Defendants in DST Systems Lawsuit Say Plaintiffs’ Attorneys Have a Conflict

Defendants in a lawsuit questioning the fiduciary prudence of investing DST Systems Profit Sharing Plan assets in the Sequoia Fund, distributed and advised by Ruane, Cunniff & Goldfarb & Co. have asked that the counsel for the plaintiffs be disqualified.

A Memorandum of Law in Support of the DST Defendants’ Motion to Disqualify Conflicted Counsel says the plaintiffs’ counsel concurrently represent approximately 420 participants in the DST Systems Inc. 401(k) Profit Sharing Plan together with three plan fiduciaries whom they allege in these and other actions committed a series of Employee Retirement Income Security Act (ERISA) violations that caused losses to the plan accounts of their other clients. “In other words, plaintiffs’ counsel represent three individuals that they accuse of wrongdoing at the same time as they represent the supposed victims of that very alleged wrongdoing,” the memo states.

“Neither the law nor ethical rules permit plaintiffs’ counsel to represent at the same time the adverse interests between, on the one hand, non-fiduciary plan participants and, on the other, the interests of the plan fiduciaries whose decisions plaintiffs’ counsel allege violated ERISA,” the memo argues.

The plaintiffs alleged in their lawsuit that a portion of the plan’s assets are invested in the DST Systems Inc. Master Trust. The investment manager of the Master Trust was and/or is defendant Ruane, Cunniff & Goldfarb & Co. Inc. DST disclosed that, in contravention of the fiduciary obligations owed by those with discretion and control over the profit sharing plan, it was not properly diversified. In fact, rather than minimize the risk of large losses to the plan, the complaint said, the plan’s fiduciaries caused and/or allowed plan assets to be invested imprudently in the stock of Valeant Pharmaceuticals International Inc.

According to the complaint, at the end of 2014, approximately 30% of the profit sharing plan consisted of Valeant stock, which constituted a clear breach of the defendants’ duty to diversify plan assets in an appropriate and prudent manner. The complaint also said that not only did the DST Defendants retain Ruane, they continued to follow Ruane’s advice, knowing that such advice was flawed and unsuitable.

The memorandum in support of the motion to dismiss plaintiffs’ counsel says they represent three former members of the DST Advisory Committee—the named fiduciary of the plan. And its members owed fiduciary duties to plan participants, including the plaintiffs’ counsel’s other clients, to oversee the plan in the best interests of the participants. The memo points out that all the alleged conduct occurred during the period between 2010 and 2013 when the plaintiffs’ counsel’s clients served on the Advisory Committee.

However, the plaintiffs’ counsel now assert that their claims are supposedly limited to “breaches occurring in or after 2014”—three months after the last of their three clients ended their service on the Advisory Committee. Yet, the memo says, the complaint obviously alleges “misconduct that began and continued prior to 2014—whether the selection and retention of Ruane, supposedly excessive fees, the investment strategy employed by Ruane or the Valeant investment itself—during the time when plaintiffs’ counsel’s clients were plan fiduciaries.”

The defendants say that, far from justifying their conflict, the plaintiffs’ counsel’s effort to time-limit their claims highlights the disqualifying nature of their conflict. That is, “if they abandon the pre-2014 allegations in their complaint, they are sacrificing the claims brought by certain of their clients in an effort to mitigate the impression that they are directly attacking the three former plan fiduciaries that they also represent. Sacrificing the apparent interests of one group of clients to favor another proves even more than the mere ‘appearance of representing conflicting interests’ that the Second Circuit has held warrants disqualification.”

The defendants argue that the plaintiffs’ counsel’s clients will suffer no prejudice from barring their counsel from continuing in their conflicted representation. They point out that there already are two representative actions before the same court featuring substantially similar allegations against the same defendants which seek to recover on behalf of all plan participants, including the individuals represented by the plaintiffs’ counsel in the present case.

“The lawyers in those cases—Department of Labor [DOL] attorneys and private lawyers representing the plan as a whole—do not suffer from the conflicts of interest that infect plaintiffs’ counsel’s representation. While the DST defendants believe that the claims asserted in all the actions are without merit, the only individuals who have a real interest in avoiding disqualification are plaintiffs’ counsel themselves—who seek to extract unnecessary and unmerited fees from clients whose interests already are being represented in other actions,” the memo states.