Systemic Losses and Fiduciary Liability

We have all taken note of the run up in filings of very large breach of fiduciary duty cases against plan fiduciaries that are based on the tremendous losses incurred in investments held by plans as a result of the subprime lending mess. The filings themselves are noteworthy, and the numbers, losses and alleged misconduct depicted in them are eye-grabbing, in ways reminiscent of tabloid headlines that focus on the most sensational elements of a story for the purpose of separating readers from their three quarters. Most lawyers, myself included, and other observers have immediately delved into the ERISA defense lawyers playbook in thinking through these cases, looking towards the procedural, and if they fail, substantive defenses that the fiduciaries can present. But it may well be that the best defense is in the fact that fiduciary obligations may be high, but they do not require omniscience, and therefore in the argument that even a fiduciary who did everything at the level of competent industry professionals was still going to have the plan assets suffer these large losses, and thus cannot be liable here. I thought about this as I read this article here (the latest in what I have always thought of as Paul Krugman’s simplified economics seminars for the non-economists among us, including myself), which could almost serve as a trial lawyer’s closing argument that, whatever happened to the plan’s assets, it wasn’t the fiduciary’s fault, but a systemic problem giving rise to losses that could not have been avoided.

I am not entirely sure I believe that argument myself, at least in all cases, but in the case of a fiduciary who can document that standard, best investment practices were pursued, and the losses happened anyway, it’s a pretty persuasive argument. For the plaintiffs’ bar bringing these cases, and for the plan participants who have suffered large losses in their retirement holdings, what does this mean? It means that pragmatically, the case to be put in will probably have to combine the existence of the large systemic losses with compelling evidence that the fiduciaries in question in any particular case did not actually follow the industry’s best practices, but instead fell down on the job somewhere along the way, before those losses struck home. That second piece of the case is where the fun will be for the lawyers, in the nitty gritty of discovery battles seeking that evidence and in the fights to submit or exclude expert testimony as to whether the professionals did not pursue appropriate practices and whether that caused or increased the losses.