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Nager Vs. Teachers' Retirement Board of the City of New York


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The Teachers' Retirement System of the City of New York operates a Variable Annuity Program in addition to providing Defined Benefit pensions. Its Variable Annuity has three investment options: A fixed interest rate, currently 8.25 percent; a Variable A fund, for investment in common stock and a Variable B fund, for investment in "fixed income and equity securities". This Variable Annuity Program is available for mandatory employee pension contributions as well as pre-tax investing under section 403(b). Since 1970 this Variable Annuity Program has been the sole investment provider under section 403(b) for the k-12 crowd of the City School District of New York.

The Variable B Fund began operation on July 1, 1983. The TRS Board of Trustees have never invested Variable B assets in "fixed income and equity securities" but only in fixed, guaranteed interest rate instruments like Guaranteed Investment Contracts (GICs). The state statute, however, that created it directed the Trustees to invest the assets of the Variable B Fund in "fixed income and equity securities". Contrary to the state statute which created it, its portfolio has been managed as a Stable Value Fund for the past 24 years.

The Plaintiffs' Class Action suite against the TRS Trustees began in 1997 alleging breach of fiduciary duties and gross mismanagement of Variable B assets. The Lower Court feels that the Board of Trustees have exercised their discretionary authority in a proper way and has so ruled. The case is currently on appeal in the Appellate Division of the Supreme Court of the State of New York. The Complaint alleges damages well in excess of a billion dollars. What say you?

Of note: The suite was brought by an individual teacher/union member on behalf of himself and all others similarly situated. I never invested in the Variable B Fund so I was precluded from being the named Plaintiff, otherwise I would have been. Over the years I have furnished technical data to the Plaintiffs attorney. The Defendants suppoenaed me and I gave testimony a number of years ago.

3 of the 7 member TRS Board of Trustees are appointed by the United Federation of Teachers (UFT) the union representing City teachers. In order for any action of the Board of Trustees to be binding one of the four votes must be cast by a UFT Trustee. This is the same UFT that made sure that the high price Variable Annuity, known as "Opportunity Plus" which was illegally endorsed for 20 years by its state affiliate New York State United Teachers (NYSUT) was never sold to the teachers of the City of New York.

Joel L. Frank


The Plaintiffs' Appellate Brief Follows:


NATURE OF THE CASE A. HISTORY OF THE LITIGATION This action was commenced by plaintiff Arnold H. Nager (“Nager”) as a proposed class action in February 1997 by the filing of a summons and complaint in the Supreme Court, New York County. R-43. Nager’s principal claim was that the assets of the Variable B Annuity Program (“Variable B”) of the Teachers’ Retirement System of the City of New York (the “TRS”) had been improperly invested and that he and the proposed class had been damaged. On or about October 26, 1997, Defendants moved for summary judgment. That motion was denied by Order of the Honorable Richard F. Braun dated May 31, 1998 and Amended Opinion dated June 8, 1998. R-159. Defendants appealed. By Decision dated May 25, 1999, this Court affirmed the denial of summary judgment. Nager v. Teachers’ Retirement System, 261 A.D.2d 292 (R-165), lv to appeal den’d, 1999 N.Y. App. Div. LEXIS 8712 (1st Dep’t 1999). R-166. During the discovery process, Plaintiff moved for class certification which was granted by Justice Braun by Order dated March 30, 2000 and decision dated February 22, 2000. R-167. The class is defined as [T]he named plaintiff and all other current and former members of the Teachers’ Retirement Association of the defendant Teachers’ Retirement System of the City of New York, other than defendants, who at any time had all or any part of their

contributions to the defendant Teachers’ Retirement System of the City of New York allocated to the Variable B Annuity Program of the defendant Teachers’ Retirement System of the City of New York. After the close of discovery, Plaintiffs moved for leave to file a second amended complaint. That motion was granted in substantial part by Justice Braun pursuant to Order dated August 3, 2002 and Decision dated August 6, 2002. R-188. In July 2003 Defendants moved for summary judgment dismissing the second amended complaint and Plaintiffs cross-moved for partial summary judgment (1) on liability on their first cause of action and (2) dismissing Defendants’ third, seventh, ninth and tenth defenses. By decision dated May 2, 2005, the Honorable Doris Ling-Cohan denied Defendants’ motion, denied Plaintiffs’ motion insofar as it sought to establish liability, and dismissed the four defenses. R-196. A bench trial was conducted before the Honorable Walter B. Tolub during September 2005. After its conclusion, both sides submitted proposed findings of fact and conclusions of law. R-2572; R-2675. The trial court issued its Findings of Fact and Conclusions of Law on January 26, 2006. R-2686. Judgment dismissing the second amended complaint (R-2696) was signed February 27, 2006. Defendants then served a Notice of Settlement of an Amended Judgment (R-2697) seeking to include, inter alia, the cost of the trial transcript. Plaintiffs opposed (R-2704), but the Amended Judgment was entered on May 3, 2006. R-11. Plaintiffs


served their Notice of Appeal to this Court on June 2, 2006. R-41. B. FACTS 1. Facts of General Applicability The TRS was established in 1917. R-300:9-13.1 The defendant Teachers’ Retirement Board of the Teachers’ Retirement System of the City of New York (the “Board”) has 7 members (R-297:23-26), three of whom are elected by the members of TRS. R-298:1-13 (members of the Board are sometimes referred to herein as “Trustees”). The Board has an Investment Committee which includes all Trustees. R-418:19-25. The Board is responsible for all TRS investments. R-303:13-15; Administrative Code of the City of New York (“Ad Code”) § 13-354. Active employees are members of TRS and retired employees are beneficiaries of TRS (collectively the “Teachers”). R-398:14-21. Both employers and Teachers contribute to TRS. R-300:14-17. Employer contributions are credited only to the Qualified Pension Fund (“QPP”). R-300:17-26. Teachers currently have three investment options for their contributions: the Fixed Annuity Program (“the Fixed Fund”); the Variable A Annuity Program (“Variable A”); and Variable B. A Teacher’s retirement benefit will depend, in part, on how much s/he has contributed and the earnings on those contributions during employment and following retirement. R-845:5-8.

1 The notation “R-__” is to a page in the Record on Appeal. The notation “R-__:____” is to a page of the Record on Appeal and the cited lines of the trial transcript on that page.


In the Fixed Fund, a guaranteed rate of return on employee contributions is set by the Legislature. R-301:15-20. Since July 1, 1980, the rate of return has been as follows: from July 1, 1980 to June 30, 1982: 7.50% from July 1, 1982 to June 30, 1988: 8.00% from July 1, 1988 to present: 8.25%. R-66-67 at ¶ 15. In the late 1960’s, at the behest of the Board, the Legislature established the Variable Annuity Program (“VAP”) (now known as Variable A). R-301:22-55:3. The VAP was enacted to allow teachers to protect the purchasing power of their retirement income by investing in equities (common stock). R-1501. Investments could be either 100% in the Fixed Fund or the VAP, or 50% in each. Id. In the late 1970’s, the Board retained Martin E. Segal Co. (“Segal”) to draft legislation to establish a third option, to be Variable B. R-1545; R-316:14-17. A 1978 draft of that legislation stated: To achieve the purpose of the new funds, the Board is directed to provide for the investment of their assets in fixed income securities, and to a lesser extent, in equities that can be expected to pay dividends at rates at least equal to the interest allowed on accounts in the annuity savings funds. R-1546-8. The actual 1982 Variable B legislation, also drafted by Segal (R-1564), directs a different investment program:


Section 1. Intent and purposes. Chapter five hundred forty-four of the laws of nineteen hundred sixty-six established a variable annuity program within the teachers' retirement TRS. Its purpose was to make available a means by which a teacher may protect the purchasing power of his retirement income. It accomplished this purpose by permitting, subject to election by the contributor, one-half or all of his salary deductions, and thereby a portion of his retirement allowance, to vary in accordance with fluctuations in the value of investments which the Board was directed to make with the funds that became available through such election. Many teachers, both the majority who have elected to participate in the variable annuity program and among the minority who have elected not to participate, have expressed a preference for an alternative form of investments. Where the present investment program emphasizes reliance on the long-term growth of the equity market, the alternative preferred by these teachers would seek a relatively fixed, more stable, rate of return. This amendment accordingly establishes a set of variable annuity funds parallel to those already in existence and gives the teacher the option of choosing between them. To achieve the purpose of the new funds, the Board is directed to provide for the investment of their assets in such fixed income and equity securities as can be expected to yield the more stable rate of return desired. Chapter 735 of the Laws of New York, 1982 (“Chapter 735”); R-1567-8 (emphasis added). Upon the passage of Chapter 735, the VAP was renamed Variable A. R-1568. Teachers could invest their contributions: (1) 100% in any one of the programs; (2) 50% in Variable A and 50% in the Fixed Fund; or (3) 50% in


Variable B and 50% in the Fixed Fund, but not in both Variable A and Variable B. Id.; R-588:20-26. In 1988, legislation was enacted to permit Teachers to invest 100% in any one program or 50% in any two, thus permitting simultaneous investment in both Variable A and Variable B. R-589:2-24. In about 1994, this was changed so that investments could be made in any of the three programs in 5% increments. R-597:9-12.2 As Chapter 735 states, Variable B was enacted to provide a more stable rate of return than the all-equity Variable A yet provide the opportunity to exceed the Fixed Fund’s return. R-1567. Various documents in Chapter 735’s bill jacket, including the Board’s supporting statement,3 (R-1578), confirm that the assets of Variable B were to be invested in both fixed income and equity securities with the

2 When Variable A (then known as the VAP) was enacted, Teachers could transfer money between the Fixed Fund and the VAP but the transfer was restricted and spread over a minimum of three years. That period was reduced to one year in 1994. R-425:15-21. While the 36-month transfer rule was in effect, 1/36 of the assets would be transferred in the first month, 1/35 in the second month, etc. until the transfer was completed. R-425:22-426:4. An election to transfer could be made once per year, only in April, and only if an election had not been made in the prior year. R-426:10-23; R-426: 24-427:2. If one forgot to make a transfer in April, s/he had to wait another year. R-427:3-5. Defendant Melvyn Aaronson (“Aaronson”), an elected Trustee, conceded that someone who decided to transfer from one option to the other ran the risk that the transferor fund would start doing well mid-transfer because the transfers took so long. R-426:5-8. (Aaronson’s testimony is most frequently referenced herein because he has the most institutional memory, having been a Board member from 1980 through the trial herein.. R-50:14-16.) Despite a Teacher’s current ability to invest as little as 5% in any one option, due to restrictions on the timing and amount of transfers, imperfect information, and lack of investor discipline, it is not possible for a Teacher to construct a balanced fund on his/her own. These factors were described at length by Plaintiffs’ expert Malkiel. R-1178:14-1184:22. The trial court’s contrary finding, R-29 at ¶ 55, ignored this evidence. 3 The statement would not have been submitted without the Board's approval. R-792:3-5. The trial court did not mention this document in its findings and conclusions. Indeed, the trial court referred to none of Plaintiffs’65 admitted exhibits.


goal of more stability than Variable A and providing the opportunity to exceed the return on the Fixed Fund. See also R-1566, 1575, 1576. After the enactment of Variable B, a 16-page booklet (known as the “Red Apple Book”) (R-1579-97) was sent to Teachers to explain this new investment option.4 R-333:24-334:2. The front page of the booklet stated: This booklet describes the new Variable Annuity B option, as well as the existing fixed and Variable A options. Enrollment material will be sent in one to two weeks to members eligible to make a variable election.5 If after reading this booklet, you decide to participate in the Variable Annuity B, please complete and return the appropriate forms at that time. R-1579. The booklet went on to say: Your Variable B account participates in the investment results of a fund which invests primarily in programs aimed at positive returns with a minimum of fluctuation. Investments may include long-term bonds, guaranteed investment contracts with insurance companies,6 money market instruments, appropriate nonvolatile equities,7 etc. It is hoped that these investments will provide a relatively stable yield above the rate of inflation; however, there is no guarantee that this objective will be attained. (R-1585). It then compared Variable B to Variable A:

4 Trustees had the opportunity to edit the booklet before its distribution. R-389:19-390:9. 5 See R-1598-99. 6 A guaranteed investment contract (“GIC”) is an instrument issued by an insurance company that promises to repay the invested principal at a specified future date with interest at a stated rate. R-1169:12-18. 7 See note 26, infra, and accompanying text for other references to the use of the term “nonvolatile equities.”


Factors to Consider About the Variable Annuity B Program. Advantages...It is expected that the return on the investments in Variable B will be positive and generally produce increasing unit values. It is also expected that the yields on these investments will be higher than those realized on the fixed-dollar portfolio. Annuity payments under Variable B may fluctuate but to a much lesser degree than under Variable A. On the other hand...These are expectations of the Variable B program now and it cannot as yet be determined what the results will be. While it is anticipated that the return on Variable B will be higher than fixed, and less volatile than Variable A, there are no guarantees in the Variable B Program that this will be so. In addition, stocks may continue an upward trend, in which case, a member participating in Variable B could participate in the economic growth to a lesser degree than if he or she were in Variable A. R-1589-90 (emphasis in original). Only stocks, not bonds or guaranteed investment contracts or any other investments, participate in economic growth.8 R-605:3-13. So that if, as the booklet states, Variable B could “participate in the economic growth” to any extent, it must, as stated, invest in stocks. The booklet also explained that the unit value of Variable B9 would increase if annual earnings were more than 4%, and decrease if they were less than 4%. R-

8 Plaintiffs’ finance expert confirmed this. R-1233:8-1234:11. 9 When an individual contributes to Variable A or Variable B, s/he purchases a specific number of units. Each of those funds commenced operation with a designated unit value of $10.00. Unit value is adjusted each month based on the prior month’s investment performance. See R-1967.


1585.10 The purpose of this language was to inform the Teachers that it was possible for Variable B’s unit value to go down. R-798:16-799:22. The Teachers were never informed that Variable B would have ever increasing unit values. R-799:26-800:6. The booklet also says: “While it is anticipated that the return on Variable B will be higher than the fixed and less volatile than Variable A, there are no guarantees in the Variable B program that this will be so.” R-1590. Thus, from its inception, the Trustees anticipated that Variable B might sometimes be more volatile even than Variable A. R-802:9-26. Variable A’s returns had fluctuated widely in the 1970’s and Variable B was intended to fluctuate not as widely. R-608:2-17. An article in New York Teacher11 on April 17, 1983 said as much. Id.; R-2226. Nothing in Variable B’s legislative history or in the documents distributed to Teachers at its inception stated that Variable B was not to fluctuate at all or that it would be a stable value fund. A short pamphlet was part of the enrollment material for Variable B mentioned in the Red Apple Book (see R-339:3-8). It stated in part: The initial funding vehicle for the first year’s contributions will be a Guaranteed Interest Contract (G.I.C.).12 This is a contract issued by an insurance

10 This is due to an actuarial convention of TRS known as the “explosion factor.” R-840:7-841:12. 11 See n. 14, infra, and accompanying text. 12 Consistent with this stated intention to retain all investment options, a May 26, 1983 Board resolution authorized tax counsel to obtain a supplemental ruling from the IRS “to make it clear


company which provides guaranteed fixed rate of interest and a guarantee of principal. . . . The Trustees will examine investment opportunities for the second and subsequent years of operation at a future date. R-1599 (emphasis added).13 New York Teacher is a publication of the New York State United Teachers in which the United Federation of Teachers (“UFT”) publishes a section.14 R-303:18-23. All Teachers are eligible to be members of the UFT, except for school supervisors (such as principals including Nager) who may join the Council of Supervisors and Administrators (“CSA”), and employees of the Board of Higher Education who may join the Professional Staff Congress (“PFS”). R-304:6-20. New York Teacher is provided to members of the UFT and the PSF but not to members of the CSA. R-304:21-R-305:2. A 1982 New York Teacher article, written by the elected Trustees, states in

that if the Teachers’ Retirement System were to subsequently decide to change the investment medium for Variable . . . B it may do so[.]” R-1727. 13 Diane Sisenwein (“Sisenwein”), the Director of Investment Administration of TRS since 1994, R-619:22-620:2; R-626:18-627:7, has been part of TRS professional staff since 1973, when she was the Assistant to the Director of Administration. R-620:17-20. She has also been the Portfolio Administrator since 1981. R-620:2-5. She understood when Variable B was enacted that there was no point in having a new investment program unless it served a different purpose than the existing ones, R-624:7-10, yet Variable B and the Fixed Fund are both stable value funds (although Variable B, as implemented by the Trustees is inferior). Sisenwein has been the highest ranking investment professional at TRS since 1994. R-628:8-10. She did not herself express, nor did she ever hear anyone else express, the view that the list of permissible investments for Variable B in either the Red Apple Book or the subsequent enrollment pamphlet was incorrect. R-639:14-19; R-642:19-643:3. 14 The New York Teacher articles concerning TRS are written by the three elected Board members. R-376:25-377:5. The four non-elected Board members have no role in writing these articles, R-377:6-8, and are not even aware of them. R-377:6-15.


part: There will be no attempt in this article to blueprint the exact investment vehicles to be utilized. This major concern will certainly be dealt with at great length and given intensive study. . . . It may be that a large portion of B funds will be placed into longer-term bond holdings to “lock in” the high rate of return now available in government bonds and in high-grade corporate bonds. It may be that quality high yield stocks offering attractive dividends and some opportunity for capital gains will constitute appropriate holdings. R-1619. An October 25, 1982 TRS letter Bernard Goldberg, then a longstanding elected Board member, R-356:21-14, states in part: It is not contemplated that this variable program invest only in bonds. There will be periods during which equity investment would be advisable. Such investments would be carried at market for all purposes. R-1643. Although the Variable B legislation expressly directs investment in equities, and although the Trustees repeatedly informed the Legislature and the Teachers that they considered equities to be an appropriate investment,15 it is undisputed that none of Variable B’s assets have ever been invested in equities, even though the

15 See, e.g., note 26, infra, and accompanying text. 11

Board never formally decided not to invest any Variable B assets in equities.16 R-359:9-15. Rather, Defendants assert that the three goals of Variable B are: preservation of capital: ever increasing unit value; and current rates of return. R-357:24-113:4. Defendants did not recall that the Board ever voted these to be the goals of Variable B.17 R-360:15-17. Rather, Aaronson candidly admitted these goals “just evolved” although how they evolved was unknown to him. R-360:18-23.18 The Board commissioned a poster which states, in toto: Investing For Retirement. [a picture] Your New Investment Choice... Variable Fund B Preservation of Capital Unit Value Growth Current Rates of Return Watch for future announcements R-1600. No one had first hand knowledge that the poster was ever distributed, or was

16 Donald Miller, who became TRS assistant executive director in 1973 and executive director in 1987, R-891:25-892:8, recalled no documents specifying how Variable B assets were to be invested. R-895:18-896:8. 17 No document reveals any such deliberation or vote. 18 The trial court’s finding that these Variable B investment goals were adopted by the Trustees and publicized in 1982 and 1983, R-22, ¶ 28, is simply erroneous.


ever posted or seen in a school. R-342:15-96:3. Other than the Red Apple Book (R-1567), the enrollment pamphlet (R-1598), and possibly the poster, no other documents were provided by TRS to Teachers about Variable B at the time it commenced. R-343:26-344:18. No “special effort” was made to apprise Teachers about Variable B. R-894:6-895:3. Andrew Irving (“Irving”) served as TRS outside counsel from 1978 until 2003. R-945:9-18. Irving did not participate in any way in drafting the Variable B legislation or any statements supporting the legislation. R-946:10-25.19 Irving learned of Variable B only after its enactment. R-946:6-9. While he was aware of the Trustees’ “evolved” investment objectives for Variable B (preservation of capital, increasing unit value and current rates of return), he had no role in formulating them. R-962:26-963:13. Robin S. Pellish (“Pellish”) is with the firm of Barra Rogers Casey (f/k/a/ Rogers Casey & Barksdale), and is a TRS financial consultant who has contact with the entire Board. R-927:5-6, 25. Pellish testified that equities were not suitable for Variable B because the Trustees insisted on a “stable return:” My understanding of the objectives of the fund were to generate a stable return, a return that closely tracked interest rates and a return that in fact never went

19 The Board has never sought or received any opinion or instruction from counsel concerning their fiduciary responsibilities (R-377:19-24), prudence standards for investing Variable B’s assets (R-948:11-949:2) or the appropriate composition of Variable B’s portfolio. R-516:24-517:10; R-760:22-761:2.


below zero for any given month; and anything other than a trivial allocation to equities could lead to a negative return. My understanding was the fact that one of the objectives for the fund was to have a steadily increasing Unit Value which, in fact, meant the fund had to earn four percent a year because of the way that the fund units are calculated. And anything other than a non-trivial allocation to equities could lead to those objectives not being realized in a given period of time. R-930:18-931:6.20 TRS supposedly does not provide advice to Teachers about how to invest their contributions. R-376:9-12; R-896:20-897:7. If a Teacher asked which fund to contribute to, TRS is not supposed to give that advice. R-376:17-21. Aaronson testified that the UFT does not give investment advice to Teachers, either. R-376:22-24. Variable B’s first investment was a Metropolitan Life Insurance GIC (R-380:16-19) which had an interest rate in excess of 11%.21 R-380:12-13. Irving had concluded in a memorandum (R-1657) that GICs were a lawful investment for

20 Contrary to the trial court’s finding, R-24, ¶ 32, the investment advisor’s suggestion of GICs was dictated by the fact that the Trustees’ had decided, incorrectly, that Variable B was to be a stable value fund. Similarly, in 1982, when first consulted about Variable B, the investment advisor had, contrary to the trial court’s findings, R-23, ¶ 31, recommended equities. R-1642. 21 The early 1980’s were a period of unusually high interest rates. R-667:22-25; R-1190:15-21.


Variable B. R-962:4-7.22 Aaronson had not heard of GICs before examining investments for Variable B. R-381:16-18. Indeed, despite having a Ph.D. in Economics and being the City Finance Commissioner, Carol O’Cleireacain had never heard of GICs when she became a Board member in 1991. R-887:13-14.23 In the second half of 1987, the Board decided to invest a small portion of Variable B’s assets in bonds because GIC rates were falling. R-395:21-396:2; R-396:25-397:3; R-1921. These limited bond investments continued into 1988 for the same reason. R-397:9-398:2; R-1935. However, by June 30, 1989, Variable B had only about $1.2 million in bonds as compared to almost $100 million in bonds one year earlier. R-1935; R-1949. The bonds were sold-off to eliminate the small degree of fluctuation (or volatility) they created in Variable B’s unit value.24 R-398:23-399:5. Subsequently, Variable B has never invested in bonds. R-402:6-10. The Board was aware when it bought bonds for Variable B that they would fluctuate in value based on market price.25 R-653:15-25. The Board nevertheless came to believe that this fluctuation was intolerable and inconsistent with Variable

22 The memorandum did not address the appropriate composition of Variable B’s portfolio; only whether GICs could lawfully be included. R-966:11-15. Thus, contrary to the trial court’s finding, R-24, ¶ 34, Irving never opined on whether equities should be included in Variable B or whether it was to be a balanced fund. 23 It should not be surprising, therefore, that Nager, a layman, also did not know what a GIC was. R-990:21-25; R-990:26-991:5. 24 The Board never deliberated or took a vote on what level of volatility was acceptable for Variable B. R-459:15-17. 25 Unlike bonds, GICs can be carried at book value per accounting convention and thus cause no fluctuation in value to Variable B’s portfolio even though, if interest rates increase, their actual value declines. R-1169:12-1170:23.


B’s overall objectives. R-654:5-10. When certain Teachers complained about the fluctuation to Sisenwein, she said “well, it is variable.” R-663:21-26. Aaronson was asked why the 1989 edition of the Pension Handbook (R-1965), which he updated, R-414:10-14, included “nonvolatile equities” as appropriate investments for Variable B if, as he had testified, no such thing existed:26Some day we may learn about them. I don’t have anything eliminated. Something may occur, something may be invented in the investment field and it may occur, that’s why it’s included. R-415:18-416:2. Before 1990, the QPP (the plan to which the employer contributes) had only invested in bonds and had never invested in equities. R-404:5-13. In 1990, defendant Elizabeth Holtzman, then the Comptroller of the City of New York, urged TRS to diversify the QPP portfolio to include stock investments. Holtzman noted the benefits of diversification, including reduced investment risk and

26 A We never said we ruled out equities, we said we did not find any which were appropriate, up until this time. Q And in order to be appropriate they would have to be nonvolatile? A That is correct. Q And you are not familiar with any equity which is nonvolatile? A None that have been presented to us. R-456:16-21. For other examples of the use of the term “nonvolatile equities,” see e.g. R-1579; R-1661; R-1899; R-1963; R-1967; R-1988. The repeated use of the term “nonvolatile equities” in the literature about Variable B could only have caused Teachers to understand that equities were an appropriate investment for Variable B and were in its portfolio, as Nager himself understood. R-983:5-21; R-984:10-14.


increased returns. R-1843. The Board voted to diversify the QPP to realize these advantages. R-448:14-449:14. The QPP portfolio included 70% equities at the time of trial. R-824:2-4. The agenda for the October 10, 1991 Investment Committee meeting noted “Today’s GIC rates are below 8.25% for all allowable maturities.” R-1876. This fact was significant because 8.25% was then, and continues to be, the crediting rate on the Fixed Fund. R-420:15-23. Q Do you have any recollection of any discussion concerning the fact that the rate on GICs had fallen below 8.25 percent? A No. One of the things that we had as a goal for our Variable B Program was that it earn higher than the fixed income, and this was the first time when we didn't reach our goal. Q So it was a concern? A Yes, it was. THE COURT: Why was it a concern? THE WITNESS: Because we told our members that we are going to try to, in the Variable B Program, to earn more than eight and a quarter percent.27Q In fact in the booklet, [the Red Apple Book, R-1579], it was stated that Variable B was expected to exceed a return on the Fixed Fund. Correct? A It did say that, um-hum. Aaronson: R-421:9-26. For the calendar year 1992, Variable B earned 8.12%, beginning a 15-year trend (that continues to the present) of Variable B underperforming the rate on the Fixed Fund. R-424:21-24; R-1878.

27 But once GIC rates fell below 8.25%, the Trustees admittedly did not try to exceed that rate.


A balanced fund is one that includes both equities and fixed income securities. R-1166:4-6. If a fund is described as investing in both equities and fixed income securities, it is a balanced fund even if the words “balanced fund” do not appear in the description.28 R-1166:7-13. Aaronson testified that he understood a “balanced fund” to be one that invested in both equities and fixed income securities. R-427:12-14. Aaronson conceded that the QPP, which since 1990 invested in both equities and fixed income securities, is a balanced fund. R-427:25-428:18. Aaronson conceded that if Variable B’s rate of return was less than 4% annualized, the unit value would go down. R-467:2-8. A minimum rate of return of 4% had to be achieved to avoid a decline in the value, due to a TRS actuarial convention known as the “explosion factor.” R-840:7-841:12. An April 23, 1999 memorandum from Irving states that given then-current interest rates, it was impossible to obtain a GIC with a 4% floor. R-1905. Nevertheless, the Board did not invest Variable B in stocks or bonds during this period in an effort to increase the yield on the portfolio. R-475:8-14. The fiscal year rates of return for Variable B from its inception in 1983 to the year ended June 30, 2005, dropped steadily from 11.9% in the year ended June 30, 1984 to 3.5% in the year ended June 30, 2005. R-2148. The unit value

28 See e.g. R-1567, the Variable B legislation.


histories (the monthly unit values) for both Variable A and Variable B from their inceptions to August 2005 (R-1967) were downloaded from the TRS website and admitted in evidence. R-473:19-13. Variable B’s unit value decreased every month from September 2002 to August 2005 because its investments returned less than 4%. As a result, anyone who was receiving an annuity from Variable B had his/her retirement benefit decrease each month beginning in September 2002. R-602:21-603:2. After GIC rates dropped below the 8.25% crediting rate on the Fixed Fund, the Trustees often discussed stopping enrollments in Variable B (R-673:23-26), closing down Variable B (R-674:14-15; R-675:14-16), investing in higher-yielding investments (R-674:17-18; R-682:15-19), and even trying to invest Variable B’s assets in the Fixed Fund. R-676:25-677:3. New Trustees, principally non-elected Trustees (R-682:5-10), often raised the possibility of closing down Variable B when they saw its declining, increasingly inferior investment returns. R-677:19-24. New Trustees often asked why Variable B did not invest in equities (R-681:23-682:10) because they understood that there was no bar to investing Variable B assets in equities or seeking something other than current interest rates. R-714:9-13. Certain Trustees also were in favor of contacting the Teachers and suggesting that they take their money out of Variable B due to its inferior and


downward-trending performance. R-683:17-685:8. This step to protect the Teachers was not taken because the Trustees believed that the GIC contracts they had entered into barred them from doing anything that might encourage withdrawals from Variable B. R-685:10-17. Neither Aaronson nor March, both of whom are TRS participants, has ever invested in Variable B. R-475:2-8; R-475:9-11; 485:21-23. A Teacher may opt to receive a retirement annuity from the Fixed Fund, Variable A or Variable B. Annuities from Variable A and Variable B are calculated using a 4% interest rate assumption, while annuities from the Fixed Fund are generally calculated using a 7% interest rate assumption. R-835:4-11. Thus, a Fixed Fund annuity’s monthly benefit will be higher, at least in the beginning, R-835:12-18, but will not change over time absent action by the Legislature. R-836:17-21. In contrast, the monthly payment on a Variable A or Variable B annuity will change each month depending on investment returns and, therefore, could eventually catch up to a Fixed Fund annuity. R-837:2-6. A 1998 New York Teacher article (R-2096) discussed this problem The article also noted that at its then-current rate of return of 5.9%, it would take a Variable B annuity 23 years to equal the monthly amount of a Fixed Fund annuity and then another 23


years to make up for the years when it paid less.29 The article then states: “Therefore, it is estimated that if a retiree elects the Variable B program the election will be financially advantageous if the member lives 46 years or more.” Based on the TRS actuary’s mortality assumptions, very few Teachers will live for 46 years after retirement. R-839:6-15. TRS has never informed Teachers of this information and has stood mute as Teachers have elected Variable B annuities that have no practical possibility of equaling a Fixed Fund Annuity. R-488:9-13; R-495:22-26. Aaronson was aware of no document other than this one isolated New York Teacher article that addressed this problem. R-517:14-18. A management study of TRS done in 1990 found that TRS “member communication services are neither timely nor adequately controlled.” R-1993. Member services include adequate reporting, adequate access to answers to questions, and adequate preparation for retirement. R-498:22-26. In fact, Aaronson readily admitted that TRS member services “stunk.” R-498:20-21. The study also stated that because of TRS’s inability to provide adequate member education, TRS members tended to rely on the UFT. But “This is not an appropriate role for the UFT.” R-1993. Member education is properly the role of TRS itself. R-499:17-20. Yet in a

29 Variable B’s rate of return for the five years ending January 31, 2007 was 3.74%. Because a rate of return less than 4% causes unit values to decrease, Variable B annuities have been steadily losing even more ground to Fixed Fund annuities over the last five years.


memorandum dated November 25, 1991, TRS’s Executive Director directed the staff not to discuss UFT retirement services or information with Teachers. R-2082. The Board passed a resolution, dated December 16, 1999 (R-1906), in response to Justice Braun’s 1998 decision denying defendants’ initial motion for summary judgment (R-159) and this Court’s 1999 affirmance (R-165). The resolution purportedly amended Variable B (pursuant to section 13-567© of the Ad Code, which permits the Board to create, modify or terminate variable funds) to be a stable value fund in the event that this Court’s May 25, 1999 decision could be read as requiring Variable B to invest in equities. The resolution purported to be effective retroactive to January 1, 1994. Aaronson had no idea why this resolution was adopted other than the fact that it had been recommended by counsel. R-506:20-261:2. Aaronson also did not know why the resolution was retroactive. R-512:21-513:16.302. Facts Particular to Nager Plaintiff Nager began teaching in the New York City school system in 1971. R-968:19-20. In February 1968 he became an assistant principal,31 R-969:13-15, and in 1990, a principal, the position from which he retired in 1996. R-969:15-19. Nager was a member of the UFT while he was a teacher. As an assistant

30 Indeed, Aaronson had not read either Justice Braun’s decision or the decision of this Court (R-504:11-20) nor has he ever read the provisions of the Ad Code applicable to TRS. R-509:2-6. 31 Not 1988 as erroneously found by the trial court. R-30.


principal and principal, he was a member of the CSA until he retired. R-970:5-8; R-970:10-14. While a member of the UFT, Nager received the New York Teacher. R-970:18-20. But he did not receive it after 1968.32 R-970:21-24. However, Nager’s wife, with whom he has resided since 1985 (R-1335:2-10), was a UFT member (R-1006:22-1007:5) and she received the New York Teacher. R-1008:12-15. Since 1968 when he stopped receiving his own copy, Nager has looked through the New York Teacher from time to time. R-1009:9-17. Nager became a member of TRS in 1958. R-970:25-971:3. He contributed the maximum amount allowable. R-971:4-972:26. Nager recalled seeing the television program about the VAP (Variable A) when it was introduced in 1968 (R-973:25-974:9) as well the booklet (R-1514) explaining it. R-974:23-26. Nager understood that the VAP would invest in common stocks (equities). R-975:2-5. He transferred all of his funds from the Fixed Fund to the VAP and also made all subsequent contributions to the VAP. R-975:12-976-7. Nager elected the VAP because the crediting rate on the Fixed Fund was then only about 4%, inflation was significant and the stock market had been doing well. R-976:8-12. When the Tax Deferred Annuity Program was established, he contributed the maximum amount permissible, again opting for the VAP. R-976:13-978:14. Nager first saw the Red Apple Book (R-1579) at about the time Variable B

32 Not 1986 as erroneously found by the trial court. R-30.


commenced (prior to July 1, 1983). R-978:25-979:18. He retained his copy of the booklet and it was produced at trial. R-979:13-23. Nager also received a smaller pamphlet (R-1598), with a kit to enroll in Variable B. R-979:24-980:5. The kit contained an election form to designate a choice of the funds. 733:14-21. The shorter pamphlet refers to a previous booklet describing the Fixed Fund, Variable A and Variable B. Nager understood this to refer to the Red Apple Book. Nager decided to move of all his existing funds as well as his future contributions to Variable B. R-982:2-3. He elected Variable B because Variable A had been losing money and he wanted an investment option that was less volatile than Variable A but aimed to beat the Fixed Fund. As Nager understood from the Red Apple Book, Variable B satisfied these criteria. R-982:14-983:4; R-1015:19-1016:5. Nager understood from the Red Apple Book (at R-1585) that Variable B would be invested in both stocks and bonds. R-983:5-21. He understood its reference to nonvolatile equities to mean blue chip and utility stocks. R-984:10-14. The fact that Variable B was going to be invested in both stocks and bonds influenced Nager’s decision to elect Variable B. R-984:15-19. Because Variable B would be professionally managed, he expected the managers would make appropriate investments based on market conditions. R-985:22-987:8. Nager understood from the Red Apple Book that Variable B could lose


money. R-987:9-16. He never received any information from TRS stating that Variable B would only make investments which did not fluctuate in value. R-987:21-25. Nor did he ever receive any information from TRS stating that Variable B would only persist in making investments which would not fluctuate in value, even if the return on those investments was less than that on the Fixed Fund. R-987:26-988:9. Nager no longer has any of his retirement money in Variable B. R-988:11-13. He last had money in Variable B sometime in 1998-99. R-988:14-15. At the time Nager received the Red Apple Book, he did not know what a GIC was. R-990:21-25. He did not learn what a GIC was until 1995. R-990:26-991:5. Between 1983 and 1995, he did not attempt to learn what a GIC was because he did not understand that Variable B’s investments had been limited to GICs. He believed that Variable B was diversified as stated, among stocks and fixed income securities. R-991:13-23. Nager was informed by a UFT pension consultant that an annuity from the Fixed Fund was calculated using a 7% interest factor and that annuities from Variable A and Variable B used a 4% interest factor. R-994:22-995:6. He was told that initially, an annuity from the Fixed Fund would be larger than an annuity from Variable A or Variable B. R-1001:12-15. Nager was also told that an annuity from Variable A or Variable B would go up or down depending on


investment performance. 1000:7-11. However, Nager was not told how the different interest factors might otherwise affect the value of an annuity from the Fixed Fund as opposed to one from Variable B. In particular, he was not told the length of time it would take for a Variable B annuity to match the payout of a Fixed Fund annuity. R-995. Nager initially received a retirement annuity from Variable B. R-2562. Nager claims that he and the class have lost money because of the way Variable B has been invested. R-997:20-26. He seeks relief to place himself and the class in the position they would have been in had Variable B been invested in accordance with its enacting legislation. R-1062:14-18. The trial court credited Nager’s testimony essentially in toto, including his testimony about his understanding that Variable B was a balanced fund that was to invest in both fixed income securities and equities. See e.g. R-29, ¶ 57 to R-32, ¶ 81. The trial court improperly took exception to Nager’s statement that the New York Teacher was not “coming into [his] house” after 1968 when, in fact, Nager’s wife, a UFT member, with whom he lived starting in 1985, received it. R-35, ¶¶ 98-99. Nager’s testimony in this regard was in response to a question by plaintiffs’ counsel on redirect examination. See R-1071:6-21. When questioned about this upon being recalled by defendants, Nager readily admitted that he and his wife had lived together since 1985.


The trial court also found that Nager was aware of the investment policies the Trustees had developed for Variable B. R-39. However, the record instead shows that, although Nager was aware of what Variable B was invested in from time to time (GICs and like investments),33 he did not know and could not have known that the Trustees had determined to invest exclusively in GICs and like investments no matter how low their returns might be, in order to insure that Variable B never lost money. This was information which, as shown, was never disseminated.

33 Although, as shown, he did not know what a GIC was until 1995.


QUESTIONS PRESENTED 1. Did this Court in the initial appeal of this case rule that the Legislature clearly envisioned that the Variable B portfolio was to include equities? The trial court answered in the negative. 2. Did the legislation that enacted Variable B direct the defendant fiduciaries to invest assets of Variable B in equity securities? The trial court answered in the negative. 3. Did the defendant fiduciaries’ failure to invest any assets of Variable B in equities breach their duties to follow the mandatory directions of the enacting legislation? The trial court answered in the negative. 4. Did the defendant fiduciaries’ practice of investing Variable B assets solely in “stable value” fixed income securities breach their duties to invest Variable B prudently and productively? The trial court answered in the negative. 5. Did the defendant fiduciaries breach their duties by failing to initially adopt and periodically re-evaluate prudent investment goals and investment objectives for Variable B based upon a fully informed consideration of the legislation and the investment options available? The trial court answered in the negative. 6. Did the defendant fiduciaries breach their duties by failing to provide to plaintiff and the class members adequate information about the clear, adverse


consequences of electing to receive a retirement annuity from Variable B in lieu of an annuity from the Fixed Annuity Program? The trial court did not address this issue. 7. Did the defendant fiduciaries breach their duties by failing to provide to plaintiff and the class members adequate information about the nature of the actual investments held by Variable B and the actual investment goals and investment objectives that they had adopted for Variable B? The trial court answered in the negative. 8. Did the defendant fiduciaries breach their duties and violate the Public Meetings Law by failing to adopt investment goals and investment objectives for Variable B at a public meeting? The trial court did not address this issue. 9. Did the defendant fiduciaries breach their duties by passing the 1999 Resolution altering Variable B’s investment objectives and/or by making the resolution retroactive to 1994? The trial court did not address this issue. 10. Were plaintiff and the class members entitled to the monetary and injunctive relief they requested? The trial court answered in the negative.


ARGUMENT I. THE TRIAL COURT ERRED IN CONCLUDING THAT THE FIDUCIARIES WERE FREE TO DISREGARD THE VARIABLE B LEGISLATION DIRECTING THEM TO INVEST IN EQUITIES. The trial court concluded that, inter alia, the Trustees were free to choose to invest solely in GICs and similar fixed income investments and to invest none of Variable B’s assets in equities (stocks). According to the court, “The power to decide how to invest the assets of Variable B resides solely in the hands of the Trustees.” R-37. Defendants did not dispute, and the evidence at trial established, that the Board/Trustees never invested any of Variable B’s assets in equities. R-359:9-15. Plaintiffs thus established that the Trustees/fiduciaries violated the express investment directive of the 1982 legislation establishing Variable B, Chapter 735 of the Laws of New York (1982), 2 McKinney’s Session Laws of New York (1982) at pp. 1846 et seq. The “Intent and purposes” section of that legislation provided in part: Many teachers, both the majority who have elected to participate in the variable [A] annuity program and among the minority who have elected not to participate, have expressed a preference for an alternative form of investments. Where the present investment program emphasizes reliance on the long-term growth of the equity market, the alternative preferred by these teachers would seek a relatively fixed, more stable, rate of return. This amendment accordingly establishes a set of variable annuity funds parallel to those already in existence and gives the teacher the option of choosing between them. To achieve the purpose of the new funds, the 30

Retirement Board is directed to provide for the investment of their assets in such fixed income and equity securities as can be expected to yield the more stable rate of return desired. R-1567-68 (emphasis added). Despite repeated references to this legislation and this clause, see R-20, 36-37, the trial court never quoted their language in its decision. The court did refer to this Court’s 1999 decision of the first appeal in this case, but misquoted the decision as holding that the Variable B portfolio “was envisioned by the Legislature as including both fixed income securities and investments [sic].”34 R-37. This led the trial court to conclude, erroneously, that, “The preamble to Ch. 735 of the Laws of 1982 does not mandate that the Trustees invest funds of Variable B in equities.” Id. This error is patent and infected all of the trial court’s findings and conclusions. The court’s failure to give weight to the legislative directive for Variable B, or to even quote and consider its language, came despite the fact that the original text of this legislation was admitted as an exhibit on the first day of trial (R-322, 1567-74), and Plaintiffs had entered into the record multiple documents correctly quoting it. See, e.g. R-70, ¶ 21; R-127; R-163; R-199; R-2576, not to mention this Court’s actual decision, R-165.

34 Compare the actual language of the decision, “both fixed income securities and equities” (R-165).


Contrary to the trial court’s reading, the legislative history shows, and the statute itself contains, an express “direct[ion]” to the Trustees to invest the assets of Variable B in a balanced portfolio consisting of both “fixed income and equity securities” with the objective of exceeding the guaranteed return on the Fixed Fund, while maintaining less volatility than Variable A. As this Court held in 1999, the statute contains “an expression of how the Legislature intended the Variable B fund portfolio to be composed and indicates with some clarity that the Variable B Annuity fund portfolio was envisioned by the Legislature as including both fixed income securities and equities.” Nager v. Teachers’ Retirement System, 261 A.D.2d 292, lv. to appeal den’d., 1999 N.Y. App. Div. LEXIS 8712 (1st Dep’t 1999) (emphasis added). In enacting Variable B, the Legislature functioned as the settlor of a trust-like retirement program. The settlor may either specify the type of investments which the trustees are to make, in which case those instructions are mandatory, or leave those decisions to the discretion of the trustees. Application of Griswold, 125 N.Y.S.2d 479 (Sup. Ct. N.Y.Co. 1953). Accord, Fratcher, Scott on Trusts (“Scott”), § 227.14, p. 486 (4th ed. 1987). “If the settlor has stipulated the conditions under which, or the manner in which, a power is to be exercised the trustee must strictly follow his directions.” Bogert & Bogert, The Law of Trusts and Trustees (“Bogert”) § 551, p. 7 (2d Rev. Ed. 1982 & Supp. 2002). “[T]he


terms of the trust, and its particular object and purpose are, in no case, to be lost sight of in its administration.” King v. Talbot, 40 N.Y. 76, 86 (1869). The question whether a trustee acted with the requisite prudence can only be addressed in the context of the intent of the testator/settlor as evidenced in the trust instrument. Id. at 87. The statutory term “direct” expresses a mandatory instruction regarding the manner in which the assets of Variable B were to be invested. Bogert at § 552, p. 65. If a power is mandatory, the trustee must exercise the power as stipulated. Id. at § 552, pp. 65-66. “The settlor has the power to make provisions regarding the trust investments which are binding on the trustee.” Id. at § 680, p. 92. The effect of a mandatory statement about investments “is to create a duty upon the trustee to follow such direction, and to create a liability for loss to the beneficiary by failure to obey the order of the settlor.” Id. at § 680, p. 97. A trustee is obligated to follow any investment instructions that are set out as terms of the trust. In re Saxton, 274 A.D.2d 110 (3d Dep’t 2000). The trial court never addressed these principles. As a matter of statutory construction, Defendants’ supposed “interpretation” of Variable B – documented only once, in a poster (R-1600) that few people (and perhaps only the Trustees) ever saw – was not entitled to any deference by the trial court. Where the statute in question involves no “operating practices” and the


matter before the court is solely a question “‘of pure statutory reading and analysis, dependent only on accurate apprehension of legislative intent’ (Matter of Guido v. New York State Teachers’ Retirement Sys., 94 N.Y.2d 64, 68 [1999])” then “de novo review is appropriate.” Weingarten v. Board of Trustees of the New York City Teachers’ Retirement System, 98 N.Y.2d 575, 580 (2002) (rejecting contention that TRS’ interpretation of statute governing system was entitled to judicial deference). The evidence established that Defendants did not engage in any well-informed and careful consideration of the investment goals and objectives for Variable B, nor did they ever give more than passing thought to equity investments, despite being urged repeatedly by new professional Trustees and others to include stocks. Rather, the investment program began as an opportunistic attempt to take advantage of historically unprecedented, high investment returns on GICs but then became a continuing habit. Aaronson himself admitted at trial that the practice of relying solely on GICs and other “stable value” investments “just evolved. I – I don’t know how it evolved.” (R-360:18-23). Over a period of more than 22 years (1983-2005), Defendants never gave any serious consideration to investing in equities, despite the command of the legislation and their own continuing statements to participants that Variable B would include investments in “appropriate nonvolatile equities.” See, e.g., R-1580, 1585. According to their


testimony, the Trustees believed that Teachers would prefer investments under which benefit checks would not decline from one month to the next. The Trustees might have sincerely believed that volatility should be avoided at all costs, but the investment approach they chose to follow was shown to have caused over $ 1.5 billion dollars in lost investment return from March 1992 to July 2005. R-2115, 2138. Defendants did not challenge these investment loss calculations, only the fact of liability. Defendants’ asserted good faith in pursuing only “stable value” investments, which never included any stock investments, and which included bond investments for only a brief period of time (1987-89), is not a defense. A trustee’s asserted good faith in violating investment instructions cannot excuse the violation. Bogert, § 680, p. 97; Matter of Will of Newhoff, 107 Misc.2d 589 (Sur. Ct. Nassau Co. 1980), aff’d 107 A.D.2d 417 (2nd Dep’t), appeal den’d, 66 N.Y.2d 605 (1985), citing Matter of Rothko, 43 N.Y.2d 305 (1977). Fiduciaries like the Trustees who want to deviate from investment directions that bind them must seek prior approval from the appropriate court in an action for reformation or application of the doctrine of equitable deviation. Dardaganis v. Grace Capital, Inc., 889 F.2d 1237, 1241-42 (2d Cir. 1989) (holding trustees liable for disregarding explicit investment instructions, even where investments otherwise appeared to be prudent). The evidence showed that Defendants never


sought or obtained judicial relief to enable them to deviate from the statutory directions. The Trustees’ investment conduct also violated contemporaneous TRS statements to the participants, which indicate that the Trustees understood that Variable B was supposed to have a diversified investment portfolio, including equities. This fact, together with expert testimony by Professor Malkiel on behalf of Plaintiffs, established that, in the context of investment management practices that were prevailing at the time Variable B was enacted and thereafter, a “balanced fund” consisting of relatively equal portions of stocks and bonds was the accepted method to obtain relatively higher returns with reduced volatility and risk, just as the legislation directed. R-1186:9-1187:9, 1188:9-1189:7. Defendants admitted that the assets of Variable B were never invested in equities. (R-96, 359:9-19). Considering the actual text of the Variable B legislation, the precedents mandating that trust fiduciaries strictly follow the investment directions imposed on them, and the undisputed evidence of contrary investment conduct, Plaintiffs established that their contractual and statutory rights were breached and the Trustees thereby also violated Article 5, § 7 of the Constitution of the State of New York, which provides that “membership in any pension or retirement system of the state . . . shall be a contractual relationship, the benefits of which shall not be diminished or impaired.” See, e.g., McDermott v.


Regan, 82 N.Y.2d 352 (1993); Sgaglione v. Levitt, 37 N.Y.2d 507 (1975); Birnbaum v. New York State Teachers' Retirement System, 5 N.Y.2d 1 (1958).35II. THE TRIAL COURT ERRED IN IGNORING THE LAW OF THE CASE ESTABLISHED BY THIS COURT THAT VARIABLE B WAS TO INCLUDE EQUITIES. In concluding that Defendants were free to invest assets of Variable B exclusively in stable value instruments, the trial court also contravened the law of the case set by this Court’s 1999 ruling. Defendants’ first motion for summary judgment was predicated on their argument that Variable B need not include any equities. In denying that motion, the Supreme Court, per the Honorable Richard F. Braun, held that “[t]he Board was to invest the assets of Variable B in a balanced portfolio of equities and fixed income securities. That did not occur.” R-160. On appeal, Defendants argued that Justice Braun had never decided “the legal issue at the core of defendants’ summary judgment motion, i.e., whether plaintiff’s claims must be dismissed as there is no statutory requirement that the

35 Although the issue was not reached by the trial court, Defendants’ 1999 Resolution (R-1906) purporting to retroactively alter the terms of the Variable B program, likewise violated Plaintiffs’ constitutional and statutory rights to have Variable B invested as intended when it was enacted. The purpose of Art. V, § 7 “was to fix the rights of the employee at the time he became a member of the system . . . .” Public Employees Federation, AFL-CIO v. Cuomo, 62 N.Y.2d 450, 459 (1984), quoting Birnbaum v. New York State Teachers' Retirement System, 5 N.Y.2d 1 (1958); see also Central School District No. 2 v. New York State Teacher's Retirement System, 23 N.Y.2d 213, 232 (1968) (constitutionally impermissible to make a change to vested rights acquired by retirement system members). Retroactive alteration would violate vested rights, and also constitute a violation of the fiduciary duty of loyalty, as there could be no proper justification for retroactive effect, only an improper desire to shield the Trustees from liability for pre-existing violations.


Trustees invest in equities for this Program [Variable B] . . ..” Appellants’ Brief, Sup. Ct. N.Y. Co. Index No. 102377/97 (filed November 9, 1998) at 18. Moreover, Defendants’ Reply Brief left no doubt that the question whether equities were required to be included in Variable B was before this Court: Defendants contend that the IAS Court failed to recognize the pivotal issue that the statute authorizing the Variable B Annuity Program, which plaintiff claims compels the Trustees of the Variable B Annuity Program to invest Variable B assets in equities, contains no such requirement. Appellants’ Reply Brief (filed December 24, 1998) at 1. This Court, affirming Justice Braun’s ruling, unequivocally stated that Variable B’s legislative preamble “indicates with some clarity that the Variable B Annuity fund portfolio was envisioned by the Legislature as including both fixed income securities and equities.” Nager v. Teachers’ Retirement System, 261 A.D.2d 292, lv. to appeal den’d., 1999 N.Y. App. Div. LEXIS 8712 (1st Dep’t 1999) (R-165). As noted above, the trial court misquoted this Court’s decision, to the effect that the Variable B portfolio was to include “both fixed income securities and investments [sic].” R-37. Passing this fundamental and obvious error, the judgment cannot stand because it violates the law of the case set by this Court’s 1999 ruling. See Insurance Group Committee v. Denver & Rio Grande Western RR. Co., 329 U.S. 607, 612 (1947) (“When matters are decided by an appellate


court, its rulings, unless reversed by it or a superior court, bind the lower court.”); Martin v. City of Cohoes, 37 N.Y.2d 162, 165 (1975): The doctrine of the “law of the case” is a rule of practice, an articulation of sound policy that, when an issue is once judicially determined, that should be the end of the matter as far as Judges and courts of co-ordinate jurisdiction are concerned. (Citations omitted.) This Court having determined that “equities” were to be included in Variable B’s portfolio, that is the law of the case and it was not subject to revision by the trial court. Yet that is exactly what the court proceeded to do, by ruling, inter alia, that the statutory preamble “does not mandate that the Trustees invest funds of Variable B in equities.” (R-37). III. THE TRIAL COURT ERRED IN CONCLUDING THAT DEFENDANTS ACTED PRUDENTLY BY INVESTING VARIABLE B ASSETS SOLELY IN FIXED INCOME, “STABLE VALUE” INVESTMENTS. The trial court erred in applying the law regarding the fiduciary duty of prudence that governed the Trustees’ investment decisions and in assessing their conduct. The evidence established that the Trustees breached their fiduciary duties to Plaintiffs by failing to diversify in a prudent manner the investments of the Variable B Annuity Program. Before the 1995 enactment of the Prudent Investor Act, EPTL § 11-2.3, New York followed the prudent person rule in reviewing a fiduciary’s investment decisions. In re Janes, 90 N.Y.2d 41, 49 fn. (1997). Under that standard, a failure


to diversify was not necessarily imprudent, and the question whether the fiduciary violated the prudent person standard by failing to diversify was a question of the facts and circumstances. Id. at 50. The Prudent Investor Act imposed a specific diversification rule on trustees. EPTL § 11-2.3(b), titled “Prudent investor standard,” which states in pertinent part: (3) The prudent investor standard requires a trustee: . . . © to diversify assets unless the trustee reasonably determines that it is in the best interests of the beneficiaries not to diversify, taking into account the purposes and terms and provisions of the governing instrument. See also Restatement (Third) of Trusts, ch. 7, p. 5, Topic 5, Investment of Trust Funds, Introduction (“sound diversification is fundamental to risk management and is therefore ordinarily required of trustees”). Thus, since January 1, 1995, Defendants have been required by New York statute to diversify the assets of Variable B – absent good cause for not diversifying. Defendants’ adoption and pursuit of an investment program which has relied solely on “stable value” fixed income instruments such as GICs effected a non-diverse investment program. In the absence of any statutory or other legal compulsion directing such a program, the Trustees were governed by the fiduciary duty to diversify the investments, first as a matter of the Variable B legislation


itself and common law duties, and then also as a matter of New York’s prudent investor statute.36The evidence showed that the Trustees had no basis to “reasonably determine[ ]” that it was in the best interests of Variable B beneficiaries not to diversify. EPTL § 11-2.3(b). The “purposes and terms and provisions of the governing instrument” are those stated in the Variable B legislation.37 They do not admit of any suggestion that it

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