come to Terms

The parties in an excessive fee suit involving proprietary funds have come to terms – the day before they were slated to go to trial.

Deutsche Bank Americas Holding Corp. has settled claims of a class action brought by Ramon Moreno and Donald O’Halloran, former participants in the Deutsche Bank Matched Savings Plan. The parties informed the court that they reached a “settlement in principle on July 8,” according to an order (Moreno v. Deutsche Bank Americas Holding Corp., S.D.N.Y., No. 1:15-cv-09936, order for parties to file motion for preliminary approval of class action settlement 7/9/18) by Judge Lorna G. Schofield of the U.S. District Court for the Southern District of New York. The parties have until August 14 to submit the settlement terms and request preliminary approval of class action settlement – though the terms of that agreement were not disclosed.

The original complaint, filed in 2015, was amended the following March, and asserted several causes of action; that the plan fiduciaries “breached their duties of care and loyalty in selecting, retaining and monitoring the Plan investments,” that the “inclusion of proprietary mutual funds caused the Plan to engage in prohibited transactions with parties in interest” (the internal managers of those funds) who were “paid monthly fees for the services they rendered to the proprietary funds,” that certain of the defendants were plan fiduciaries that engaged in prohibited self-dealing transactions because they received consideration for the investment management services, and that the fiduciaries breached their fiduciary duties by failing to monitor the Plan’s decision-making process.

The suit, filed on behalf of a proposed class of about 20,000 employees, claimed that Deutsche Bank directed more than $300 million of its workers’ retirement savings toward an in-house index fund with fees 11 times higher than a comparable Vanguard fund – fees that went “directly into Deutsche Bank’s pocket.”  Plaintiffs had also alleged that the plan included actively-managed proprietary funds that charged investment management fees two- to five-times higher than other “actively managed funds in the same style” – and that those proprietary funds consistently underperformed benchmarks. As other excessive fee suits have alleged, these plaintiffs also challenged the “jumbo” plan’s failure to consider/include mutual fund alternatives, such as collective funds, that carry lower fees. Moreover, the plaintiffs had alleged that for two of those proprietary funds, this plan was the only defined contribution plan among roughly 1,400 such plans with more than $500 million in assets to hold these funds.

In response, the defendants had argued that the suit is barred by ERISA’s statute of limitations, the plaintiffs failed to state a claim upon which relief can be granted, and that two of the named plaintiffs were not fiduciaries – but U.S. District Judge Lorna G. Schofield, of the U.S. District Court for the Southern District of New York rejected all but the last of the defendants’ claims.

Things hadn’t looked promising for the defendants. In allowing their claims to go forward in October 2016, Judge Schofield held that the plaintiffs’ “specific allegations regarding excessive fees from which Defendants stood to gain is sufficient to support the inference that the process used by the defendants who were Plan fiduciaries to select and maintain the Plan’s investment options was “tainted by failure of effort, competence, or loyalty.”

Nichols Kaster PLLP represents the plaintiffs here, while Goodwin Procter LLP represents Deutsche.