A participant suit that had sought to represent up to 5 million investors in “hundreds” of retirement plans has come up short – again – in a suit alleging violations of both ERISA and the Racketeer Influenced and Corrupt Organizations Act (RICO).
It was the second rejection of the claims made in the suit, which had been dismissed without prejudice in March 2018 by Judge Virginia M. Kendall who noted that the arguments presented lacked “…allegations of concerted, structured, and purposeful conduct by the Defendants involved,” and thus “fails to adequately allege the existence of an enterprise” – one of the four key elements in establishing a RICO case, where a plaintiff must allege and prove: “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.”
‘Goal’ Post
The original suit, filed in August 2017 by a participant in a plan sponsored by Rollins, Inc., with assets of approximately $500 million and more than 10,000 participants and beneficiaries, alleged that defendants Morningstar, Inc., Prudential Investment Management Services, LLC, and Prudential Retirement Insurance and Annuity Company, 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, sent software development-related, consulting and other revenues to Morningstar.
In fact, plaintiff Michael Green alleged that 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.
Second ‘Shot’
However, while plaintiff Green made another run at making his case, Judge Kendall wasn’t persuaded. Explaining that Green “asserts that Morningstar originally developed GoalMaker and consulted with the Prudential Defendants regarding the program for a flat fee,” she went on to note that in a RICO setting “alleged communications and actions must be undertaken on behalf of the enterprise and not the defendant entities in their individual capacities to advance their individual self-interests.”
“Put differently,” she commented, “the enterprise must not be the same entities named as defendants just referred to in a different way; there really must be a distinction between the defendants and the enterprise.” And Judge Kendall wasn’t persuaded that plaintiff Green had done so: “…once again Green failed to distinguish between the illicit purpose of the enterprise and the lawful purpose of the defendant businesses.”
While the case really turned on the RICO findings the revenue-sharing structure was discussed (and promptly acknowledged as legitimate). Ultimately, Judge Kendall found no ERISA malfeasance since “…in simple terms, the defendants cannot kick back or embezzle dollars that, when all is said and done, they do not control” because the plan sponsor (Rollins) “has the ultimate authority over the selection of funds, not the defendants,” and beyond that GoalMaker was an optional service for participants.
“To be sure, the defendants seemed to be involved with one another through meetings, trainings, and otherwise consulting on projects,” Kendall wrote. “But regular corporate communication and transactions show only that the defendants had a commercial relationship, not that they had joined together to create a distinct entity with the goal of making enough money off GoalMaker to become a market leader.”
Perhaps to add insult to his injuries, Judge Kendall said that even if plaintiff Green had sufficiently pled a RICO claim, it would be barred by the four-year statute of limitations – since he should have known about the fees he was paying in 2012.
“At day’s end, the amended complaint suffers from the first flaw its predecessor did: failure to allege that this ‘enterprise’ was anything more than a run-of-the-mill business deal,” Judge Kendall wrote – this time dismissing the case – with prejudice.
What It Means
The RICO element of this case was unique (and ultimately problematic for the plaintiff), and therefore its implications are limited. However, it’s not the first suit brought against these kind of “robo-advisor” configurations – and while to date they haven’t enjoyed much success (see Robo Arrangement Wins Again on Fiduciary Challenge, Déjà vu All Over Again in Voya Fiduciary Suit and Plaintiffs Come up Short Again in Robo-Advice Suit), for plaintiffs there seem to be two deep pockets to target (the advice provider and the affiliated recordkeeper platform), and so we likely haven’t seen the last of them.
