By Susan Barreto
went wrong in 2008, many investors learned that greed wasn't
good. Now some of these same pension funds are learning that
greed on the Gordon Gekko scale also does not necessarily equal
success when it comes to the courtroom.
As rumours swirl that defendants in an early Madoff-related
lawsuit are setting aside property and assets in preparation
for a possible settlement, the court system in the US is seeing
its fair share of pension investment litigation surrounding
issues of potential fraud and fiduciary responsibility.
Recent non-Madoff related lawsuits do not seem to have been
successful, although they may more easily lay claim to breach
of fiduciary duty. Or is this something pension funds have
For example, Seattle City Employees' Retirement System lost
the legal action it took earlier this year against a fund
called Epsilon Global Active Value Fund II (see page 13).
Rather than claiming fraud or failure of fiduciary
responsibility, Seattle took aim at the failure of Epsilon to
provide audited financial statements at the end of 2008, then
its suspension of redemptions in the early months of 2009 and
the fees it charged on money that was locked up.
Whether Seattle will follow up with an appeal has yet to be
seen. But the city pension fund's defeat in such litigation
follows similar disappointment at San Diego County Employees'
Retirement Association, which lost its case against Amaranth
Advisors. Officials at one time said they planned to appeal the
court's decision, but it looks a tricky case - as Amaranth
didn't engage in illegal activity and the court has ruled that
the pension fund's contract with Amaranth did indeed contain
routine disclosures that advised of some level of risk.
What about outright fraud? Bernard Madoff has been providing
an interesting test when it comes to fiduciary responsibility -
a hitherto largely untested area, but part of a mindset and
sales technique that are often bandied around. Much of the
Madoff-related litigation continues to clog the court system
and includes a variety of pension funds and ancillary
The recent case against Ivy by New York Attorney General
Andrew Cuomo seems to be very detailed. Instead of focusing on
failed fiduciary responsibility alone, the case goes into the
profits Ivy allegedly made from misleading clients into
believing Madoff was a legitimate investment, while officials
at the firm apparently revealed in internal emails their
misgivings over the investment.
Showing a profit from malfeasance may be the key to winning
the argument. But Ivy says that the complaint relates to
non-discretionary advisory services that it provided to a
limited number of professional investment advisors who, in
turn, chose to invest their own clients' assets with Madoff
(see page 12).
As Cuomo makes his bid for the New York Governor's office,
it may be that much of this activity is politically motivated.
Public pension trustees themselves are subject to prudent
investor standards, but does that mean they are responsible for
losses if a manager messes up? Or is the adviser or consultant
The town of Fairfield, Connecticut's case against NEPC could
ultimately determine who holds fiduciary responsibility. In
early 2009, the town filed its first complaint which emphasised
that NEPC conducted no due diligence on the Maxam fund that
ended up being a feeder into Madoff. That case involves a
number of defendants and has yet to be decided.
For now, the outcome is a whole new concept of headline
risk. So whether more such lawsuits will be filed in future is
doubtful, especially if it is up to the pension fund trustees
to adequately define fiduciary responsibility within their
portfolio - as they themselves may ultimately be held to the
same test by the pensioners they serve. Then again, if
Fairfield or the New York Attorney General's office were
to win, it could create an interesting legal precedent.