Chimicles Schwartz Kriner & Donaldson-Smith LLP (CSK&D) filed a class action in New York federal court to recover damages suffered by participants in the American Federation of Musicians and Employers’ Pension Plan. The action asserts claims against the Plan’s Trustees and Executive Director, among other things, to recover Plan losses resulting from breaches of the Trustees’ and the Executive Director’s fiduciaries duties under ERISA and the Plan governing documents. The Complaint alleges that after previously assuring Plan participants that the Fund “is not severely underfunded,” benefits were not in jeopardy and the Fund was projected to be solvent through at least 2047, in December 2016 Defendants stunned the Plan participants with a letter revealing that the Fund could soon be in “critical and declining” status Multiemployer Pension Relief Act as soon as March 31, 2017 and that participants’ ability to get their full pension benefits was in jeopardy. The Complaint alleges that Defendants breached their fiduciary duties by making an excessive, imprudent gamble by investing over $240 million of the Fund’s assets in high-risk, high-cost international emerging markets equities. Despite knowing that the average pension plan invested only about 4.5% of total assets in risky emerging markets equities, Defendants initially invested up to 5% of total Fund assets in emerging markets equities, and then, following negative returns, more than doubled the high risk investment to 11%, only to again double-down and increase the Fund’s investment to an extraordinary 15% of Fund assets. The Complaint alleges that Defendants acted like a gambler “chasing” losses by recklessly try to win back money already lost by not only increasing the amount gambled, but also increasing the riskiness of the gambling bet. Had Defendants simply invested Plan assets in three Vanguard index funds, including a 5% allocation to emerging markets equities with annual cost savings, the Plan would have earned hundreds of millions of dollars more than the Fund earned due to Defendants’ risky, outsized bet in emerging markets, while at the same time saving tens of millions of dollars in wasted fees paid to active investment managers.
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