Compliance October 21, 2010

DoL Sues Money Managers over Madoff Losses

The U.S. Department of Labor (DoL) has accused four money management firms of violating their fiduciary duties by causing hundreds of millions of dollars in losses to pension and other benefit plans after placing their investments with Bernard Madoff.
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A DoL news release said the agency brought the accusations of violations of the Employee Retirement Income Security Act (ERISA) in a lawsuit against Beacon Associates Management Corp., Andover Associates Management Corp., Ivy Asset Management LLC, J.P. Jeanneret Associates Inc., and the principals of the four companies.

Also named in the suit are Joel Danziger and Harris Markhoff of Beacon and Andover, Lawrence Simon and Howard Wohl of Ivy, and John Jeanneret and Paul Perry of J.P. Jeanneret.  The defendants provided advice and investment services to plans.

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The suit also alleges that the defendants failed to take prudent actions to investigate or monitor Madoff and his purported trading and to disclose the extent of the known risks, irregularities and suspected “red flags” surrounding Madoff’s operation.  Additionally, the suit alleges that the defendants failed to protect the plans’ interests while collecting tens of millions of dollars in fees for themselves as a result of the Madoff investments.

According to the suit, plan investments were made with Madoff through direct investment and indirectly through the Jeanneret, Beacon and Andover funds that invested with Madoff.  The suit further alleges that the Jeanneret defendants improperly received higher fees on the Madoff investments than other investments.

The DoL said the suit seeks to require the defendants to restore all losses suffered by the plans and to return any fees and profits improperly received as a result of plan investments with Madoff.  It also seeks to permanently bar them from serving in a fiduciary capacity to any plan governed by ERISA in the future.

“These defendants chose their own financial interests over those of the plans whose assets they were duty bound to manage prudently.  Their actions put the future benefits of thousands of workers in jeopardy,” said Secretary of Labor Hilda L. Solis, in the news release.

The case is Solis v. Beacon Associates LLC, Civil Action Number 10-CV-8000.

Compliance October 21, 2010

NQDC Plan Sponsors Reminded of 409A Compliance Deadline

Employers with a non-qualified deferred compensation plan (NQDCP) that has not been amended to comply with Section 409A of the tax code have until year end to take advantage of a special offer to bring the plan into line.
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According to a new client advisory from attorney Adam B. Cantor of the national law firm Fox Rothschild, a special Internal Revenue Service (IRS) compliance program allows NQDCPs in existence before January 1, 2009 to amend their plan by December 31, 2010, with the changes to take effect as of January 1, 2009, as long as sponsors satisfy certain IRS tax return reporting requirements and correct any operational failures due to this retroactive correction.

Cantor said that plans out of compliance which are not corrected by the year-end deadline will find plan participants being taxed once the deferred amount vests and the IRS imposes a 20% excise tax and interest on the deferred amount starting from the time of initial deferral or vesting, whichever is later.

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