Law firm Schlichter Bogard & Denton this week received a rare rebuke from a federal judge, who ordered it to repay legal costs of up to $1.5 million to Great-West.
U.S. District Court Judge Christine Arguello granted Great-West’s motion for sanctions, writing that the law firm made a poor decision to pursue a trial, in light of its star witness’s testimony.
Great-West Capital Management and Great-West Life & Annuity Insurance Company won the case in August after an 11-day bench trial. The class-action case combined three separate lawsuits filed against the financial services firms since 2016. The plaintiffs in the different cases alleged that Great-West charged excessive investment management fees within its plans.
The allegations fell under section 36(b) of the Investment Company Act — a strategy that has been unsuccessful for numerous plaintiffs who have lobbed suits against investment managers. That section of the law prohibits investment firms from charging fees that are “so disproportionately large that [they] bear no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining,” Arguello wrote in her Sept. 28 order.
The plaintiffs failed to show at trial that they suffered financial damages from any alleged breaches of fiduciary duty, the judge wrote in an August order in Great-West’s favor.
Much of the case hinged on an expert witness’s testimony for estimating damages, though his testimony essentially fell apart during cross examination, according to court records.
“Even though they did not have the burden to do so, defendants presented persuasive and credible evidence [ahead of trial] that overwhelmingly proved that their fees were reasonable and that they did not breach their fiduciary duties,” the judge wrote. “Had plaintiffs’ attorneys objectively reviewed the evidence in this case, that fact would have been as obvious to them as it was to the court.”
The decision to drop the case would have been prudent for the plaintiffs, especially given the abysmal track record of 36(b) litigation, the judge wrote.
“No plaintiff — many of whom likely had better experts and stronger claims — has ever prevailed on a 36(b) claim in 50 years of the statute’s existence,” the recent order read. “Proceeding to trial under those circumstances was, therefore, objectively reckless.”
Jerry Schlichter did not immediately respond to a request for comment on the sanctions.
Defendants in another case are also pursuing sanctions against Schlichter Bogard & Denton. New York University, which was among dozens of elite colleges and universities targeted several years ago for class-action litigation over its retirement plans, won a lawsuit in 2018 at trial. The university shortly afterward filed for sanctions, though the plaintiffs have since appealed the case, at it is currently in the Second Circuit Court of Appeals.
A benefit for plaintiffs in the Great-West case is that the judge has shown a strong knowledge of securities law, said Nevin Adams, chief content officer for the American Retirement Association. Often, judges in 401(k) lawsuits have limited experience with the Employee Retirement Income Security Act or Investment Company Act of 1940, he said.
“The courts that seem to understand ERISA seem to give a great deal of deference” to defendants, he said. “You don’t always get the judge or the panel of judges that understands that [law].”
The named plaintiffs in the Great-West case essentially showed that they weren’t disappointed with the result of having saved money in the retirement plans, as their assets went up over time, Adams said.
However, the sanctions against Schlichter Bogard & Denton hardly represent a victory for the defendants, he said.
“This isn’t a big win — this is just Great-West … getting back the money they spent on this [defense],” he said. “At best, it brings them back to zero.”
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