Friday, May 7, 2010

DoL Claims No Safe Harbor in Fiduciary Breach Case

May 6, 2010 ( –

Secretary of Labor Hilda L. Solis has warned a federal appellate court that protections for plan participants could be harmed if it does not overturn a lower court ruling giving a directed trustee safe harbor protection against wrongdoing allegations.

Solis issued the warning in a friend of the court brief filed with the 6th U.S. Circuit Court of Appeals in Tullis v. UMB Bank, in which Solis argued that the lower court misread the safe harbor clause in the Employee Retirement Income Security Act (ERISA). The 404(c) provision was never intended to remove all legal liability from a fiduciary against the impact of their own failures in carrying out their plan duties, Solis contended in the brief. …

Solis asserted that the 404(c) safe harbor defense applies only where a participant exercises control over his or her investments and the loss caused by imprudent conduct “results from” such exercise of control, which was not true in the current case.

Physicians David H. Tullis and Michael S. Mack participated in the Toledo Clinic Employees' 401(k) Profit Sharing Plan. In the early 1990s, Tullis and Mack chose William Davis of Continental Capital Corp. as their investment adviser (see Case Sensitive:Shield Law).

In 1999, the Securities and Exchange Commission (SEC) entered a temporary restraining order against Continental Capital because two of its brokers were engaged in fraudulent activities. Tullis and Mack alleged that the plan's trustee, UMB Bank, knew of this fraud, yet failed to inform them of it.

In 2001, UMB Bank filed a lawsuit against Davis and Continental Capital on behalf of the plan alleging that several investments made by David and Continental Capital were improper or simply never took place. Tullis and Mack asserted that UMB, even after filing the lawsuit, never informed them of the fraudulent activities.

Tullis alleged that as of February 2003, UMB had represented that his plan account was $724,561, when in fact it was only $142,269. Mack asserted that UMB represented that his account was valued at $1.6 million when it was worth only $420,794.

Also included in the DoL brief was an argument that the losses stemming from UMB's actions resulted from UMB's breaches of its ERISA fiduciary duties. …

The DoL brief is available at

Fred Schneyer