Plaintiffs Come up Short Again in Robo-Advice Suit

Participants who argued that an advice arrangement between a recordkeeper and a robo-advisor represented a breach of fiduciary duty – and a RICO violation – have come up short again.

The original suit (Chendes v. Xerox HR Sols. LLC, E.D. Mich., No. 2:16-cv-13980, complaint filed 11/9/16) was filed by three Ford Motor Co. workers who accused Xerox HR Solutions Inc. of breaching its ERISA fiduciary duties as part of a fee-sharing agreement with investment adviser Financial Engines Inc. The workers alleged that Xerox HR violated ERISA by entering a “pay to play” scheme that wrongfully inflated the price of professional investment advice services that were critical to the successful management of the workers’ retirement savings.

The suit claimed that the arrangement resulted in payment of excessive fees from the workers’ $14 billion retirement savings plan, with Xerox HR negotiating a piece of the advice fee for itself, and that there was a quid pro quo for agreeing with Xerox HR to charge “excessive fees” for investment advice services while Financial Engines became “the exclusive investment advice provider on the Xerox HR platform.”

Replead

Following an amended complaint and a motion to dismiss, this same court dismissed the plaintiffs’ complaint, but allowed them to replead certain allegations, and the ruling here was the focus of Judge Robert H. Cleland of the U.S. District Court for the Eastern District of Michigan. Having rejected in the earlier decision the allegation that Xerox HR was acting as a fiduciary to the plan, the court allowed a repleading as to whether Xerox HR acted as a fiduciary by “‘exercis[ing] de facto control’ over the election of FE as a fiduciary for the plans,” noting that it was possible for a party to act as a functional fiduciary to the extent that the party “exercised control over the means in which another fiduciary would act in a fiduciary capacity,” but also noted that it doubted that anything short of an allegation that the “Defendant was directly involved in the Ford-FE negotiations” would rise to the level of “de facto control sufficient to impose liability.”

That his ruling this time (the case is Chendes v. Xerox HR Solutions, LLC, E.D. Mich., No. 2:16-cv-13980-RHC-SDD, order granting defendant’s motion to dismiss 6/25/18) described it as a “second – and significantly broader – bite at the apple” provides some sense of his conclusion, as he went on to note that this second amended complaint includes “new allegations and new Defendants not contemplated in the last complaint.” Specifically, this second version brings in a claim of violation of the Racketeer Influence Corrupt Organizations Act (RICO), and two new parties: Xerox Corporation and Conduent, Inc. – the defendant’s parent entities – that the plaintiffs argued “may be in possession of ill-gotten proceeds of the misconduct at issue.”

Constrained Choice?

On this second try, Judge Cleland said that the argument “fared no better,” that the second amended complaint “essentially alleges that Defendant used its influence as the Ford Plans’ record keeper to encourage the Ford Plans to hire FE,” that Xerox HR had indicated it would work with no other automated investment service provider on its platform, effectively “requiring the Ford Plans to switch record keepers” if they wanted to go a different route, that “Defendant did not choose FE for the Ford Plans; the Ford Plans did,” and that “Plaintiffs have alleged nothing to suggest that the decision was not ultimately up to the Ford Plans to make.” Judge Cleland wrote, “Constraining certain choices available to the Ford Plans … is not the same as controlling the choice that the Ford Plans made.” Having not established to the court’s satisfaction that Xerox HR acted as a fiduciary, the claims based on that status fell away.

Assets Based

Other counts in the suit were predicated on the notion that payments made by Financial Engines to Xerox HR were plan assets – a notion rejected in the first ruling, since the court determined that the plaintiffs had failed “to present any meaningful way that a court could draw a line” representing where plan assets ceased to belong to the plan. In this second go-round, Judge Cleland said that the plaintiffs “have taken the court’s language as an invitation to try drawing the line,” specifically that the transfers to Xerox HR were part of the same transaction that paid Financial Engines for their services. “But simply calling a transaction an indirect, two-step transfer of plan assets does not make it one,” Cleland wrote, explaining that, “under general notions of property rights, the payments FE collected from the Ford Plans were assets of FE – not the Ford Plans” as he rejected the claim.

Interest ‘Ed’

Another argument was premised on FE’s status as a party in interest to the Ford Plans at the time the Plans’ named fiduciaries hired FE. “But therein lies the problem,” Cleland wrote. “FE did not become a party in interest to the Ford Plans until it was hired by the Ford Plans – not before.” He went on to note that the plaintiffs “…cannot credibly claim that FE was a fiduciary or a party providing services before FE was hired by the Plans’ named fiduciaries. To say, as Plaintiffs do, that the hiring of FE was a prohibited transaction because FE was a party in interest providing services to the Ford Plans is a contradiction of terms that undermines Plaintiffs’ claim.” In fact, Cleland wrote, if one applied the logic of the plaintiffs’ argument, “it would be a prohibited transaction to hire any service provider for an ERISA plan because such a hiring would amount to engaging a party in interest to provide services for a plan.”

RICO Rejected

As for the RICO argument – that Xerox HR “repeatedly influenc[ed] the Plans to retain Financial Engines to the exclusion of any other automated individualized account management service providers in exchange for kickbacks” in the form of their take of FE’s fees – the court described this argument as “futile” because “Plaintiffs have failed to plead the predicate acts: violation of 18 U.S.C. § 1954.”

Specifically, while the plaintiffs claim that Xerox HR was liable under the statute because it is “an administrator, officer, trustee, custodian, counsel, agent, or employee” of the Ford Plans or, alternatively, “an officer, counsel, agent, or employee of an employee organization any of whose members are covered by the Ford Plans… they do not explain how it is that Defendant fits into any of these categories,” and that “at this stage, the court is not required to accept as true Plaintiffs’ legal conclusions.” Judge Cleland goes on to write: “the court is dubious that Defendant could properly be held criminally liable for violation of § 1954 as required by RICO.” And if that weren’t enough, he said the argument also failed because “Plaintiffs have not pleaded a RICO enterprise.”

Concluding that “Plaintiffs have again failed to carry their burden to plead facts showing that they are entitled to relief,” Judge Cleland dismissed the plaintiffs’ motion for leave to file a second amended class action complaint, and granted the defendants’ motion to dismiss those claims.

This is the latest of several cases that have challenged the arrangements of several recordkeepers and Financial Engines, including Voya,  Aon Hewitt and Fidelity, as well as against plan sponsors at CaterpillarNestle and Northrup Grumman – but thus far, plaintiffs have failed to persuade a judge of the merits of their case.

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