Fraud and Dishonesty

[rblum50]

I have a client that has maintained a 401(k) plan with me for some time. From about 2007, part of the plan's assets, which were all commingled, were invested with a certain investment firm. When my client started the account, he indicated on a preference questionnaire that he wanted the monies to be invested conservatively. It appears that the investment firm ignored his wishes and invested the plan's assets fairly aggressively. Over the last couple of years, my client has been requestng different types of paperwork from me such as, historical brokerage statements, reconciliation worksheets for those assets held by the investment firm, etc. After doing alot of research, my client decided to sue this investment firm. I received a call today from his attorney asking me about the entry on the 5500 forms filed over the years that indicates that there has been no fraud or dishonesty. He wants to know when this box would actually be checked. The opposing side is suggesting that if this box was never checked, then the Plan Sponsor felt there was never any Fraud or Dishonesty, so why is he crying foul now?

Here are my questions:

1. My contention is that you don't check the box indicating fraud and dishonesty because of a "gut feeling" that your plan's assets are not doing as well as you had anticipated and you want to blame it on the investment firm. Correct?

2. Not having received any indication from the plan sponsor other than having me gather historical information and his suspicion that the investment firm might not have followed his instructions, I checked "no" for every 5500 I prepared. Do you agree the correct approach was taken?

3. What would need to occur for that Fraud and Dishonesty box to be checked? Does there have to be something definitive from the courts? A judgement against the injuring party? Is the IRS clear as to what constitutes Fraud and Dishonesty so that the box would be checked with a "yes"? If you know, please direct me to where the IRS says this.

Thanks for the help,

Rick

[Andy the Actuary]

Options:

(1) Run

(2) Run quickly

(3) Notify your E&O carrier

[jpod]

Did you check the boxes when preparing the 5500? If so, what did you tell the client about those boxes when you forwarded the 5500 for signature?

If you did not check the boxes, did you give your client guidance about those questions when you forwarded the 5500 for signature?

If you didn't prepare the 5500, then I don't think you need to run or run quickly, but why your client would be asking you for your opinion on this issue is beyond me.

[Bird]

Did you check the boxes when preparing the 5500? If so, what did you tell the client about those boxes when you forwarded the 5500 for signature?

Do you make a special point to say anything about that box versus the skeighty eight other boxes?

[Bird]

I thought I had another semi-intelligent post but it seems to have disappeared; it went something like this...

I agree with you (rblum) and see nothing wrong with how your answered.

The attorney claiming that answering that question "no" on the 5500 somehow invalidates the claim is just blowing smoke. But the client is going to have a hard time proving that instructions to invest "conservatively" weren't followed is going to have a tough time proving it.

[Kevin C]

I may be a little slow today, but why would anyone try to classify an alleged failure to accurately follow what the client considers to be investment instructions as fraud or dishonesty? I can understand trying to call it a breach of contract or malpractice. I just don't see how you get anywhere near fraud or dishonesty with the situation presented.

[pmacduff]

I guess have a different take on this...I might have thought that the question was referring to the actions (or not) of the Trustees and or Fiduciaries of the Plan.

Is the investment firm either of those?

In reading the question again however, I suppose once the "fraud or dishonestly" causing the loss was discovered by the Trustees/Fiduciaries, then it might follow that you would answer "yes" and report accordingly on the return.

[ESOP Guy]

Rblum50 you are in a tricky spot. I am not trying to insult your intelligence by telling you something you may know, but I am inclined to mention this.

This sounds like one of those situations where if you cooperate you may make people happy and you get out of bad place cheap and easy.

However, if you cooperate and don’t filter it through a lawyer and things get worse you could find your “helpful” words coming back to haunt you in court.

Like I said not trying to state the obvious or insult your intelligence, but I have been in that place before. All I can say is when in that place I have typically went with the risk of make people happy and got out of the situation cheap and easy.

But we started from that point forward always reviewing anything we said, and more importantly wrote, with he lens of how will that sound in court with a hostile lawyer trying to convince people to interpret my words in the worst possible light. And we tried to write as little as possible. Honestly, I would think about stopping all e-mails about this client if you have staff working for you. People tend to write too informally in e-mails and write lots of opinion in them. One reads more and more how e-mail is what gets people in trouble in court because people forget that e-mail is forever and lawyers can and will go after them if it comes to it.