Following the twists and turns of this lawsuit requires not only some appreciation of ERISA’s legal requirements of fiduciaries, but some historical perspective about the remaking of the newspaper/media industry over the last three decades and the financial security once offered by single-employer defined benefit plans.
But it is relevant because there may still be people out there who worked for a newspaper or other vastly changed industry. Some may have participated in a pension plan long ago but are not yet in pay status. If you stopped getting a benefit statement years ago, or have been tossing it out as junk mail, now is a good time to follow up.
How it all went wrong
Freedom Communications, which owned a string of Southern California newspapers including the Orange County Register and Riverside Press-Enterprise, established the Pension Plan in 1989. It was a defined benefit plan, which was quite usual at the time. A defined benefit plan promises a set benefit to participants at a future time, usually on the attainment of a certain age and years of service. The benefit is typically paid as a lifetime annuity. If plan assets are insufficient to pay benefits when due, the employer must contribute more money. This is a very safe deal for employees.
In 2012, Kushner and Spitz bought Freedom Communications. At the time the Pension Plan was substantially underfunded, which was not shocking given the changes in the print media industry between 1989 and 2012. Kushner and Spitz agreed to assume the Pension Plan liabilities as part of the purchase price. Freedom then filed for Chapter 11 bankruptcy in 2015.
The Pension Plan terminated under ERISA during the bankruptcy reorganization proceedings. When a defined benefit pension plan terminates, existing obligations to pay already accrued benefits do not end. Generally, plan termination only prevents new obligations from accumulating.
The PBGC then became the statutory trustee of the Pension Plan. The PBGC guarantees existing participant benefits within certain limits. This guarantee exists only with respect to defined benefit plans; it does not exist with respect to more modern 401k plans.
In order to limit its liability to plan beneficiaries, the PBGC required increased contributions from Freedom. In order to limit Freedom’s obligation to make increased contributions, Kushner and Spitz directed Pension Plan assets into more and more speculative and ill-advised investments.
The whole scheme came crashing down, and the PBGC sued Kushner and Spitz for violating ERISA’s prudence requirements in a host of ways.
Four flavors of scam
First, Kushner and Spitz caused the Pension Plan to purchase life insurance policies with Freedom employees as the insureds. The Pension Plan’s actuary then inflated the value of the policies by valuing them at the net present value of future death benefits, rather than using the correct valuation method, the cash surrender value of the policies.
Second, Kushner and Spitz invested funds in another complex program where the Pension Plan purchased a portfolio of loans used to finance life insurance premiums for people unrelated to Freedom or the Pension Plan. Although such portfolios can have economic value when the insured persons are in poor health with decreased life expectancies, the actuary failed to obtain the medical information needed to make a meaningful evaluation. It was worthless.
Third, there were investments in a highly speculative and unproven foreign hedge fund. The hedge fund is now similarly worthless.
Finally, Kushner and Spitz lost millions of dollars of Pension Plan assets by causing it to buy stock in Freedom when they knew that the company was in financial distress – also worth nothing.
All told, the PBGC alleged 17 different counts of breach of the ERISA fiduciary duties of prudence and loyalty with respect to their handling of Pension Plan investments.
What happened to the Pension Plan participants?
The settlement, if approved, will redound to the benefit of the PBGC, which will pay already accumulated participant benefits within statutory limits. But, what about the Pension Plan participants? Did they or will they ultimately get their money? This is the part of the story that gets lost.
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The print media industry is also not the first or last industry to collapse and re-form. What is clear, however, is that the task of recovering long-forgotten benefits, even under established law, is largely a matter of memory, curiosity, records and the effort to seek help.