ERISA Lawsuits Filed Following Madoff Scandal

Philadelphia, PAThe Bernard Madoff Ponzi Scheme has made its way into the ERISA lawsuit arena, now that ERISA claims have been filed against companies that invested with Madoff. The lawsuit was filed against Austin Capital Management Ltd., following the loss of millions of dollars from a pension fund for Philadelphia-area health-care employees. More ERISA lawsuits will likely be filed in Madoff's wake as other pension funds and their investors discover that they lost millions of dollars when their managers invested with Madoff.

This most recent lawsuit was filed on behalf of the Pension Fund for Hospital and Health Care Employees--Philadelphia and Vicinity and a class of similar funds. The suit alleges that the fund managers violated ERISA by failing to prudently invest the funds' assets. According to the plaintiffs' lawyer, the Fund invested $10 million in a fund run by Austin Capital Management. Austin then invested $700,000 of that $10 million with Madoff. The entire $700,000 was lost when Madoff's Ponzi scheme came to light.

The lawsuit further alleges that Austin did not conduct due diligence prior to investing with Madoff and either ignored or did not notice warning signs that Madoff was running a scam. Those warning signs include Madoff's refusal to disclose his strategy for investing, the lack of volatility with the investment, the lack of appropriate auditors for investments and a discrepancy between the monthly account statements and the returns being earned.

The lawsuit seeks to represent all employee benefit plans that used Austin for investment management and lost money when Austin invested in Madoff's securities.

It may be because of the tough economic times, or just that employees are becoming more investment savvy, but either way, more and more employees are questioning how their pension funds and other employer-sponsored investments are being run. Many such employees are demanding that there be a proper accounting of where their pensions have been invested and what has happened to them. And, when the worst happens and portions of the investments are lost, they are holding their fund managers accountable for those losses.

Some employees allege that their funds were mismanaged. Others allege that their fund managers outright lied to them about the state of the investments. They say that because of this deception, they lost far more money than they should have, or would have, if the fund managers had been honest with them.

Gary T (not his real name) says he lost half of his 401(k) because of his fund's managers. "[They] failed to inform me of the rollover options when I was separated from my employer in January 2008," Gary says. "They only mailed this notice 1 year later. During this year, they showed over-optimistic numbers on my statements, which hid the losses, then removed the losses from page 1 of the statement. Due to mismanagement, I lost 50 percent of my 401(k)."

Gary is not the only person to claim that his employer and/or fund manager gave false statements regarding pension funds. Sandra H (not her real name), says that she, "Lost funds as a result of false reporting of the account." She says that she was told one thing about her account but what she was told were lies. As a result, she lost money from her pension--money she worked hard for and invested in good faith.

In addition to pension funds, employees are complaining that their Employee Stock Option Plans (ESOPs) have declined dramatically, without their ESOP managers notifying them about this or taking action to prevent or mitigate the losses. Some say that their ESOPs, benefits that they also worked hard to accumulate, are almost worthless. Unfortunately, many employees were counting on their ESOPs or their 401(k) plans to help them in their retirement years. Now, they have very little in those plans and are not sure how to regain that lost money. They counted on those funds being available to them, and those who are nearing retirement age have to scramble to make up for that lost money.

ERISA laws absolutely require that fund managers act in the best interests of fund investors. Any failure to do so--including failure to act when funds drop in value and misleading investors about the status of the funds--can be grounds for an ERISA lawsuit.