Mandelbaum, Rochelle v. Fiserv, Inc. (3/29/2011, DC CO) 107 AFTR 2d 2011-1651
A district court has dismissed all of the federal common law, state law negligence, contract, and unjust enrichment claims brought by holders of self-directed IRAs against the IRA trustees for losses incurred by the IRAs for investments with Bernard Madoff's firm.
Background. An IRA is a tax-favored way for individual taxpayers to save for retirement in addition to or instead of a qualified employer plan. IRAs are domestic trusts created for the exclusive benefit of an individual or his beneficiaries. The trust must be in writing and satisfy a number of other requirements.
ERISA §404 requires a fiduciary to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” However, IRAs and annuities are not considered to be pension plans, and the management and operation of funds held in an IRA thus aren't governed by ERISA's fiduciary provisions.
Facts. A number of individuals owned self-directed IRAs with IRA agreements that clearly stated that they were solely responsible for making investment decisions in connection with the funds in their IRAs, and that the IRA trustees would not provide any investment advice. Pursuant to instructions given by these IRA owners, the IRA trustees sent IRA funds to Bernard Madoff's brokerage firm, Bernard L. Madoff Investment Securities LLC (BMIS), for investment in securities. These funds were ultimately lost in Madoff's ponzi scheme.
The IRA owners sought to hold the IRA trustees responsible for their role in the losses that the IRAs sustained. The IRA owners filed a class action complaint in April of 2009. In November of 2009, this action was consolidated with other actions involving common questions of law, on behalf of over 800 prospective class members. The IRA owners contended that the IRA trustees, as fiduciaries of the IRAs, owed the duty to hold, preserve, and keep safe the IRA assets, and to avoid commingling the IRA assets with other assets, and that the trustees failed to fulfill these duties.
Specifically, the IRA owners alleged that the IRA trustees: (i) turned the IRA assets over to Madoff without verifying how Madoff would continue to hold the assets; (ii) failed to take steps consistent with industry customs and standards for keeping track of, and maintaining custody over, the IRA assets; (iii) failed to maintain the title to the IRA assets; (iv) enabled Madoff's theft of the assets through a lack of oversight; (v) were engaged in arrangements with Madoff which caused the trustees to disregard various red flags concerning Madoff's fraudulent activities; and (vi) received information about the questionable nature of Madoff's operations.
The action asserted claims under federal common law, and state law negligence, contract, and unjust enrichment claims. The IRA owners asserted federal common law claims to vindicate rights that purportedly involved federal policy or interests, particularly as embodied in the Code and ERISA, that significantly conflicted with state law.
Court dismisses all claims. The district court dismissed all of the IRA owners' claims against the trustees. It rejected the federal common law claims based on Code Sec. 408, finding that Code Sec. 408 does not impose a specific duty of care on an IRA trustee, or create a private right of action for fiduciary breaches. Further, the court found that there was no conflict between state law and ERISA, because the IRAs were not employer-sponsored, so that Title I of ERISA did not apply.
With regard to the IRA owners' negligence claim, the court found that the IRA trustees owed no duties to the IRA owners independent of those in the IRA agreements, which explicitly indemnified the IRA administrators from liability resulting from any claims arising from the IRAs and made the IRA owners solely responsible for the investment of IRA funds. To the extent that the trustees might have had a pre-existing duty to provide accurate account statements, investigate red flags, and retain control over the trust assets, the court said that the IRA agreements exculpated the trustees from responsibility for the failure to fulfill any such duties. The court also refused to invalidate the exculpatory provisions on public policy grounds, noting the availability of choice in the IRA market.
The court also rejected the owners' state law contract claims. The trustees had fulfilled all their obligations as delineated in the IRA agreements, having transferred IRA assets to BMIS at the IRA owners' direction, and having provided account statements that contained the information from Madoff's firm. Additionally, under the express terms of the IRA agreements, the trustees had no duty to conduct appraisals of investments or verify any values reported to them, and had no obligation to prevent Madoff or his firm from commingling the IRA assets (which was done only after the assets were transferred to Madoff).
Observation: The relief from fiduciary liability under a “§404(c) plan,” which permits a participant or beneficiary to exercise control over assets in his account and limits the administrator's fiduciary responsibilities, does not eliminate a fiduciary's duty to prudently select and monitor the plan's investment managers and designated investment alternatives. However, at least for IRAs that are not employer-provided, the fiduciary obligations of IRA trustees are not determined by ERISA, and the fiduciary liability of IRA trustees is not determined under ERISA.
The IRA owners' state law unjust enrichment claim, based on moneys paid by Madoff to the IRA trustees, was also dismissed as based on vague and conclusory allegations that the trustees had directly received a benefit at the IRA owners' expense
References: For IRAs in general, see FTC 2d/FIN ¶H-12200; United States Tax Reporter ¶4084; TaxDesk ¶283,000; TG ¶8500.