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Grand Jury Invitation


Kevin C
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We picked up a new client a couple of years back that made a mess of their plan. Over several years, one of the Trustees withdrew almost all of the plan assets and used the money to help fund company expenses. The prior TPA prepared valuations and 5500's showing a portion of some commercial real estate owned by the business owners as belonging to the plan. Nothing was done to transfer ownership of the real estate. The 5500's did not report any PT's. A participant complaint lead to a DOL investigation. At that point, their corporate attorney sent them to us for help.

We went back through their records, identified all of the withdrawals, calculated lost income and presented a proposed correction to the DOL for them to repay everything, including the lost income. The DOL approved our proposed correction. The DOL investigator said that since they were cooperating and restoring all of the plan's losses, the case would be handled informally. That meant no closing letter and no DOL penalties. The corrective deposits were made early this year. After providing documentation of the deposits, the DOL investigator told me their investigation was closed. We prepared 5330's for each year showing the PT's for the improper use of the funds and they paid all the excise taxes. The 5500's we prepared for 2009 and 2010 properly reported the PT's.

The Trustee just received a letter advising him he is the target of a federal grand jury investigation and inviting him to testify. It also mentions possible criminal indictment. He is contacting his attorney today.

Now for the question. Has anyone heard of a plan related case where criminal charges were filed against someone who cooperated and repaid the full amount of the losses? The only DOL criminal cases I recall seeing are those where the target(s) did not cooperate.

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We picked up a new client a couple of years back that made a mess of their plan. Over several years, one of the Trustees withdrew almost all of the plan assets and used the money to help fund company expenses. The prior TPA prepared valuations and 5500's showing a portion of some commercial real estate owned by the business owners as belonging to the plan. Nothing was done to transfer ownership of the real estate. The 5500's did not report any PT's. A participant complaint lead to a DOL investigation. At that point, their corporate attorney sent them to us for help.

We went back through their records, identified all of the withdrawals, calculated lost income and presented a proposed correction to the DOL for them to repay everything, including the lost income. The DOL approved our proposed correction. The DOL investigator said that since they were cooperating and restoring all of the plan's losses, the case would be handled informally. That meant no closing letter and no DOL penalties. The corrective deposits were made early this year. After providing documentation of the deposits, the DOL investigator told me their investigation was closed. We prepared 5330's for each year showing the PT's for the improper use of the funds and they paid all the excise taxes. The 5500's we prepared for 2009 and 2010 properly reported the PT's.

The Trustee just received a letter advising him he is the target of a federal grand jury investigation and inviting him to testify. It also mentions possible criminal indictment. He is contacting his attorney today.

Now for the question. Has anyone heard of a plan related case where criminal charges were filed against someone who cooperated and repaid the full amount of the losses? The only DOL criminal cases I recall seeing are those where the target(s) did not cooperate.

This story sounds a little fishy- Why would a DOL investigator allow clear violations of the pension laws involving misuse of plan assets to be settled informally without a closing letter or penalties? DOL policy is to publicly disclose settlements and punish responsible parties. I think the DOL investigator suckered the trustee to admit to violations of pension laws and criminal laws that were documentated in the 5330/5500s as PTs. The documents you prepared were the smoking gun that identified the trustee's involvement in the fraud.

This evidence was then turned over to the Dept of Justice which has jurisdiction to bring criminal charges under non ERISA provisions of federal mail fraud /wire fraud laws. My feeling is that there is more to come in criminal charges against other parties. Filing false documents signed under perjury is a criminal offense which can result in a visit to Club Fed. The Feds want the trustee to give them information against other parties in return for pleading guilty to lesser charges.

Q Did the trustee have his own counsel during the DOL investigation? If not this was a big mistake. Anytime there is misuse of plan assets separate counsel should be retained for all parties. Never believe a Federal agent who says "I am from the government and am here to help you."

This is just another reason why being a plan trustee creates risks of criminal actvity which begs the question why would anyone want to be a plan trustee?

mjb

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Thanks for the response.

Yes, he had attorney during the process. Everything I did was discussed with and approved by his attorney before presentation to the DOL. I don't consider anything I did as a "smoking gun". Information about the withdrawals and where the funds went was in the open before I became involved. We were hired to determine an appropriate correction to restore the plan. The DOL approved that correction method and made sure it was done.

I've been involved in some other cases where the DOL settled issues informally. Granted, none of those were this bad of a situation. But, it does happen. The cases you see published are just a small sample of the cases they settle.

It seems likely the Trustee was suckered by the DOL. For reasons I won't go into, I don't see that they gained anything significant by doing it. As a policy matter, it seems counter-productive to me. They have plenty of cases this bad and worse where the fiduciaries fight them every step of the way. What they seem to be doing is telling this Trustee he should have saved his money to pay lawyers instead of cooperating and restoring the participants' balances like he did.

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why would anyone want to be a plan trustee?

That's a rhetorical question, right?

I'm not sure how I got here, but it's too disconcerting to think about. :blink:

In any case, to everyone, Happy Holidays.

No its a question that is ignored in the employee benefits community. Fulfilling the duties of a plan fiduciary/trustee is time consuming and filled with unexpected risks. There are too many ways to be be blindsided or be found liable for another person's illegal activities. A few years a financial advisor was a fiduciary to a qualified plan for the purposes of investing plan assets. However the plan admin/trustee was siphoning off assets by making false entries. After the trustee took off with the assets the plan sued the financial advisor as a co fiduciary even though the advisor did not have any involvement in plan administration. The court found the advisor liable as a co fiduciary because the advisor received the monthly statements of the plan assets and did not conduct due dilligence to review their accuracy.

Now why would any one want to be a trustee or fiduciary?

mjb

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At least in the small plan world, because they do not want to pay the money (either out of pocket, or out of plan assets, which for a typical small employer is roughly the same thing, 'cause the owners have the bulk of the account balances) for proper Trustee/Fiduciary services. So they (the owner(s)) do it themselves.

Now, for a financial advisor to be a Trustee/Fiduciary - assuming they avoid any PT issues to start with? I would say, in general, that's nuts. But if the financial advisor is making enough money off the plan to justify the risk, that's something I can't assess. Had the Trustee purchased appropriate liability insurance/bonding to cover himself?

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why would anyone want to be a plan trustee?

That's a rhetorical question, right?

I'm not sure how I got here, but it's too disconcerting to think about. :blink:

In any case, to everyone, Happy Holidays.

No its a question that is ignored in the employee benefits community. Fulfilling the duties of a plan fiduciary/trustee is time consuming and filled with unexpected risks. There are too many ways to be be blindsided or be found liable for another person's illegal activities. A few years a financial advisor was a fiduciary to a qualified plan for the purposes of investing plan assets. However the plan admin/trustee was siphoning off assets by making false entries. After the trustee took off with the assets the plan sued the financial advisor as a co fiduciary even though the advisor did not have any involvement in plan administration. The court found the advisor liable as a co fiduciary because the advisor received the monthly statements of the plan assets and did not conduct due dilligence to review their accuracy.

Now why would any one want to be a trustee or fiduciary?

Mbozek has a point here.

This idea that a co-fiduciary can be held 100% liable for any other actions by a fiduciary is what has gotten all the stock appraisers in the ESOP world riled up.

The proposed DOL rules would make anyone who appraises closely held stock a fiduciary. The DOL says it would make the appraisers more accountable for the price they are giving. While one might not object to that idea but what appraiser in their right mind is going to make themselves liable for actions of people they may not know exists. You go to some of these ESOP conferences and the appraisers are saying they will leave the business. They will just do appraisals for Estate Tax, and buy/sell purposes.

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At least in the small plan world, because they do not want to pay the money for proper Trustee/Fiduciary services. So they (the owner(s)) do it themselves.

And even if you have the money, you (the employer/plan sponsor) can't buy your way out of your overall fiduciary duties with regard to the Plan, including with regard to picking proper trustees. You still end up being responsible for monitoring and in effect approving the decisions and actions of your chosen trustees.

So, one answer is that if you want to offer your employees a plan, you have to become a trustee or (equivalently for the purposes of being sued) take responsibility for the decisions of the trustees you choose. Else, there ain't no plan.

ESOP Guy - Your point is correct. If appraisers were considered fiduciaries for their appraisals only and were categorically not fiduciaries for anything else (unless they agreed to be), then we could probably move on. But without clear limits on the fiduciary responsibilities of appraisers, it's likely that some court could improperly drag an appraiser into the mix for something as far fetched as not conducting a detailed review to independently confirm the financial and business data provided by the company. What a crock.

(I am not an appraiser. We have an ESOP.)

edit: minor wording change

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Mbozek has a point here.

This idea that a co-fiduciary can be held 100% liable for any other actions by a fiduciary is what has gotten all the stock appraisers in the ESOP world riled up.

The proposed DOL rules would make anyone who appraises closely held stock a fiduciary. The DOL says it would make the appraisers more accountable for the price they are giving. While one might not object to that idea but what appraiser in their right mind is going to make themselves liable for actions of people they may not know exists. You go to some of these ESOP conferences and the appraisers are saying they will leave the business. They will just do appraisals for Estate Tax, and buy/sell purposes.

Purpose of my comments was to highlight the difference in risk exposure of trustees/fiduciaries under ERISA and rules governing other professionals. A few years ago there was a case where a corporation retained a NY law firm to prosecute an an appeal of NY state taxes that had been assessed against one of the corp's subsidaries. Corp believed the assessment should be less than the amount claimed by the state tax dept.The firm appealed and ultimately the assessment was upheld. After the s/l for appealing assessment expired the corp parent turned around and sued the law firm for malpractice because according to an opinion by an accounting firm, under the NY tax law the sub would not have been liable for any taxes which would have been discovered if the firm performed due dilligence on the matter when it was retained. The NY court of appeals rejected the claim for malpractice on the grounds that the firm had performed properly within the scope its retainer agreement and could not be held liable for not reviewing matters not agreed to in its retainer agreement. In otherwords a law firm can limit is exposure to risk in the scope of responsibilities which is not available to fiduciaries under ERISA.

It is my understanding that the proposed fianancial advisor regs that were withdrawn in Sept could provide vicarious exposure as a fiduciary to attorneys who review plan investment issues such as advising on the number funds, fees and classes of proposed investments for a plan as part of the due dilligence review performed by the attorney.

mjb

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My direct answer to your question is No--but, then, I don't follow reports of criminal liability under ERISA. But what's wrong with that? What you suggest--no cirminal liability when there has been civil cooperation--is like a thief being convinced to give the funds back to the victim and then somehow believing that such an act removes and eliminates the completed criminal act of theft. There's been no agreement not to be subject to criminal charges in exchange for civil cooperation--besides, the investigator probably did not have the authority to enter into such an agreement, in any event, because he/she was on the civil side simply investigating the loss of plan assets & trying to recover them.

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The govt reserved the right to go after criminal charges even after a voluntary correction...

The VFCP says:

(5) Criminal investigations not precluded. Participation in the VFC Program will not preclude:

(i) EBSA or any other governmental agency from conducting a criminal investigation of the transaction identified in the application;

(ii) EBSA's assistance to such other agency; or

(iii) EBSA making the appropriate referrals of criminal violations as required by section 506(b) of ERISA.

http://www.dol.gov/ebsa/regs/fedreg/notices/2006003674a.htm

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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I have seen a few cases where there was prosecution after co-operation. The thinking was that the cooperation was only because they were caught and that there was still a crime committed. If you thumb through the EBSA News Releases you should easily find a few cases.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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  • 8 months later...

The Trustee just received a letter advising him he is the target of a federal grand jury investigation and inviting him to testify. It also mentions possible criminal indictment. He is contacting his attorney today.

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  • 7 months later...

why would anyone want to be a plan trustee?

That's a rhetorical question, right?

I'm not sure how I got here, but it's too disconcerting to think about. :blink:

In any case, to everyone, Happy Holidays.

No its a question that is ignored in the employee benefits community. Fulfilling the duties of a plan fiduciary/trustee is time consuming and filled with unexpected risks. There are too many ways to be be blindsided or be found liable for another person's illegal activities. A few years a financial advisor was a fiduciary to a qualified plan for the purposes of investing plan assets. However the plan admin/trustee was siphoning off assets by making false entries. After the trustee took off with the assets the plan sued the financial advisor as a co fiduciary even though the advisor did not have any involvement in plan administration. The court found the advisor liable as a co fiduciary because the advisor received the monthly statements of the plan assets and did not conduct due dilligence to review their accuracy.

Now why would any one want to be a trustee or fiduciary?

Sounds like the advisor had the wrong attorney in court.

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If you rob a bank and the next week pay it back, should you be prosecuted? If so, then why wouldn't a fiduciary of the bank be prosecuted?

And to answer your question, I have seen many fiduciaries pay what they owe and still be prosecuted. In fact, everyone who gets prosecuted pays it back if they have the funds to pay it.

One last point. Did he lie on the 5500? That will get you every time.

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DOL has to justify their funding by showing how many criminal cases they have successfully prosecuted as well as the civil settlements they have obtained. It would be a conflict of interest for them to fail to prosecute. And since they are saying they are all about preventing conflicts of interest, one wonders if they have given any thought to their own/

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I'm not sure why this old thread was revived, but I'll provide a brief update. The trustee did not face criminal prosecution. I don't know what happened to the prior TPA, but he was named in some of the DOJ paperwork as participating in some of the activities. The DOL settled the civil matter informally and did not impose a 20% penalty on the trustee. The trustee paid some rather large PT penalties.

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