Theatrical Lawyers in Federal Court
There’s been some gleeful, though incomplete reporting of court proceedings as the lawsuit against the AFM-EPF makes its way through the process.
First there’s the “New Court Filing” in January of this year that “offers a play-by-play account of trustees’ decision making.” On closer inspection one can see it’s the plaintiffs’ lawyer stating their case, with some color (example: the word “disloyally”) thrown in a number of times.
Then there’s “Trustees call lawsuit frivolous” (of course they did, it’s part of the same playbook the plaintiffs use) “but a federal judge disagrees.” This amounted to Judge Valerie E. Caproni of the Southern District of New York declining to dismiss the case out of hand in what would have been an unusual move.
But the best is “Federal Judge calls AFM-EPF Trustees’ Investment Approach ‘Extraordinarily Risky.’”
She said a lot more than that.
Here is a fuller context for each partial quote. THE COURT is Judge Caproni. Mr. Schwartz is Steve Schwartz, attorney for plaintiffs (Snitzer and Livant) and Mr. Rumeld is Myron Rumeld, attorney for defense (the fund).
“THE COURT: So, look, I am sympathetic to the situation the trustees found themselves in, but when I hear the emerging markets, they ultimately put how much --
MR. SCHWARTZ (Plaintiff): 15 percent. THE COURT: -- 15 percent, and private equity at 10 percent or nine percent? MR. SCHWARTZ: 18 percent. THE COURT: 18 percent. That's just -- I mean again I understand the situation the fund was in, but that is extraordinarily risky. I mean, yes, if the risk pays off, mazel tov, but the reason that it's risky is that you also have a risk that you're not going to get that return, that you're going to lose money. That's why the investment is risky. MR. RUMELD(Defense): Yeah. And with respect, your Honor, that's why we hire professionals who can evaluate risk in the aggregate.”
Then the claim is made that Judge Caproni “excoriated the trustees for not having standards for evaluating how outside investment managers were doing.”
Here is the context. Hardly an “excoriation.”
THE COURT: But there was no -- at least I couldn't tell from the minutes that you gave me -- that you wanted me to decide on -- what the trustees really were using aside from what Makita said. And it wasn't clear that Makita had a standard either as opposed to kind of a gut feeling that we need to hang in with this manager for a year or two more. But it was not clear to me that there was any kind of standard, leading to the question of whether a fiduciary needs a standard. MR. RUMELD: So, let me try and respond in a couple of components here. And I don't want to get into a battle of semantics with your Honor, because "standard" could mean a few different things. So, for example, there is an allegation in the responding papers that Makita said after three to five years we should be making a decision to get rid of the manager if he's not performing well. If you read what that paragraph says in the minutes, they don't say that. They say in general three to five years is a benchmark you would be looking at, but every single manager you have to evaluate in the context of what is going on, so maybe in three to five years but not necessarily. I give that as an example, your Honor, because --
THE COURT: I don't know what that means. MR. RUMELD: Well, the point is that every circumstance has to be evaluated individually so there isn't --the advice they got from their professional is don't have a hard and fast rule. Historically the biggest mistakes that multiemployer funds make is when they bolt from an investment manager because he has two or three years of bad performance, and they exit him right before he rebounds, because the consultants would say you really have to evaluate over a market cycle.”
Did Judge Caproni conclude as is claimed: “As fiduciaries, the trustees should have some criteria they use to decide whether active management was actually worth the cost and for deciding to fire active managers who were not doing a good job?”
No, she stated the plaintiff’s complaint to that effect.
“THE COURT: Although the defendants are correct there is nothing per se wrong with active management, plaintiffs' complaint that as fiduciaries the trustees should have some criteria they use to decide whether active management was actually worth the cost and for deciding to fire active managers who were not doing a good job. Plaintiff alleges there were no standards and nothing in the defendants' documents demonstrates that there were.”
More claims are made and the transcript reveals a plaintiffs’ attorney doing his best to make the defendants look bad. Much of it seems irrelevant but there are a couple of claims that stand out: “Going from 7 1/2 to 9% (target rate) is a massive shift... and that is very much like a gambler who is doubling down or tripling down trying to take riskier and riskier bets” and “the trustees were advised by their counsel at the time that investment returns were ‘ugly’ and that ‘there would be a riot’ if the plan participants were told the facts.”
“MR. SCHWARTZ: But these trustees the active managers did poorly, and we know from the emails from plan counsel they didn't do poorly for one year, three years or five years. The numbers were ugly, and plan counsel acknowledge they were ugly, and if we actually transparently conveyed that information to participants, there would be a riot, and they would get sued just like they have been sued.”
It’s well-known the numbers in 2008-09 were ugly. The fund has averaged a 9.3% return net of fees from 2009-2016. The target rate has also not changed from 7.5% for at least as far back as 2008, so it’s not clear what Schwartz is talking about.
In fact, this is not a trial yet. It was a motion by the defense to dismiss. Judge Caproni declined to dismiss which is not unusual. But she made it clear, the plaintiffs have a steep climb to make their case.
“THE COURT: In sum, plaintiff has plausibly alleged an ERISA violation, albeit one that will have a tough row to hoe to get past summary judgment.”
Open court is theater. While the target audience is either the jury, the judge or both, the general public and whoever might be in the courtroom are an ancillary audience. Lawyers are advocates and in that role they will try to make their clients look like paragons of virtue and to paint their opponents’ clients as sleazeballs, and they will aim to do it in the most interesting way possible. Some lawyers actually take theater classes in order to be more compelling in court. Juries may not always know what’s happening, but you can be sure judges do. Judges will allow a certain amount of “color” in their courtrooms and will shut it down if it crosses the line. More leeway is likely given if no impressionable jury is present and the judge is simply hearing motions and making rulings.
One thing to bear in mind, whether you are a juror, spectator or just an interested party reading a transcript: don’t look to either plaintiff or defense counsel for an accurate representation of either party’s behavior or words.
Southern District of New York court transcript of the hearing on the motion to dismiss, April 26, 2018.