Breach Suit against Broker Too Late

U.S. District Judge Terry R. Means of the U.S. District Court for the Northern District of Texas made the ruling in a suit filed against a Dallas-based sales company now called Schnair Sales and Service, its former president and plan trustee, and an RBC Dain Rauscher broker. Means asserted that because the suit by Terrence M. Hanlon, who purchased the company in 2001, was not filed until 2003 and because the RBC Dain Rauscher broker was no longer a “de factor” fiduciary after June 1999, the dispute was raised too late to meet the ERISA deadline.

According to Means’ ruling, broker J. Everett Airington was a “de factor” fiduciary until June 1999 because he was the primary maker of the plan’s investment decisions and strategy. The court noted that former president and owner Alfred J. Melillo let Airington decide how to invest the plan’s assets and relied solely on Airington to provide an investment strategy for the plan.

Airington recommended that Melillo sign agreements authorizing the use of margin and option writing in the plan account, despite the fact that Dain Rauscher’s policies advised against the use of margin trading in ERISA accounts. According to the ruling, Airington switched the plan’s investments from mutual funds to riskier, more aggressive investments and began churning the account by engaging in frequent trading and a high number of trades that generated fairly significant commissions for Dain Rauscher.

Because of his margin trading, the court said, Airington ended up having to sell stock at inopportune times to cover margin calls.

The case is Hanlon v. Melillo, N.D. Tex., No. 4:03-CV-237-Y, 2/8/08.