A federal judge in U.S. District Court for the Southern District of New York has found the investment manager to two retirement plans liable for losses and ordered more than $15 million in damages to participants.
The lawsuit, which was brought by fiduciaries of plans sponsored by Severstal Wheeling Inc., alleged that investment manager WPN Corp. and its principal, Ronald LaBow, breeched its obligation under the Employee Retirement Income Security Act to adequately diversify plan assets.
That failure resulted in $9.6 million in plan losses to participant assets, according to the ruling of Judge Laura Taylor Swain.
She also awarded more than $5.3 million in pre-judgment interest payments, and the disgorgement of LaBow’s investment fees.
In November 2008, at a time when the two plans in question held about $38 million in assets, LaBow recommended that fiduciaries of the plans transfer the bulk of those assets—more than $31 million—into a separate trust, which was invested solely in large-cap energy stocks.
In December, after concerns were raised about the lack of diversification, LaBow assured the investment committee that he invested the assets as such because the energy stocks could be closely watched and easily liquidated, according to court documents.
LaBow was then instructed several times to reset the assets as they were originally allocated.
In the ensuing six months, LaBow failed to follow several requests by Severstal’s investment management team to properly diversify the assets.
The suit alleged that LaBow misled the company fiduciaries as to his ability to diversify the assets in the energy stocks.
One investment committee member testified during the trial that LaBow’s account of whether or not the assets could be re-diversified “was an ever-evolving story of what could or could not be done that seemed to change during just about ever conversation,” according to court documents.
“It was almost as if he was doing his homework after the fact as opposed to having it done before,” the according to the witness’ testimony.
In May 2009 Severstal terminated its relationship with LaBow and WPN.
LaBow argued that his ultimate inability to liquidate the undiversified assets was the result of Severstal’s investment management team’s inability to execute an investment contract to the fund company managing the assets in the energy stocks, Neuberger Berman.
The court found that attempt to shift the blame to the retirement investment committee to be “disingenuous,” according to the ruling.
Judge Swain’s decision resulted from a more than two-week bench trial held in July 2014.
Last March, the Department of Labor brought its own action against LaBow and WPN, as well as a claim against two members of Severstal’s investment management team for failing to adequately vet LaBow and his firm before entrusting plan assets to him.
The DOL’s claim was stayed pending the outcome of the case in New York District Court. The DOL has not released when or if its claim will be restated.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
