DALLAS - The $1.6 billion Laborers, National Pension Fund won a $7.1 million judgment from ANB Investment Management & Trust Co. and its parent over losses from a stripped mortgage-backed securities investment.
U.S. District Judge Robert B. Maloney ruled in August that defendants ANB and First National Bank of Chicago breached their fiduciary duty to Laborers' plan participants, leading to an injury of $7.1 million.
The Northern District of Texas court ruling stemmed from an $11 million investment ANB made in 1991 in interest-only mortgage-backed securities, in which ANB lost about 40% of its investment, the judge's ruling says.
Tom Kelly, a spokesman for the defendants' parent, First Chicago NBD Corp., Chicago, declined comment other than to say bank lawyers are considering whether to appeal.
In court proceedings, attorneys for the $1.6 billion Dallas-based Laborers' pension fund contended the IOs were not permitted by the pension fund's investment guidelines, while ANB's defense said the IOs were appropriate as a part of a diversified portfolio managed under modern portfolio theory.
The judge's ruling states that Thomas Pierce was the ANB executive responsible for the investments, and he "failed to consider the investment guidelines or whether IOs would violate the spirit of the guidelines.
"Had (Mr.) Pierce properly disclosed the risks associated with IOs to the (t)rustees, they would have, in all likelihood, specifically excluded them," the judge's ruling said.
Mr. Kelly again declined comment on whether Mr. Pierce was the responsible portfolio managers. According to a press report, Mr. Pierce left ANB in 1994.
Mr. Pierce, reached at Manufacturers & Traders Trust Co., Buffalo, N.Y., said: "I'm not able to comment at this time."
Mr. Pierce manages the Vision New York Tax-Free fund and the Vision U.S. Government Securities Fund, two M&T mutual funds, according to Morningstar Inc., Chicago.
Mr. Pierce declined to comment on his duties at M&T.
James Ray, an attorney for Connerton and Ray, Washington, who worked on the case and is a trustee for the Laborers' fund, said ANB helped establish the investment guidelines in 1976, before the advent of IO strips.
An IO strip is created from the interest payments on a mortgage-backed security. The amount of interest paid on an IO strip is dependent on the rate at which the underlying mortgages are paid off by the borrower. If interest rates fall and mortgages are refinanced, the amount of money passed through to the owner of the strip will fall or cease, reducing the price of the IOs, sometimes dramatically.
In addition, the ruling said Laborers' fund guidelines specified that investments should "preserve the principal while recognizing the need for income and appreciation with minimal risk."
"From the inception of the relationship, it was understood that the (t)rustees had a very low tolerance for risk of loss of principle, particularly with regard to fixed-income investments," Judge Maloney said.
The Laborers' victory could give pension funds in similar situations incentive to file suit, Mr. Ray said.
The difference between the roughly $4 million actual loss on the investment and the $7 million judgment comes from opportunity costs, Mr. Ray said.
Mr. Ray said ANB had managed $280 million for the then-approximately $1 billion fund. ANB managed money for the Laborers fund from 1971 to 1994.
He said testimony from Frank Fabozzi, a professor at Yale University, and other witnesses, was invaluable in winning the case.
But the case is not ground-breaking under the Employee Retirement Income Security Act of 1974.
David Levin, managing partner of the Washington office of the law firm Reish & Luftman, said the case underscores the importance of outside money managers knowing and following formal investment guidelines, but plows no new ground.
Mr. Levin said this case is similar to one brought by the Department of Labor in 1996 against Connecticut Plumbers and Pipefitters pension fund trustees for investing in mortgage-backed securities (Pensions & Investments, Aug. 19, 1996), "The (Labor Department's) case didn't turn on the fact that it was derivatives," and this case doesn't either, even though derivatives were involved in both, he said. (The Labor Department's case against the Connecticut Plumbers fund, based in Wallingford, Conn., is still in the discovery phase, a DOL spokeswoman said).
The issue in the Laborer's case was whether the external manager followed the investment guidelines, and the court decided the manager didn't, he said.