A lawsuit claiming that Pension Consulting Alliance failed to monitor a Northern Trust Corp. securities lending program for the $10.2 billion Los Angeles City Employees' Retirement System could have wide implications for all investment consultants.
Lawyers not affiliated with the case said that depending on who prevails in the complaint by Los Angeles City Attorney Carmen A. Trutanich, general investment consulting firms could be held responsible for the actions of their clients' investment managers, custodians and securities lending firms — even if they are not contractually required to be.
Some industry watchers call the case unprecedented for attempting to make a general consultant responsible for the actions of a securities lending firm.
Mr. Trutanich is suing both Northern Trust, LACERS' custodian and securities lending administrator, and Pension Consulting Alliance, LACERS former general investment consultant. He is claiming on behalf of the state of California that Northern Trust breached its fiduciary responsibility by lending LACERS securities to companies that invested in risky consumer debt and mortgage-backed securities. He claims that cost the pension fund more than $95 million.
The suit also alleges that Northern Trust changed to the risky investments from safer ones without telling LACERS executives.
The lawsuit also claims that PCA failed to monitor and warn LACERS that Northern Trust was making these investments and failed to act as LACERS' “watchdog,” according to the suit.
Executives at both PCA, Portland, Ore., and Chicago-based Northern Trust deny wrongdoing.
Northern Trust still holds both roles for LACERS, Linda Aparicio, LACERS spokeswoman, said.
Should PCA lose the case, employee benefits attorneys said the decision could expand the fiduciary responsibility of consultants. If courts begin to hold consultants liable beyond the limits of their contracts, it would lead to a business decision of whether the risks justify keeping the client, said Andrew Oringer, partner at Ropes & Gray LLP, a New York based law firm.
“One of the potential dangers of expanding the circle of liability is potentially adversely impacting the willingness of presumably very capable providers to stay as providers,” Mr. Oringer said.
That part of the case will turn on what exactly is in PCA's contract with LACERS and how much fiduciary responsibility PCA accepted.
If PCA's contract is more generic, does not go into detail and the court still holds the consultant responsible, it would be significant for the consulting community, said Brian Pinheiro, partner in the Philadelphia office of law firm, Ballard Spahr LLP.
PCA contends its contract with LACERS did not include monitoring the fund's securities lending agent.
“PCA's services were defined in their contract with LACERS. Those services did not include an obligation to monitor LACERS' securities lending program or oversight responsibility of LACERS' securities lending agent,” said Colin H. Murray, partner, litigation practice group, in the San Francisco office of law firm, Baker & McKenzie LLP, which is representing PCA.