FIDUCIARY CONCERN: New York Life lawsuit alleges adviser conflict

Employees say transfer of $125 million from MainStay delayed 3 years by fund president

NEW YORK - The investment adviser to New York Life Insurance Co.'s defined benefit and 401(k) plans delayed moving $125 million from the poorly-performing MainStay Value Equity Fund for almost three years after fund trustees directed her to move the assets, plan participants claim.

The investment adviser, Linda Livornese, was president of New York Life's MainStay Institutional mutual funds.

If proved true, the newest allegations in the lawsuit brought by New York Life employees against the company over how the firm manages its pension plans raise considerable fiduciary concern, according to attorneys and consultants.

In documents used as exhibits in the latest round of the class-action suit, plan participants contend that trustees of New York Life's defined benefit and 401(k) plans had hired Ms. Livornese as their investment adviser.

According to internal memos and board of trustee minutes attached to court documents, Ms. Livornese steered money into the MainStay funds. In one example, plaintiffs' claim, the memos show that she delayed for close to three years transferring $125 million out of the MainStay Value Equity Fund, which was faltering. The trustees had in 1998 recommended the assets be moved into a fixed-income investment option that was not managed by MainStay. According to the plaintiffs, the money was not moved until this year.

`Conflict'

"By appointing in-house trustees and allowing them to consider using plan assets to purchase in-house investment products, and then appointing as the trustees' adviser a top marketer of those in-house products, NYL created and maintained a fiduciary structure which virtually guaranteed, if not affirmatively encouraged, the misuse of plan assets...," according to a reply brief recently filed by the plaintiffs in U.S. District Court for the Eastern District of Pennsylvania.

Attached to the plaintiffs' brief is a handwritten note, purportedly written by Jay Calhoun, one of the trustees, stating: "Inaction on direction to move money from value fund. President institutional funds" and then, on a separate line, it states "CONFLICT" (sic).

The plaintiffs' lawyer, Eli Gottesdiener of Washington-based Gottesdiener Law Office, noted that between board of trustee meetings Ms. Livornese was the one moving the money.

"There is clear evidence that if she didn't disobey them she, at least, delayed implementing their clear instructions in order to keep the maximum amount of assets in the MainStay mutual funds as possible," Mr. Gottesdiener said. "The trustees, all senior New York Life executives, were already conflicted. Rather than to take steps to ensure that their decisions were not conflicted, they brought in someone whose own conflict simply compounded their conflict . The documents clearly establish that she had discretionary authority to invest plan assets as she saw fit in between quarterly meetings."

Complaint to be amended

The plaintiffs intend to amend their complaint to add Ms. Livornese as a defendant, Mr. Gottesdiener said.

"The investment adviser provides some counsel to the trustees, and carries out the trustees' directions," according to a New York Life statement for Pensions & Investments. "The trustees have the ultimate responsibility for the investments of the pension fund."

The statement added: "ERISA anticipated that financial institutions like New York Life would manage their own money. Given that, it is obvious that some employees in those institutions would have to serve in dual roles. As a matter of fact, it is well established in case law that employees can fulfill dual roles. Therefore, we're confident that this issue being raised by the plaintiffs' attorney won't be a factor in the outcome of our case."

Ms. Livornese was investment adviser to the trustees from 1993 to 2000, said William Werfelman, a New York Life spokesman. "She is not currently the adviser. She is a managing director in our New York Life Investment Management subsidiary. Jefferson Boyce, a senior managing director in NYLIM has the adviser role now."

While a company employee may wear two hats, the U.S. Supreme Court has held that a fiduciary must wear one hat at a time, said Fred Reish, an attorney who specializes in retirement plan issues and partner in Reish Luftman McDaniel & Reicher, Los Angeles.

Mr. Reish added he has not seen the president of a service provider's mutual fund company advising the trustees of the company's pension and 401(k) plans.

"If they are acting as a fiduciary, they have to act in the best interest of the participants in the plan," Mr. Reish said. "I would dispute slightly that ERISA anticipated that managers would manage their own assets. ERISA anticipated that managers would want to manage their own assets and there are two barriers to doing that."

Prohibited transactions

The first barrier is the prohibited transaction rules, although there is an exemption to those rules for financial institutions so long as they follow specific conditions. The second barrier is the plan sponsor's fiduciary responsibility to behave like a prudent fiduciary, Mr. Reish said.

"The most fundamental requirement for a fiduciary making investment decisions is to engage in prudent processes called procedural prudence," said Mr. Reish, who represents financial institutions. "The two most common ways to engage in prudent process is that they do a diligent investigation into needs of the plan and they hire an independent and competent expert."

Most financial institutions hire outside consultants to do the analysis, with the trustees or investment management committee making the final decision, he added

Ms. Livornese's memo

In one of the memos attached to the plaintiff's latest filing, Ms. Livornese writes that during 1998, and on the direction of the trustees: "We had been moving money out of value, global equity and convertible securities." Global equity was liquidated, she wrote, and the convertible securities account was about to be closed out by year-end 1999. She reported in the memo that the Value Equity Fund was doing poorly.

According to minutes from the trustees' meeting on Jan. 27, 1999, she reported the Value Equity Fund had an annual return of -8.10% for 1998, was ranked in the 99th percentile of the Lipper Growth and Income category, had a two-star rating from Morningstar and experienced a change in portfolio managers. At that point, New York Life's plans had more than $500 million invested in the Value Equity Fund and comprised more than 60% of the assets in that fund, according to plaintiffs' filing.

Overall, the defined benefit and defined contribution plans had nearly $2 billion invested in the MainStay Institutional Funds.

According to the minutes of the meeting, Ms. Livornese suggested the trustees decrease the plans' position in Value Equity by about $50 million "in order to return the asset mix to 50/50" and do it in an orderly fashion" in order to use fixed-income averaging.

The trustees decided to invite an outside party for an assessment at their next quarterly meeting.

2001 move

Although the plaintiffs received no documents after the minutes from the trustees' meeting of Nov. 22, 1999, they contend in their brief that no money was moved until this year. On April 1, 2001, New York Life transferred the $4 billion in defined benefit plan assets out of its mutual funds, now known as Eclipse Funds, and into separate accounts managed by the same money managers.

Firm officials said the move was the result of an asset allocation study in 1999, by consultant DeMarche Associates Inc. (Pensions & Investments, April 30), explaining it took two years to get the results of the study and to make changes in a rational way over a period of time.