DMA Computes $300M Damages Resulting From Breach of Fiduciary Duty in Retirement Portfolio Accounts
One of the largest employee retirement funds in the country at the time with nearly $1b in assets under management.
The fund managers were alleged to have violated their fiduciary duty to maintain proper diversification in the fund by allowing one particular security to make up more than 25% of fund value and up to over 40% of fund value by mid-2015
There were also allegations against the retirement fund managers of failure to prudently divest the security when accounting irregularities became publicly known in late 2015
The fund managers were alleged to have violated their fiduciary duty to maintain proper diversification in the fund by allowing one particular security to make up more than 25% of fund value and up to over 40% of fund value by mid-2015
There were also allegations against the retirement fund managers of failure to prudently divest the security when accounting irregularities became publicly known in late 2015
DMA Economics role
DMA was brought in to calculate how pension fund investors were harmed by the alleged breach of fiduciary duty in failure to adequately diversify the portfolio and prudently divest a particular security when its accounting irregularities became public.
DMA also assisted the client in engaging Richard Marin of SEDA Experts, a seasoned portfolio manager who could opine on the proper level of portfolio diversification and the time period when the security should have been divested.
DMA was asked to calculate damages to retirees based on simulated but-for portfolio values assuming the fund managers did not violate their fiduciary duty
DMA simulated fund performance under four alternative portfolio management strategies to calculate but-for performance and fund value had the fund not violated their fiduciary duty
o Maintain below 25% of portfolio value for any individual stock throughout the retirement plan’s existence
o Divest down to 25% when advised to do so by investment advisory committee who noted their concern that the fund was not adequately diversified
o Divest the entire position when the fund actually divested the position in Spring 2016
o Divest the entire position when accounting irregularities became known and causation experts testified it would have been prudent to do so in Fall 2015.
DMA’s Approach - Rigorous analysis clearly communicated ®
DMA calculated the value of the portfolio less the value of each but-for. simulated portfolio to assess damages for the fund as a whole under each of the four scenarios
Aggregate damages were calculated to be nearly $300 million under the most accepted scenario.
Damages where then allocated to each retiree based on a month-by-month basis their monthly account balances relative to the value of the fund as a whole.
Damages were calculated as of June 2016, when defendants ceased to manage the pension fund and brought forward to 2020 based on pre-judgment interest.
Using this approach DMA was able to calculate damages for over 400 individual fund investors.
The result
Arbitrators have concluded that DMA’s calculations were rigorous and clearly communicated and accepted the damages calculations for over 90% of investors.
Thus far, almost every retirement fund investor has been able to recover damages which DMA Economics calculated to be nearly $300 million for all retirement account investors.
ABOUT THE AUTHOR: Don May CPA PhD
Don May is Managing Partner at DMA Economics LLC and possesses over 30 years’ experience in consulting, valuation and litigation support as well as researching, publishing and teaching at the university level. His experience includes implementing a broad range of damage analyses and valuations for businesses of various sizes and in numerous industries. Prior to founding DMA Economics, Dr. May was Managing Director at Berkley Research Group and the Principal in charge of valuation and litigation support services for a regional accounting firm, a Managing Director for PricewaterhouseCoopers and a professor at the Massachusetts Institute of Technology - Sloan School of Management.
Dr. May has prepared expert reports and testified in federal and state courts as well as AAA, JAMS, and FINRA arbitration hearings and has effectively communicated as an expert witness testifier and consultant in several multi-million dollar cases.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.
