GE Says Judge Misunderstood Prohibited Transaction Claim

Posted January 11th, 2019.

As It Appeared On
Law360

By Emily Brill

Law360 (January 11, 2019, 8:17 PM EST) — General Electric Co. on Friday asked a Massachusetts federal judge to reconsider her decision to allow a claim that GE improperly invested workers’ retirement savings in subpar company-affiliated funds, telling the judge she misinterpreted the conditions under which an exemption to the Employee Retirement Income Security Act’s self-dealing rules apply.

GE said U.S. District Judge Indira Talwani mistakenly thought ERISA’s Prohibited Transaction Exemption 77-3 couldn’t apply to the company because its workers successfully pled an ERISA fiduciary-breach claim.

GE said 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 underperfomed and one allegedly charged excessive fees.

“This court declined to dismiss Count IV, holding that PTE 77-3, an exemption that allows a company to offer affiliated mutual funds without committing a Section 406 prohibited transaction, was inapplicable at this stage because plaintiffs adequately pleaded a violation of ERISA’s general fiduciary duties under Section 404(a),” GE said in a memorandum in support of its motion for reconsideration. “This conclusion conflated Sections 404(a) and 406, and erroneously made compliance with one provision a condition of compliance with the other.”

GE asked Judge Talwani to “correct this error without delay” and reconsider whether Count IV — a claim that GE violated ERISA’s ban on self-dealing — belongs in the suit.

R. Joseph Barton of Block & Leviton LLP, an attorney for the proposed class of GE workers, said the plaintiffs “believe the court made the correct decision the first time when it came to this claim.”

In December, Judge Talwani trimmed one claim from the proposed class’ suit in response to GE’s motion to dismiss. She preserved allegations that the company flouted 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.

The participants initially sued GE, GE Asset Management and other related affiliates and individuals in October 2017, revising their pleadings multiple times before their most recent complaint in March. The participants alleged, among other things, 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 the following month, saying, among other things, 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.

A representative for GE said Friday the company does not comment on pending litigation.

Counsel for GE did not immediately respond to request for comment Friday.

The participants are represented by Jason M. Leviton, Jacob A. Walker and R. Joseph Barton of Block & Leviton LLP, Mark C. Gardy and Orin Kurtz of Gardy & Notis LLP, Lee Squitieri and Raymond Barto of Squitieri & Fearon LLP, Evan J. Kaufman and Jordan Mamorsky of Robbins Geller Rudman & Dowd LLP, and Andrew Miller and Charles H. Field 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 Danielle Nichole Smith. Editing by Stephen Berg.

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