ERISA Self-Dealing Rules Clarified As GE Suit Rolls Along

Posted October 30th, 2019.

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By Kevin Stawicki

Law360 (October 30, 2019, 8:51 PM EDT) — A Massachusetts federal judge on Wednesday denied General Electric Co.’s attempt to scrap her decision to allow a claim that GE improperly invested workers’ retirement savings in subpar company-affiliated funds, clarifying the scope of an exemption to federal benefits law’s self-dealing rules.

The Employee Retirement Income Security Act’s Prohibited Transaction Exemption 77-3 still can’t apply to the company because workers leading the proposed class action successfully pled a fiduciary-breach claim under ERISA that alleges substantial self-dealing tied to a 2016 deal with State Street Corp., U.S. District Judge Indira Talwani said.

“Plaintiffs have alleged that beyond merely investing in in-house funds (the GE Funds), defendants did so as part of a strategy to prop up the apparent value of GE Asset Management before its sale to State Street, and that this sale profited defendants’ own account,” Judge Talwani wrote. “This allegation, if substantiated, may constitute a prohibited transaction beyond the scope of the PTE 77-3 exemption since the allegations concern self-dealing beyond the mere acquisition and sale of shares of an in-house fund.”

Judge Talwani in December trimmed one claim from the proposed class’ suit but preserved allegations that the company violated ERISA by offering certain proprietary funds even though they were expensive and performed poorly. The class alleged that GE kept those funds in the 401(k) plan’s lineup in order to amass fees for a subsidiary and inflate the subsidiary’s value before it was sold.

GE argued in a motion to reconsider the ruling that the exemption should apply regardless of whether the company committed a fiduciary breach when it placed five of its own funds in the company’s 401(k) plan lineup even though four of those funds allegedly underperformed and one allegedly charged excessive fees.

But the workers argued in February that the court already rejected the argument that PTE 77-3 should have been the reason to dismiss that part of their suit and that there wasn’t any error in the judge’s decision that needed correcting.

The participants initially sued GE, GE Asset Management and other related affiliates and individuals in 2017, alleging in multiple revised pleadings that GE breached its fiduciary duties under ERISA by not acting in the best interests of the plan and instead used the plan to garner fees and “prop up” mutual fund business for GE Asset Management.

The company moved to toss the case, saying that the participants’ claims were erroneously based on hindsight and that the U.S. Department of Labor distinctly allowed the practice of offering affiliated mutual funds. But in August, Judge Talwani allowed six of the participants’ eight claims to proceed, taking the other two under advisement. Those two were the claims ruled on in December.

Counsel and representatives for the parties did not immediately respond to a request for comment.

The participants are represented by Jason M. Leviton and R. Joseph Barton of Block & Leviton LLP, Mark C. Gardy and Orin Kurtz of Gardy & Notis LLP, Lee Squitieri of Squitieri & Fearon LLP, Evan J. Kaufman and Jordan D. Mamorsky of Robbins Geller Rudman & Dowd LLP, and Andrew Miller, Charles H. Field and David Tracey of Sanford Heisler Sharp LLP.

GE is represented by James O. Fleckner, Alison V. Douglass and Jaime A. Santos of Goodwin Procter LLP.

The case is In re: GE ERISA Litigation, case number 1:17-cv-12123, in the U.S. District Court for the District of Massachusetts.

–Additional reporting by Adam Lidgett, Danielle Nichole Smith and Emily Brill. Editing by Haylee Pearl.

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