stolen assets

[Santo Gold]

Financial advisor for a small 401k (eff 1/1/03) is in jail for stealing plan assets. Phony statements were created, 5500 was prepared using these phony numbers. Truth is there was no money in the plan until late in 2006, when the problem was discovered, and the current 401k and match amounts started to actually get invested. Plan should have had around $100,000 in assets as of 12/31/05.

Lots of questions here, but can anyone offer some guidance on how to prepare the 2006 5500 (due in a weeks time), especially the schedule I? Should we use actual assets (which were $0) for most of the year, use the number from the previous 2005 5500 as a starting point, or accrue what we think should have been the correct number as a starting point?

Also, is the trustee responsible for the lost assets in this plan? That is, if the crook is in jail and we assume they can't get anything out of him, and there was no fidelity bond for the plan, does that just leave the employer who has to make up the shortfall? The company that the financial advisor worked for is still in existence, should the trustee go after them?

Thanks

[Mike Preston]

There is no way that anybody here can effectively answer you. You simply must engage ERISA and litigation counsel to determine what is your client's best course of action. Period. End of discussion. Keep in mind that anything you disclose on the 5500 will be subject to disclosure and be part of the litigation process. It will at some point be referenced by the folks that your client will probably sue and by the folks that may sue your client for recovery of their monies. Do not pass go. Do not collect $200. Go directly to engage appropriate counsel.

[Santo Gold]

Thanks Mike. Better to have the attorneys sort out the legal mess and then file late. After posting, I read in EOB that a court ruled that the preparer of a 5500 (in that case, the same person who stole the money) was criminally liable for reporting mis-leading information on the 5500. 5500 showed all kinds of $$$ in the plan when in fact it was all gone. Jail-time for that partcular offense was doled out. Thats not too far from where we are at right now.

[Peter Gulia]

While it makes sense to get an expert lawyer’s advice, consider that the different interests might need or want separate lawyers (or should understand the risks of going without). In particular, a Form 5500 preparer or compiler shouldn’t rely on the advice of a lawyer who represents or advises a person other than the preparer or compiler.

• A practitioner wants advice about how to manage his or her engagement and services to avoid his or her personal liability or professional-conduct problems.

• A fiduciary who made a decision that a plaintiff or claimant might assert was imprudent wants advice about how to defend his or her conduct.

• The plan wants advice about how to pursue a restoration or recovery of the plan’s losses.

A fiduciary’s personal interest is at least different than – and in circumstances like those described might conflict with – the plan’s interests. Along with this, a practitioner might have as his or her client the plan or the fiduciary, but shouldn’t take both (at least not without both clients’ informed, clear, and independent approval of the conflicts). Even then, a practitioner must be mindful that some of his or her personal interests (including those concerning professional conduct) can conflict with a client’s interests.

Beyond considering the possibility of conflicting interests, one might consider how the differences in roles affect a person’s rights to preserve the secrecy of communications to and from a lawyer. (This matters because some decisions about how to react to what happened remain open or ongoing.)

• If a practitioner seeks a lawyer’s advice about the practitioner’s conduct (and not to get advice for the practitioner’s client), usually communications in such a lawyer-client relationship are privileged against disclosure without the client’s consent.

• If a fiduciary gets a lawyer’s advice not as a fiduciary but to defend his or her conduct or protect other personal interests, usually communications in such a lawyer-client relationship are privileged.

• By contrast, if a person seeks a lawyer’s advice as a plan fiduciary, the privilege for confidential lawyer-client communications belongs to the plan.

By the way, even if the plan isn’t protected by ERISA fidelity-bond insurance, a plan fiduciary might consider whether another person’s insurance might respond to the theft and, if there is a significant possibility, whether a Form 5500 should or shouldn’t disclose the plan’s decisions concerning whether or how to pursue such a recovery.

[david rigby]

.... but don't spend too much on legal fees, considering the amount at stake.

[Peter Gulia]

Not spending too much makes sense, and what "not too much" means again relates to role.

A person who or that gets advice to protect his, her, or its personal interests is free to consider cost-benefit trade-offs as a businessperson or even on personal taste.

An ERISA fiduciary must act as carefully, skillfully, and diligently as an expert experienced in making these fiduciary decisions would act in the circumstances. If it has become clear that the plan has almost no chance for getting a recovery, spending on advice should be restrained. But sensible spending to find out what the plan's opportunities are should be okay.