Merrill Lynch Reaches Tentative Settlement in ERISA Suit

Merrill Lynch has reached a proposed settlement with trustees of retirement plans that filed suit over the calculation of sales charges and fee waivers.

The retirement plans in question are run by the LAAD Corporation, short for the Latin American Agribusiness Development Corporation. Trustees of the LAAD Corp filed their suit in the U.S. District Court for the Southern District of Florida.

The case itself is relatively straightforward in retirement industry standards and is being resolved following related action by the Financial Industry Regulatory Authority (FINRA). About a year before plaintiffs filed their lawsuit, Merrill entered into a letter of acceptance, waiver and consent with FINRA, acknowledging its failure to provide appropriate sales charge waivers for mutual fund purchases by “RCMA 05 small business retirement accounts,” including the ones held by the LAAD plans and settlement class members. As the settlement agreement lays out, Merrill made two sets of remediation payments, one voluntary and another pursuant to the FINRA letter—totaling about $79 million.

Plaintiffs in their lawsuit called the remediation insufficient and sued for breaches of fiduciary duty under Section 404(a) of the Employee Retirement Income Security Act (ERISA). In addition to a “complete remediation,” plaintiffs sought under ERISA 409(a) the disgorgement of profits derived by Merrill of the result of the practices in question.

Two years of litigation and negotiation later, the parties have reached a preliminary agreement to settle the class action, valued at an additional $25 million. Plaintiffs say the settlement agreement “provides an excellent recovery” for class members, paying them “100% of their losses” and including “accounts that were incorrectly excluded from the [initial] remediation.” The remediation also gives the class members additional millions in disgorged profits.

NEXT: Merrill’s arguments fell flat 

Background information in the text of the proposed and uncontested settlement agreement should offer some important food for thought for PLANADVISER readers. As part of the proceedings, class counsel “scoured 6.5 years of Merrill’s documentation … as well as the plans’ account statements to confirm the existence of a shortfall. Beyond this, the discovery effort included "six motions to compel, 11 depositions taken or defended and a review of more than 125,000 pages of documents and dozens of complex spreadsheets.”

Class counsel also hired a “data scientist” whose work “confirmed that the shortfall amounted to millions of dollars in unremediated sales charges and unpaid interest.”

Moreover, arguments leveled by Merrill Lynch generally seemed ineffective. Merrill for example initially challenged plaintiffs’ standing on the ground that the plans “did not invest in each of the 106 mutual funds sold by Merrill to class members.” Merrill contended that plaintiffs “could represent only those plans that invested in the same 14 mutual funds purchased by the plans.” If Merrill’s standing argument had prevailed, it would have greatly curtailed the scope of the action and the number of participant accounts receiving relief. The defense also (unsuccessfully) challenged class certification on ascertainability and manageability grounds.

Finally, Merrill failed in its assertion that it was not a fiduciary under ERISA or otherwise. With this, the final argument was made that the firm should be protected by ERISA’s statute of limitations, arguing many of the sales in question took place outside the limitation period anyway. In the end, pending a fairness hearing and the district court’s approval, the company seems to feel it’s arguments along these lines are less certain to reach a positive outcome than simply settling the claims outright.

Read the full settlement proposal here.