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Defense Litigator Sees Improving Legal Landscape for Stable Value Industry

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The terms “good news” and “class-action lawsuits” don’t pair together very often, but for the stable value industry they have.

Earlier this year, at the SVIA’s 2017 Spring Seminar in April, Mark Blocker, a partner with the law firm of Sidley Austin LLP, had cautioned that it was hard to predict how the industry would fare in the rash of lawsuits that had been filed over the past few years against stable value funds. In October, addressing the SVIA again at its Fall Forum, Blocker delivered a decidedly more upbeat message.

“Today, as I speak to you, the future of stable value litigation as an ongoing enterprise for plaintiffs’ class-action lawyers looks much clearer,” Blocker said. “I think there’s a chance, over the next year or two, that you’ll see stable value litigation decline. Not totally disappear. But a lot of the types of cases you’ve seen, you’re not going to see again in the future.”

A litigator specializing in consumer class-action cases, Blocker attributed the improved outlook largely to the fact that in the cases decided since his last talk before the SVIA, the defendants—stable value funds—had largely been winning.

Blocker classified the cases against stable value funds into three categories, and provided an update on each group:

Pooled stable value funds: Of the three cases brought against pooled stable value funds, claiming either that the funds had invested too conservatively or too aggressively, two have now been dismissed, Blocker reported. “I think it shows courts are starting to understand stable value,” he said. In the cases where the defendants prevailed, courts upheld the idea that conservative investment guidelines imposed by wrap providers right after the 2008 financial crisis weren’t necessarily unreasonable. Nor, they said, were conservative performance benchmarks that had been prudently selected. The courts also rejected the idea that a stable value fund could be held liable simply because its returns lagged those of an industry average.

“There is one (pooled fund) case remaining, and I think it will be a very difficult case for the plaintiffs to win on appeal,” Blocker said. “Unless it comes out badly, or there is a very large settlement, I think we may be close to an end on these kinds of cases.”

Single-company stable value funds: In the two cases against single-company stable value funds, Blocker said, one older case has settled, and the other was dismissed but is now on appeal. In the dismissal ruling, the court again agreed that the investment process matters more than the result, that deviation from an industry average means nothing, and that it’s not enough for plaintiffs to suggest ways a fund could have performed better using hindsight.

Blocker said the case on appeal could be significant for the stable value industry because it could help to resolve once and for whether the claim that underperforming the arithmetic mean of a broad group of stable value funds is grounds for legal action.

General account fixed-income products: There have been eight claims filed against insurance companies that offer general account fixed-income stable value products. The lawsuits allege that the insurance companies are ERISA fiduciaries, and as such unlawfully profited from the “spread” between the crediting rates they paid on their products and what they earned on their underlying investment portfolios. Most of the cases have been allowed to proceed thus far, Blocker said, with courts saying they need more information about whether the companies are, in fact, fiduciaries in these cases. In one case, however, the court found that there was no spread and dismissed the lawsuit. In another, the court denied class certification to the plaintiffs. Two cases have been allowed to proceed as class actions, Blocker said, and requests for class-action status are pending in several others. There have been no settlements.

Blocker also noted that there have been four lawsuits against plan sponsors claiming they breached their fiduciary duty by offering a money market fund or similar fund, rather than a stable value fund, in their defined contribution retirement savings plans. In one case, the plan sponsor has prevailed. In another the defendant settled. Two other cases remain open. One of those, involving plan sponsor American Airlines, is cause for concern, Blocker said. The case revolves around American Airlines’ use of a credit union fund rather than a stable value fund. American Airlines and the plaintiffs last year agreed to settle the suit for $8.8 million, but a federal judge refused to certify the settlement over concerns it was too small. More recently, the two sides submitted a proposed $22 million settlement, which, at the time of Blocker’s presentation, had received preliminary but not final approval from the court.

“What does the future hold?” Blocker concluded. “When I spoke at the Spring Seminar someone asked when the madness will end. For pooled funds, I think we may be near the end of the madness. For single funds, I also think we’re near the end of the madness. We still need further illumination on general account cases; the motion to dismiss rulings thus far haven’t provided a lot of guidance. As for the failure-to-offer-stable-value cases, we should know more in one year.”