PHILADELPHIA -- The latest ruling in the Wellington-Schneider battle came down on the side of money management firms, rather than their clients.
The 3rd Circuit Court of Appeals in Philadelphia ruled contracts between investment managers and the firm for which they work are internal business arrangements that don't have to be revealed to their clients.
Keeping such business decisions inhouse doesn't harm an investment manager's fiduciary obligations to clients as outlined in either the Employee Retirement Income Security Act or the Investment Advisers Act of 1940, according to the Aug. 18 decision (Pensions & Investments, Aug. 24).
Frank Russell Co. of Tacoma, Wash., had sought in April an injunction against Wellington Management Co., Boston. Russell wanted the court to stop Wellington from forcing former partner Arnold Schneider to give up Russell as a client. Russell uses Mr. Schneider's new firm, Schneider Capital Management, an all-cap value equity manager, in its manager-of-managers program.
Russell attorneys had leaned on both ERISA and the 1940 Act in their arguments, which prevailed in the lower court but were struck down on appeal. The court struck down each of Russell's arguments.
Russell had argued that by suing Mr. Schneider, Wellington had not acted in the best interest of clients, as is its fiduciary responsibility under ERISA. The appeals court determined the action of Wellington was a business decision, not a fiduciary one.
Russell also charged Wellington failed to inform Russell that its partners were bound by noncompete agreements; Russell should have been told, attorneys argued, because a manager change in this instance will cost an estimated $13 million to $25 million in transaction expense.
The court pointed out Russell and Wellington's contract could be canceled on a 30-day notice: "Wellington therefore always had the power to impose substantial transactions costs on Russell.
"We note that Schneider is far more responsible for imposing the $13 million to $25 million potential costs on Russell than Wellington is. It was Schneider's choice to sign the noncompete agreement, Schneider's choice to leave Wellington, and Schneider's choice to accept Russell's business in violation of the agreement."
Russell formerly used Wellington in its manager-of-managers program. When Mr. Schneider left Wellington in late 1996, Russell and two large pension clients followed Mr. Schneider to his new firm in Wayne, Pa.
Wellington sued Mr. Schneider because of the noncompete agreement, and won a decision in Massachusetts district court that forced Mr. Schneider to give up the former Wellington clients.