RICO Suit Filed Against Advice Program Administrators

A complaint seeking class action status alleges that an investment advice platform steered participants into high-cost retirement funds that paid excessive fees and revenue-sharing “kickbacks.”

The suit, filed August 3, charges violations of both the Racketeer Influenced and Corrupt Organizations Act (RICO) and ERISA by defendants Morningstar, Inc., Prudential Investment Management Services, LLC, and Prudential Retirement Insurance and Annuity Company by a Michael Green on behalf of himself and similarly situated individuals before the U.S. District Court for the Northern District of Illinois.

The plan at issue is sponsored by Rollins, Inc., with assets of approximately $500 million and more than 10,000 participants and beneficiaries, though the company, nor plan fiduciaries are not named as a defendant.

The complaint (Green v. Morningstar, Inc., et al) alleges that the defendants, through their GoalMaker investment advice program, influenced the plans’ retirement investors to invest in high-cost investments that pay allegedly unwarranted fees to Prudential and that, in turn, send software development-related, consulting and other revenues to Morningstar.

GoalMaker Revisited

According to the plaintiffs, GoalMaker, which was designed and built by Morningstar, was modified to Prudential’s specifications to “systematically influence” the plan participants to put their money into a variety of high-cost retirement funds that paid what are alleged to be excessive fees to Prudential.

The defendants supposedly did so by requiring plan sponsors electing to offer GoalMaker to its retirement plan participants to restrict the number and identity of a plan’s investment options that would be included in the GoalMaker asset allocation.

“Plaintiff and the other participants in the plans used and were injured by this innocuous-sounding ‘investment advice’ program – which in reality was a predatory racketeering enterprise developed, maintained and marketed by defendants,” the complaint alleges.

The complaint notes that, when plans use GoalMaker, the program does not take into consideration each plan’s entire menu of designated investment alternatives. With respect to the Rollins Plan, 7 of the 16 designated investment alternatives were utilized by the program, which, according to the complaint, included the most expensive investment choices and excluded the least expensive choices.

Moreover, the suit alleges that, even though GoalMaker was provided to plans as a free application, the related fees imposed on the plaintiffs “were not bona fide, good faith fees” for work actually performed. “Instead, they are and were deceptively and/or incompletely disclosed fees taken by Defendants from Plaintiff and the proposed Class in bad faith for an essentially Tammany-esque reason: Defendants seen their opportunities and they took ’em,” the complaint contends.

The complaint further alleges that the majority of the investment choices selected for inclusion in GoalMaker were chosen “exclusively for the purpose of providing additional and effectively hidden compensation to the Prudential Defendants.”

The plaintiff has requested a trial by jury and seeks compensatory damages, treble damages, legal fees, other relief the court deems just and an order enjoining the defendants.

Defendants Respond

Meanwhile, Morningstar and Prudential have urged the court to dismiss the claims in their entirety.

Morningstar’s August 25 response contends that Green has no standing to assert a RICO claim and fails to allege that Morningstar conducted or participated in a RICO enterprise. In addition, their response argues that Green failed to plead a RICO predicate act and that the case should be dismissed because it impermissibly relies on conduct subject to federal securities laws as a predicate act. The response notes:

“In his complaint, Green shoehorns run-of-the-mill business relationships that are already heavily regulated by the Employee Retirement Income Security Act of 1974 (“ERISA”) into the RICO statute. But Green cannot cobble together a RICO claim out of any of the defendants’ lawful conduct, and moreover, Morningstar’s only role in the GoalMaker product that is the basis of Green’s complaint is to provide model asset allocations by asset class categories for a flat consulting fee. As a result, Green’s pleading deficiencies are particularly stark with respect to Morningstar, and fail even to demonstrate that he has standing to raise a RICO claim against it.”

In its August 28 response, Prudential raises similar points, arguing, among other things, that the plaintiff fails to state a claim upon which relief can be granted and that the claims are barred because the revenue sharing payments at issue are bona fide compensation within the meaning of § 1954.

They argue that the claims should be barred because there is no viable RICO enterprise and they do not have RICO standing, as they cannot show that any defendant’s conduct “proximately and factually caused any injury to their business or property or any damages.”

In addition, the response contends that the claims are barred by the “doctrines of waiver, consent, ratification, estoppel, and laches because the conduct at issue was fully disclosed.” It further notes that the plaintiff and putative class members failed to object when they learned that Rollins chose to offer GoalMaker to Rollins Plan participants and they decided to allocate funds to investment options through GoalMaker.

Similar Case Dismissed

It should be noted that a similar case before the U.S. District Court for the District of Connecticut involving the GoalMaker product and a plan’s use of revenue-sharing, allegedly excessive fees and pay-to-play arrangement was dismissed late last year.

In Rosen v. Prudential Ret. Ins. & Annuity Co., plaintiff Richard Rosen brought suit on behalf of the Ferguson Enterprises, Inc. 401(k) Retirement Savings Plan in which he participates, as well as on behalf of other similarly situated participants, challenging:

  • the concentration of actively managed mutual funds offered as part of the plan’s menu;
  • Prudential’s alleged “self-dealing” through its receipt of revenue sharing payments in exchange for investing plan assets in mutual funds; and
  • the inclusion of Prudential’s GoalMaker product in the plan, which they claimed steers participants into high-cost investment options to the benefit of Prudential and against the best interests of plan participants.

While the circumstances are different (and the case above includes alleged RICO violations), Judge Victor Bolden, addressing the inclusion of the GoalMaker product, noted that “the documents referenced in the Amended Complaint demonstrate that Prudential disclosed relevant details with respect to its GoalMaker program, and the contractual agreement in place regarding the GoalMaker program confirms that Ferguson, not Prudential, was ultimately responsible for the investment selections with respect to this program.”

Ultimately, the court held that the trust agreement “demonstrates that Prudential did not possess the authority to be considered a fiduciary under ERISA,” and thus the firm “cannot be held liable under ERISA for breach of fiduciary duties or prohibited transactions with respect to its selection of investment options, determination of compensation, administration of the GoalMaker program, or alleged securities lending activities.”

Post a Comment

Your email is never published nor shared. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Send this to a friend