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November 20, 2001


The opinion of the court was delivered by: Rodriguez, District Judge.


This matter is before the Court on motion of Defendants Michael E. Hegarty, Patrick Campbell, Edward Zarnock, Robert M. Occhiuzzi, John Chrysogelos, Jr., Martin D. Jessen, and Joseph A. Natoli ("Defendants") for Summary Judgment pursuant to Fed.R.Civ.P. 56. Plaintiff Harold Olsen ("Plaintiff") has opposed Defendants' motion. For the reasons stated below, the Defendants' motion is denied.


This claim arises from the operation and administration of the Operating Engineers Local 825 Pension Fund (the "Plan") between the years 1993 and 1998. Plaintiff is a retired member of the International Union of Operating Engineers Local No. 825, and is a beneficiary of the Plan. He alleges certain violations of the Employee Retirement Income Security Act of 1974 ("ERISA"), arising from the management of his pension fund. Defendant Michael E. Hegarty is the Chairman (now Co-Chairman) of the Board of Trustees of the Pension Fund ("Board"), which is the administrator of the Plan. According to his testimony, Defendant Hegarty became a member of the Board in 1989 and became the Chairman of the Board in the mid 1990's. Defendant Patrick Campbell acted as the Secretary of the Board of Trustees and has been a member of the Board for each fiscal year since July 1, 1991. Defendant Edward Zarnock, Defendant Robert M. Occhiuzzi and Defendant Joseph A. Natoli, were members of the Board of Trustees on September 30 1999, at the time the Complaint was filed, and had served for varying lengths of time prior to that. Defendant John Chrysogelos, Jr. and Defendant Martin Jessen were not members of the Board of Trustees at the time that the lawsuit was filed but, according to the Complaint, were members during the time period relevant to this lawsuit, beginning in 1995 and 1991 respectively, according to the complaint.

A. Factual Background

1. Brief History of the Fund, its Holdings and its Decision-Making Process

In examining the factual landscape of the present motion for summary judgment, the Court may not resolve conflicting factual contentions. Paton v. La Prade, 524 F.2d 862 (3d Cir. 1975). The Court is under a duty to construe the facts in the light most favorable to the Plaintiff and the history outlined below will reflect as much.

In November 1955, the International Union of Operating Engineers Local 825, along with a number of other trade associations*fn1 entered into an Agreement and Declaration of Trust. ("Trust"). The Trust allowed for the creation of a pension fund for the purpose of providing retirement benefits to employee participants. The pension fund was intended to be a "multi-employer plan" as that term is defined by ERISA § 4001. 29 U.S.C. § 1301(a)(3). The Trust laid out rules governing the administration and oversight of the Fund by eight trustees, and defined the rights, duties and obligations of these trustees. Also provided for was a Finance Committee that could act as the delegate of the Fund's investment and finance decisions. In January 1956, the Trustees of the Fund, in accordance with the Trust, created the Local 825 Pension Plan, which is the Plan now at issue.

The Plan provided a contribution and benefit scheme by which an employer's contribution and an employee-participant's retirement and related benefits is calculated. Each participant is entitled to "receive a monthly pension for his or her lifetime based on the vested credited service and the value per credit in effect when the participant last earned one full year of credited service." Sullivan Cert. at Exh. 3 at 14. Plan participants are not entitled to benefit increases above the amount calculated by that method, although any surplus generated was required to be utilized for the benefit of the participants and the Trustees enjoyed the discretionary power to issue benefit increases.*fn2

The growth of the Fund over the its first 36 years is largely beyond the scope of this motion. For present purposes, there are two noteworthy factors in the Fund's evolution prior to 1993. First, except for the years 1986 and 1987, employer contributions were greater than benefits paid in every year prior to 1990. Second, as the Fund grew and sought to become less reliant on employer contributions to pay benefits, the Plan became heavily invested in guaranteed investment contracts ("GICs"),*fn3 a type of fixed-income bond that provided for return of principle on maturity. As of 1989, the Fund had over $264 million dollars invested in GICs. This amounted to roughly 89% of the Fund's total assets. As of November 1992, the proportion of fund assets held in GICs had grown to 91%, before falling to approximately 64% in 1994.

This drop was a result of problems that developed with GICs as investments during the early 1990s, including their diminishing rate of return. Additionally, the Trustees' accounting projections revealed that the rate at which benefits paid would outstrip employer contributions would continue to grow. By the Trustees' estimation, this deficit created the need for the Fund to transition away from the traditional GICs that they had relied on in the past. The overriding concern of the Trustees during the 1990-1992 time period was ensuring the Fund's continued ability to pay out pension benefits. It was also during this period that the Trustees considered forming a bank with the Funds' assets.

Toward that end, a group of Fund advisors and employees began to meet in 1991 to consider investment alternatives. While the meeting minutes of this group refers to it as the "Investment Subcommittee" and Defendants' "Statement of Undisputed Material Facts" ("Defs.' Facts") does the same, Defendant Hegarty testified that:

[t]here was no committee ever formed by the trustees as an investment subcommittee. When [Joseph Pagano, Esq., the "Secretary"] wrote the minutes up he used to call it the investment subcommittee. I always used to laugh about it. It had no duties or responsibilities. It was there to assist — these individuals who are Fund employees were there to assist me as a member of the Finance/Investment Committee, but it was not a constituted committee with any authority under the Trust. Dep. of Michael Hegarty at 72.

Regardless of its nomenclature, it is clear that a group of Fund employees and advisors met nearly every month between 1991 and 1994 in order to discuss and evaluate investment options. Included in this group were Defendant Michael Hegarty, Jerome Foley (investment advisor), Mary Keane (Fund employee who regularly dealt with commercial paper issues), Alan Leiwant (provided Fund with actuarial information), Clara Ciccotelli (Fund administrator), Joseph Pagano (attorney) and Joseph Corcoran (accountant). Defs.' Facts at ¶ 62. Despite this group's lack of official standing within the Trust, it is clear that the official Investment / Finance Committee, which consisted of only Defendant Hegarty and Defendant Campbell, substantively relied on the discussions that occurred in the context of this subcommittee before making recommendations to the full Board.

On November 4, 1991 Defendant Hegarty presented the full Board with the recommendation of the subcommittee and the Trustees agreed to a written investment strategy entitled "Proposal for Asset Diversification for Current Short Term Assets, Current Contributions and Income Only." ("1991 Proposal"). In this Proposal, the Trustees reaffirmed their primary investment policy as one that would "obtain a total rate of return from quality investments to meet plan obligations." Defs.' Facts at ¶ 77. This rate of return had to be "above actuarial assumption," which later was set at 7.5%. The 7.5% rate would become a benchmark for the rest of the Board, as future investments were measured by whether they surpassed this rate of return. Dep. of Jerome Foley at 78. The Proposal also contained certain diversification requirements, laying out specific investment vehicles that were "recommended" and prohibiting participation in "puts, calls, straddles, short sales and pair offs, strips, residuals, zero coupon bonds, and corporate obligations rated lower than `A.'" Sullivan Cert. at Exh. 18 at 5. Investments in common stock were not prohibited. Despite being adopted in 1991, this Proposal is relevant because it laid the groundwork for the investment strategy well into the time period described in the complaint.

Following the introduction of the Proposal, monthly meetings of the subcommittee group were held in order to monitor and discuss the investment portfolio of the Fund. Beginning at their April 2, 1992 meeting, the subcommittee began to track a model stock portfolio, comprised of 15 different utility stocks at 100,000 shares each. From time to time, the subcommittee would check on the model portfolio to compare how an investment there would have fared against their actual investments. The subcommittee thus considered the possibility of non-fixed income securities as early as 1992.

Based on their discussions during this period, the subcommittee committed to a dramatic reduction of the fund's GIC holdings. This had been a goal of the subcommittee since at least August 1992, when the meeting minutes expressly lay out the goal of reducing the percentage of GIC holdings from over 90% to under 50% in five years. As noted above, this goal had not been met by 1994.

The full Board of Trustees met quarterly between 1992 and 1994 in order to receive reports from the actuary and accountant regarding employee contributions, investment income, benefits paid, actuarial assumptions, expenses, net assets, and actuarial liability. At these meetings, Defendant Hegarty would usually present an investment report that summarized new investments, maturing GICs, rates of return, both current and projected. Hegarty also recommended amendments to the 1991 Proposal and offered resolutions for vote by the full Board. There is no evidence in the record that Hegarty's investment recommendations were ever rejected or critically examined at the Board meetings.

The work of the investment subcommittee and Defendant Hegarty reached a head in June 1994 when they presented an "Investment Policy for Operating Engineers Local 825, Pension, Annuity, Welfare, Out-of Work and Savings Funds" ("Policy"), which was voted upon and approved by the Board. Sullivan Cert. at Exhs. 54 & 55. This Policy was designed to be a replacement and update of the 1991 Proposal and was built upon the subcommittee's experience of the last 3 years. The Policy reflected a growing concern among the subcommittee concerning the trend of diminishing employee contributions relative to benefits paid.

The Policy categorized recommended investment vehicles into 3 distinct classes. Id. Similar to the Proposal, the Policy outlined some prohibited types of investment vehicles. Common stock was not included on this prohibited list. Safeguards were put in place to ensure that the Fund was properly diversified across lines of "issuer, industry, geography and purpose." Sullivan Cert. Exh. 54 at 3-4. Pursuant to the Policy, both Defendant Hegarty and Mr. Foley had the permission to purchase or sell investment vehicles "so long as the criteria contained in the investment policy were followed." Defs.' Facts at ¶ 111.

In accordance with the Policy, Defendant Hegarty and Mr. Foley led the effort to broaden the investment holdings beyond GICs. This was done both because much of the Fund's GIC holdings would be maturing over the next few years and because the Trustees no longer wished to be locked down in GICs that were not marketable. The following months saw the Fund's portfolio move away from GICs and into other fixed-income vehicles, with an emphasis on government-issued bonds, and other investments within the credit industry. This included a modification to the Policy that recommended the previous mark of 50% in government issued vehicles be allowed to float upward. The investments following the adoption of the Policy continued to be measured against the 7.5 % benchmark.

The transition away from GICs marked a potential sea-change in the life of the Funds. It represented an opportunity for the Trustees to reinvest much of the asset base that had been tied up in non-marketable GICs into new vehicles. Defendant Hegarty testified that at the time this transition was occurring, his decision, made with the assistance of the investment subcommittee, was that the credit industry represented the safest and easiest strategy.

Looking at it from the prospect of transition of hundreds of millions of dollars with having the least amount of risk at that particular point during the transition, which is your most vulnerable time, the way that it came about as the best path of least resistance and least risk was to go to the credit market. And that was a proposal that was taken to the Board and that's what the Board voted to do. Dep. of Michael Hegarty at 103.

When asked if the Trustees had considered transitioning the maturing GIC funds into other types of investment vehicles, Defendant Hegarty explained that he had run some scenarios that revealed different mixes of investments, but that his ultimate decision was to stay in the credit markets because it would mean a "more orderly transition." Id. at 68. None of the Trustees compared their prospective strategy or past rate of return against the S & P 500 Index. Id. at 103. Finally, when pressed specifically on why the Trustees had ignored investments in equities, Defendant Hegarty cited the large fees that would inevitably result from having to manage, monitor and conduct the constant transactions that accompany stock investments. Id. at 233-35. Defendant Hegarty also explained that because the Trustees had no one capable of performing those tasks within the Funds, outside brokers and managers would have to be utilized at high costs to the Funds. Id.

It was only in early 1997 and beyond that the Funds began to invest in common stocks. Defs.' Facts at ¶ 124. By June 30, 1998, the aggregate investments in common stock represented about 4% of the Fund's total assets. Id. at ¶ 125. These included stocks that Defendant Hegarty considered to be "blue chip," although some Trustees were not even aware which stocks were being bought by the Funds. Dep. of Robert Occhiuzzi at 97-99. It can be fairly stated, then, that throughout the relevant time period the Fund's investment holdings were comprised primarily of GICs and fixed-income bonds (with a particular focus on government-issued bonds).

The record reveals a process of investment purchasing that leaves little doubt as to where the locus of decision-making power rested. Defendants Hegarty and Campbell, in conjunction with Mr. Foley would decide on a particular investment or line of investments. That vehicle would be discussed to some degree in the context of the monthly investment subcommittee meetings, in the context of the status of the Plan. These meetings included updates and projections from the actuary and accountant. Defendants Hegarty and Campbell or Mr. Foley would make the purchase and then only later submit a report to the full Board of Trustees. Inevitably, the full Board, upon receiving an investment report at their quarterly meeting, would adopt Defendants Hegarty and Campbell's purchase or sale decisions after the fact, without question or debate as to either the specifics of that particular investment or how this single purchase fit into the overall investment strategy of the Fund.

This process is apparent both in the deposition testimony of the individual Trustees, as well as from a review of the Trustee meeting minutes. For example, the first time that Defendants Hegarty and Campbell along with Mr. Foley decided to invest in equities, a step that departed from their past practice, the Board was notified via a Memorandum, written the previous day and presented at their meeting on March 27, 1997. Sullivan Cert. at Exh. 62. The memo, in pertinent part, reads, "Equities [] are now being added to the Pension's portfolio as the Subcommittee has determined that the fund is now large enough to allow for any long term holding, 10 to 15 years, that may be necessary to achieve a return of 150 basis points above our assumptions. See attached sheets for equities chosen to date." Id. This is clearly not a proposal, but rather a report informing the Board that a decision has already been made. The investment process after the 1994 Policy was put in place followed this pattern, with the full Board accepting each and every one of the Hegarty, Campbell and Foley decisions.

The parties here do not agree on the proper manner by which to determine the amount of cash that was available to invest in other vehicles during the time period in question. The Defendants maintain that part of what prompted the 1994 Policy was a concern over shrinking cash flow and increasing actuarial liability. Plaintiff maintains that the Defendants had a large amount of cash run-off from their investments at that time that could have been used to create a more diversified investment portfolio.

With this review of the actual process of decision-making that occurred over the course of the Plan's history in mind, this Court will review the background of each Defendant.

2. Qualifications of the Trustees to Make Investment Decisions

a) Michael Hegarty

Defendant Hegarty attended general college courses at Saint Mary's University in San Antonio, Texas and at the County College of Morris in Randolph Township, New Jersey. He also attended one seminar that outlined the duties of a trustee sponsored by the Association of General Contractors. He has never had any formal training on investment strategy or pension fund management, although he did attempt to educate himself by reading the Wall ...

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