Did Northrup Grumman Squander ERISA Pension Money?

Los Angeles, CA Marshall v. Northrop Grumman Corp a class action ERISA lawsuit alleges that fiduciaries of the Northrup Grumman Savings Plan (“Plan”) squandered nearly $10 million in employee 401k retirement money through mismanagement that included paying unnecessary administrative fees between 2010 and 2016.

The latest twist in this long-running lawsuit involves efforts to disqualify expert witnesses hired by both sides to provide evidence about what prudent investment management practices would have been in the circumstances. This is part of a larger trend in class action lawsuits where the plaintiffs’ success depends on scientific or highly technical evidence.

The case of the careless fiduciaries

The participants in the Plan claim that it mismanaged assets in two major ways. First, the Plan paid both Hewitt Associates, a third party record keeper, and Financial Engines, another service provider, for essentially the same services. Hewitt and Financial Engines also had a tangled financial arrangement with each other under which Financial Engines kicked back some of the fees it received from the Plan to Hewitt. Hewitt arguably provided no service to Financial Engines or the participants that would justify the payment. The fees the Plan paid to Financial Engines increased sharply between 2013 and 2015 even though the recordkeeping services provided by Hewitt to the Plan remained the same or declined. Second, the lawsuit challenged the decision by the Plan to retain an equity investment option that was both the most expensive choice and which “consistently and dramatically underperformed its benchmark index.”

This is not a case, as were some of the earlier ERISA investment mismanagement lawsuits where the plaintiffs allege that the mismanagement redounded to the employer’s benefit. If the Plan was a cash cow, it appears to have been a cash cow only for the service providers.

Under Section 404 of ERISA, however, it is clear that the Plan’s fiduciaries had a legal duty to act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing retirement benefits and defraying reasonable plan administration expenses.

As with so many legal issues, the question becomes whether the expenses were “reasonable” or whether the Plan administrators’ lack of oversight was so outrageous that it amounted to a breach of legally mandated duty. And for evidence about what the phrase “reasonable plan administration expenses” means, both sides have turned to experts.

Who do you trust?

In Marshall attorneys for the participants sought to have Northrop Grumman’s expert witness disqualified. This is generally an extreme step. This is not an effort to dispute the expert’s opinion. It is an argument that the witness is either unqualified to offer evidence or is tainted by a conflict of interest, and so should not be allowed to testify, at all.

The participants argued that Marcia Wagner, an attorney, should not be permitted to testify as an expert because another attorney currently at her firm, Wagner Law Group, had represented different plaintiffs in a similar case when he was an attorney at Schlichter Bogard & Denton LLP, which now represents the participants in Marshall. It speaks to the smallness of the world of ERISA fiduciary duty lawsuits, but it may not be sufficient to disqualify the witness.

Conflict of interest issues arise when an expert changes sides from the defendant to the plaintiff’s side, or vice versa. Even then, however, most believe that there must have been a confidential relationship with a party to the lawsuit and disclosure of confidential information. It is not clear that the other attorney involved either had or disclosed privileged information to Ms. Wagner.

Alternatively, an expert witness may be unable to qualify due to his or her lack of credentials. This was the issue raised by defense counsel in a recent Monsanto Roundup cancer trial where the expert’s degree was in a field that was arguably only tangential to the factual issue at hand.

More commonly, opposing counsel may simply attempt to impeach the value of any opinion the expert offers as not particularly valuable or relevant. This appears to have been the approach in another recent ERISA lawsuit, where an expert who offered to explain the way in which benefits were calculated could not do so.

Is this the shape of things to come?

Increasingly ERISA fiduciary conduct lawsuits depend on expert testimony about investment management practices. Lay juries cannot be expected to know about industry practices, just as they cannot be presumed to be experts in medicine or chemistry. It is one of the particular challenges of this kind of ERISA lawsuit.

Both the selection and disqualification of experts and the impeachment of expert testimony can be expected to play a large role in future lawsuits of this kind.