Letter to Robert A. G. Monks from the Law Office of
Peter L. Murray - re: ERISA
January 25, 2001

Law Office of Peter L. Murray
89 West Street
Portland, Maine 04102

Phone: 207 879-1533                                                                    Fax 207 879-9073

January 25, 2001

Mr. Robert A. G. Monks
Lens, Inc.
45 Exchange Street
Portland, ME 04101

Re: Employee ERISA Remedies for Fiduciary Investment Mismanagement 

Dear Mr. Monks:

You have asked my opinion whether employee participants in employee benefit plans maintained by Stone & Webster, Inc., have a reasonable avenue of legal recourse against Putnam Fiduciary Trust (“Putnam”), the ERISA Trustee of Stone & Webster’s employee benefit plans, for 1) Putnam’s improvident investment of plan funds in common stock of Stone & Webster only a few months before that firm declared bankruptcy, and 2) Putnam’s failure to take any affirmative action as Stone & Webster’s single largest shareholder to avert the firm’s financial collapse.  Based on the facts as related to me, and based on my own legal research and that of Barbara T. Schneider, Esq. of Murray, Plumb & Murray, Portland, Maine, it is my opinion that the Employees Retirement Security Act of 1974 as it is currently construed by the courts does not as a practical matter provide the Stone & Webster employees with a viable legal remedy for the above cited actions and inaction on the part of Putnam and the employees’ resulting financial loss.

Material Facts

You have advised me of the following material facts, on which this opinion is based.

Stone & Webster, Inc., a Delaware corporation with a principal place of business in Boston, Massachusetts, has been primarily an engineering and construction company, although it has been engaged in other businesses, including at one time securities underwriting and, more recently, cold storage.  It has sponsored various employee benefit plans, including a pension plan and various employee thrift and stock ownership plans.   These employee plans have invested substantially in Stone & Webster stock and have been for a long time collectively the Company’s largest shareholder, holding nearly 33.9% of the Company’s outstanding common stock.  Putnam Fiduciary Trust, of Quincy, Massachusetts, serves as Trustee of these plans and is responsible for investment of plans’ funds and administration of the plans’ portfolios.  Putnam is a “named fiduciary” within the meaning of the Employee Retirement Income Security Act of 1974.  See 29 U.S.C. §§ 1102(21)(A) & 1102(a) (ERISA).

Several years ago as the result of shareholder initiatives spearheaded by Lens, Inc. the Company’s Board of Directors adopted certain governance reforms including election of at least one truly independent director.  The Board also resolved to focus the Company’s activities on its core engineering business and divest itself of extraneous assets and investments, including the Company’s cold-storage properties.

In 1998 the Company experienced a cash shortage as a result of cancellation of major construction projects abroad.   At the same time Company management inexplicably abandoned its earlier efforts to sell the cold storage properties and instead made a major new investment in cold storage warehouses.   The cash crisis intensified.

 Late in 1999 Company management and Putnam entered into an arrangement to generate needed cash by the sale of additional shares of Stone & Webster common stock to the Stone & Webster employee benefit plans.  On December 14, 1999 Putnam purchased with plan funds one million shares of Stone & Webster common stock at a price of $15.35 per share.

Within four months the stock price had tumbled, and on June 2, 2000, a scarce six months after Putnam had bought the stock the Company declared bankruptcy.  The employee benefit plans had lost a total of approximately $75,000,000 on their Stone & Webster stock, including nearly $14 Million in this most recent investment.

You have suggested that Putnam’s conduct in connection with this investment may give rise to fiduciary liability in at least two senses:

1) The decision to buy more Stone & Webster stock was a very bad one at the time it was made.  There were abundant indications that the Company was in trouble.  Its engineering business was floundering.  The 180% shift on the cold storage business was inexplicable.  The independent director had resigned.  These circumstances were such as to lead a prudent trustee to use extreme caution in considering a further investment of fiduciary funds.  Under these circumstances Putnam’s decision to invest $15 Million in plan funds in Stone & Webster stock, possibly without sufficient analysis and due diligence, may well not have been the action of a prudent person in the management of plan funds.

2) Putnam took no action in its position as Stone & Webster’s largest single shareholder, owning more than one-third of the company, to investigate the Company’s circumstances, to work with other large shareholders to effect positive change, or to challenge management or to hold it accountable.  While one cannot expect much pro-active behavior from small shareholders, a shareholder with the relative voting power of Putnam as fiduciary of all the employee plans has real options to protect its investment and can exercise a strong positive influence on management and the state of affairs at the company.   Moreover, the proportion of its portfolio invested in Stone & Webster stock meant that the consequences of Putnam’s failure properly to manage, monitor and exercise the ownership rights inherent in this investment would be particularly catastrophic.  Putnam took no action to exercise its rights as Stone & Webster’s largest single shareholder but let management continue in a counter-productive and ultimately self-destructive downward spiral.  It can be persuasively argued that such inaction by a plan fiduciary (whose sole duty is to the employee participants of the plans) can smack of conflict of interest and rise to a breach of fiduciary duty in the administration of the plan’s invested assets.

At least the first basis for liability finds support not only in reported decisions under ERISA, but also in the Regulations issued by the Labor Department under ERISA.

Section 404(a)(1) of ERISA requires, in part, that plan fiduciaries must act solely in the interest of participants and beneficiaries of a plan and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.  A Plan may be permitted to acquire qualifying employer securities under section 408(3); however, if the acquisition is not prudent (because, for example, of the poor financial condition of the employer) or is not for the exclusive purpose of benefiting participants and beneficiaries (such as an acquisition that is made primarily to finance the employer), the responsible plan fiduciaries will remain liable for any loss resulting from a breach of fiduciary responsibility.

Department of Labor, Opinion of the Office of Regulations and Interpretations, 96-08A (1996).

 If the foregoing facts were asserted and proven in court one would expect that Putnam would be held liable to reimburse the Stone & Webster employee plans for the losses sustained by reason of this most recent investment in Stone & Webster stock.  The question, though, is who is in a position to bring Putnam to court and hold it accountable to provide redress to the employee plans which it harmed?^[1]

Question Presented

Does ERISA give Stone & Webster employees who are participants in the employee benefit plans administered by Putnam practical ability to obtain redress from Putnam for the harm suffered by the employee benefit plans and themselves as plan beneficiaries?  As stated above and for the reasons hereafter set forth, the provisions of ERISA as construed by the courts do not give adequate support or incentives for employee participants to seek and obtain redress for Trustee malfeasance under the circumstances posed, even assuming that the Trustee is guilty of either or both of the breaches of fiduciary duty described above.

Reasons for Opinion

The Employee Retirement Income Security Act of 1974 (ERISA) was hailed at its enactment as legislation giving important rights to employee beneficiaries of private pension and employee benefit plans.  For the first time, the entire group of obligations and relationships involved in the nation’s private pension system were brought under one regulatory scheme.  The obligations of sponsors and administrators of employee benefit plans were federalized and clarified.  The “prudent man rule” was adopted to govern the responsibilities of plan fiduciaries with respect to investment of plan funds. All of these measures, although creating some added complexity in employee benefit administration, have tended to rationalize and improve the administration of employee benefit plans.  On the other hand, it is now evident, if it was not evident at the time ERISA was enacted, that the portions of ERISA which provide remedies for breach of ERISA-created fiduciary obligations seriously limit the practical ability of employee participants in ERISA plans to obtain legal redress either for themselves or for the plans of which they are members.

1.                  Employee Claims for Fiduciary Liability under ERISA

The provisions of ERISA that provide remedies for breaches of fiduciary duty by trustees are found in 29 U.S.C. § 1109 and 1132.   Read together, the statutory sections of ERISA that provide the remedy for breach of fiduciary duty give both individual plan participants, beneficiaries, and fiduciaries, as well as the Department of Labor standing to enforce ERISA’s fiduciary requirements by suit in court.

Individual employees or beneficiaries may bring claims against fiduciaries both in their individual capacities, see 29 U.S.C. § 1132(a)(3) (allowing generalized relief) and on behalf of the plan as a whole, see 29 U.S.C. § 1132 (a)(2) (allowing specific relief under section 1109).  See Varity Corp. v. Howe, 516 U.S. 489 (1996)  (recognizing right of individual plan members in breach of fiduciary duty case to bring claims pursuant to 29 U.S.C. § 1132(a)(3) to seek reinstatement of benefits that were given up as a result of fiduciary’s breach).  ERISA does not, however, give individual employees or beneficiaries the right to bring breach of fiduciary duty cases seeking their own compensatory damages.  Although individual employees or beneficiaries may bring actions on behalf of a plan against a trustee for breach of fiduciary duty and obtain in such actions restitutionary remedies to reimburse the plan for its losses, the structure of ERISA as it now exists deters such actions and makes them a practical improbability.

The only circumstances under which a plan participant, fiduciary, or beneficiary can complain in her own name of actions of the trustee are those cases in which the individual can establish some sort of individualized harm.  For example, in Varity, after a company that sponsored a self-funded employee welfare benefit plan decided to transfer the assets of all of its failing divisions to a new company, the employees were induced by the company in its capacity as plan administrator to release it from its obligations under its plan and “sign up” for benefits in the new company’s plan.  The new company failed and the employees successfully brought suit to be “reinstated” into the plan of the original employer.  In the case of Varity, the employees were able to show some sort of individualized harm to their own benefit packages, which the Supreme Court enabled them to pursue under 29 U.S.C. § 1132(a)(3).

Under this doctrine, the most common category of cases brought under ERISA are claims by employees for withheld or terminated benefits.  Such claims involve individualized harm to the employees.  They also produce individual economic recoveries which will support the employment of counsel and contingent fee arrangements.

In cases where a fiduciary has mismanaged plan investments, the harm is to the plan as a whole rather than individual employees, and will not support individual actions.  Although employees clearly have the right to bring suit for such harms, the proceeds of such suits go directly to the benefit of the plans.  There is nothing which goes to the employee or employees who go to the trouble to bring the suits.

There is also no money available from which to pay contingent fees to the employees’ lawyers.  Employees, although authorized to bring suit for the benefit of employee plans, do not have the authority to dedicate plan assets (including amounts recovered for the benefit of the plan) to the payment of the employees’ lawyers’ fees.  There is thus very little incentive for employees to bring such suits and no means by which to finance them.

This does not mean that there are no cases in which employees have complained of breaches of fiduciary duty by trustees and other fiduciaries.  There have even been cases where employees have been able to maintain breach of fiduciary claims against trustees that have invested in employer stock, when the employees have been able to demonstrate that the trustees abused their discretion.   E.g. Moench v. Roberston, 62 F.3d 553, 571 (3^rd Cir. 1995) (reversing summary judgment in favor of trustee and remanding for factual determination of whether trustee had divided loyalties and made an impartial investigation of all options).   The difficulty is that there is very little practical incentive for most employees, particularly non-management employees of large corporations, to bring such actions, where there is no direct economic return to the employee and no direct economic recovery to support a contingent fee to the employees’ lawyer.

While claims in behalf of numerous employees against a single wrongdoer would seem to be well suited to class action treatment, ERISA effectively displaces the class action by authorizing any employee to bring suit in behalf of the plan, and limits the opportunity of employees to bring claims in their own interests by limiting employees’ ability to obtain compensatory damages.  See McLeod v. Oregon Lithopring, Inc., 102 F.3d 376 (9^TH Cir. 1996) (holding that while individuals may bring breach of fiduciary duty claims against a plan administrator as a result of the Supreme Court’s holding in Varity, such claims are limited to equitable relief and employees may not pursue compensatory damages); see also Hoeberling v. Nolan, 49 F.Supp. 575 E.D. Mich. 1999).

It is unlikely that even a group of employees will wish to bring a suit which will only redound indirectly and in small part to their benefit.  The indirect per-employee effect of even egregious losses such as those sustained by the Stone & Webster plans in this case is unlikely to provide enough incentive to cause employees to initiate a David-and-Goliath battle with a multi-million dollar adversary such as Putnam Fiduciary Trust, to recover funds which will only ultimately redound in tiny proportion to their individual benefits.

2.                  Actions by the Department of Labor for the benefit of employees harmed by fiduciary misconduct.

One option for the Stone & Webster employees might be to try to convince the U.S. Department of Labor (DOL) to bring suit and obtain redress in their behalf. An aggressive program of public enforcement of ERISA fiduciary standards by DOL-instituted litigation could in part make up for the lack of resources and incentives for private enforcement by employees and their lawyers.   While the DOL has occasionally brought a case raising issues of fiduciary liability for poor investment decisions, the relative rarity of reported cases of this kind suggests that such actions may be more the exception than the rule.  One would expect that the Department of Labor’s limited resources must be allocated to those programs it considers most important for the nation as a whole, and may not suffice to provide redress to individual groups of employees harmed by investment mismanagement by their plan fiduciaries.  Indeed, the policy of the DOL in recent years has been to emphasize bringing erring fiduciaries into  “voluntary compliance” rather than holding them financially responsible for the effects of their lapses on the plans in their trust.  See, e.g. U.S. Department of Labor, Fact Sheet: Voluntary Fiduciary Correction Program, www.dol.dol/pwba/public/pubs/vfcpfs.htm.  Although an enterprising employee might attempt to convince the DOL to litigate the issues in this case, given the relative novelty of at least the second issue, one could have no confidence that the DOL would make this one of the relatively few fiduciary enforcement actions that it would bring in court.

3.                  Attorneys’ Fees in ERISA Claims

ERISA does attempt to mitigate the burden of litigation on successful parties by authorizing awards of attorneys’ fees in the discretion of the court.  However these provisions, as construed to date, tend to exacerbate rather than mitigate the disincentive to plaintiffs to undertake claims of the kind involved in the Stone & Webster case.

The terms of 29 U.S.C. §1132(g) provide that “the court in its discretion may allow a reasonable attorney’s fee and costs of action to either party.”  For potential employee plaintiffs the message of this section is clear.  Any compensation from the defendant for the employees’ counsel will be only at the discretion of the court:

”Unlike other fee-shifting statutes . . . ERISA does not provide for a virtually automatic award of attorneys’ fees to prevailing plaintiffs.  Instead, fee awards under ERISA are wholly discretionary.”

            See Cottrill v. Sparrow, Johnson & Ursillo, Inc., 100 F.3d 220, 225 (1^st Cir. 1996).

            Most circuits that have addressed the question have refused to adopt any  “mandatory presumption that attorneys’ fees will be awarded to prevailing plaintiffs in ERISA cases absent special circumstances. “  Id.  Instead, attorneys’ fees are awarded after consideration of five factors, namely:

“(1) the degree of the opposing parties’ culpability or bad faith; (2) the ability of the opposing parties to personally satisfy an award of attorney’s fees; (3) whether an award of attorney’s fees against the opposing party would deter others from acting under similar circumstances; (4) whether the parties requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA: and (5) the relative merits of the parties’ positions.”

Sage v. Automation, Inc, Pension Plan and Trust, 931 F.2d 900 (10^th Cir. 1991) (attorneys’ fees denied to successful plaintiffs on remand at 777 F. Supp. 876 (D. Kansas 1991).

Thus, a plaintiff seeking to establish a fiduciary’s liability to a plan for breach of duty will have to reckon with the possibility that even if successful, payment of attorneys fees by the other party is not guaranteed.  And awards of fees have tended to be relatively modest, computed on an hourly basis without multipliers to reflect the actually contingent nature of such compensation.  See, e.g. Bruner v. Boatmen’s Trust Company, 918 F. Supp. 1347 (E.D. Mo. 1996) (award of attorneys fees equal to about 10% of amount recovered for the fund based on hourly rate of $100 without enhancement).

Moreover, the provisions of ERISA permitting awards of attorneys’ fees go both ways.  An unsuccessful plaintiff may be ordered to pay the fees incurred by the defendant.   Although the five factors that most courts use to determine whether or not attorney’s fees should be awarded tend to discourage awards to prevailing defendants, see Salovaara v. Eckert, 222 F.3d 19, 28 (2^nd Cir. 2000), there are instances where losing plaintiffs have been required to pay attorney’s fees incurred by the other side, Operating Engineers Pension Trust v. Gilliam, 737 F.2d 1501 (9^th Cir. 1984).

The effect of ERISA’S fee-shifting provisions in the area of claims for fiduciary liability is to deter all but the most cut-and-dried “slam-dunk” cases of trustee malfeasance.  Without some guarantee of reasonable compensation, or at least a good chance for a real contingency fee, plaintiffs’ attorneys can scarcely be expected to undertake complex litigation against corporate trustees.  And the risk of being required to pay the adversary’s fees will screen out all but the most obvious and routine claims, certainly any cases that raise new theories or attempt to cut new ground.

 While it might occasionally be possible to find a lawyer willing to prosecute a simple and relatively obvious case of fiduciary negligence or incompetence, for the reasons above stated, more serious cases such as the Stone & Webster case, are very likely to go begging. This is particularly the case if the claim is somewhat novel, as would be the case with the second potential claim described above.  While it is perfectly logical to hold that a trustee who neglects the prudent management of an investment once bought is as negligent as one who carelessly makes the investment in the first place, the fact that this claim is not specifically established by statute and is not well known in the case law would make it extremely unlikely that a plaintiff would assert it if it had to pay its own attorney’s fees or, potentially, pay its opponent’s attorney’s fees.

Conclusion

This statutory scheme, as construed to date by the courts, means that at least some of the obligations ERISA imposes on plan fiduciaries may be illusory in that there is no effective means for the employee beneficiaries to hold the plan fiduciaries accountable.  This state of affairs is not in accord with the stated purposes of ERISA, but it appears to be an undeniable practical reality.

What would be needed to “even the playing field” would be:

1) Better standards for the award of attorneys’ fees in ERISA cases, including a “risk factor” to compensate successful plaintiffs’ counsel for the practically contingent nature of such engagements, and standards limiting awards of fees to defendants to egregious cases of plaintiff bad faith.

2) More clearly defined standards of fiduciary responsibility, especially in the area of the fiduciary’s exercise of its governance rights and options as a shareholder. This is particularly important where the fiduciary is a major shareholder of the employer, and not only has the ability to exercise shareholder power in the interest of plan participants and beneficiaries, but also is subject to potential conflicts of interest which might impede it in the exercise of this power.

In the absence of either or both of these reforms, not only the Stone & Webster employees, but many others like them, will continue to go without effective practical remedy for serious breaches of fiduciary duty by employee plan administrators and trustees.

My qualifications to render this opinion include several decades of practice experience with employee benefit plans, before and under ERISA, my experience as a litigator in cases involving ERISA issues, and my ongoing work in law academics as Braucher Visiting Professor of Law from Practice at Harvard Law School.

Very truly yours,

Peter L. Murray