8:14pm PT by Jonathan Handel
AFTRA Retirement Board Sues JP Morgan Chase
The board of trustees of AFTRA’s retirement plan, in conjunction with two other retirement/pension plans, filed a class action suit against JP Morgan Chase, alleging that the bank left a half-billion dollars of client money in a “structured investment vehicle” called Sigma even as the bank was expressing doubts at the highest levels about the safety of the client transaction.
Meanwhile, the bank itself lent money to Sigma, but under terms that would allow it to profit if the company failed, according to the plaintiffs. Sigma ultimately did collapse, and the investors were left with assets worth six cents on the dollar, the suit contends, while JP Morgan Chase made profits of more than $1.9 billion on the deal.
The suit, filed two years ago in the U.S. District Court for the Southern District of New York, was brought to wide public notice Monday by the New York Times, which reported on detailed documents unsealed in the suit last month.
The amount lost by AFTRA’s retirement plan was $2-3 million, according to a source with knowledge of the matter. That’s only around a tenth of a percent of the plan’s total assets of about $2 billion, said the source, who declined to be identified. Nonetheless, the plan, which is frequently asked to be lead plaintiff in class actions, decided to do so in this instance even though it more often elects not to. The suit is being handled by lawyers on a contingent-fee basis.
The Plan, like most or all of the Hollywood union pension and health plans, is governed by a board with equal representation from management and labor. Each of the pension/retirement and health plans are legally separate entities from the related union, with separate staff and offices.
Telephone calls and emails to AFTRA, the Plan and its lawyers, and JP Morgan Chase were not immediately returned.
The Plan's suit alleges that the bank breached its fiduciary duty to its clients. The bank disagrees, arguing that the two halves of its business – investing client money versus lending its own money – are maintained on opposite sides of an “information wall” (often referred to as a Chinese wall or firewall) and that the lending business has no fiduciary duty to clients of the investment operation.
A finding of fiduciary duty, says the bank, would make it impossible for the bank to lend money or conduct other activities, such as issuing research reports, without subjecting the bank to liability.
Steve Diamond, a professor at Santa Clara law school and observer of Hollywood labor matters, criticized AFTRA itself, asking on his blog “when [AFTRA] was approached by the bank about dumping millions of dollars of actors’ money into an offshore tax haven, did it consider the risks sufficiently?”
A source countered that the same type of transaction – known as “securities lending” – had made money for the Plan in the past, and was just a small piece of a diversified portfolio of various types of stocks, bonds and “alternative investments” including commercial real estate partnerships.
Plan investments are made by some 20 or so money managers who specialize in different types of investments, and it is not clear that the Plan’s board would have been asked to approve the investment in the JP Morgan Chase securities lending program, let alone the transaction with Sigma. The latter appears to be only one of a number of securities lending transactions made through JP Morgan Chase.
The money managers are selected by the plan in consultation with outside counsel based on the managers’ investment philosophy and track records. The managers have discretion in making investments within specified parameters. The Plan holds investments in at least 1000 different companies, according to the source, and a smaller number of alternative investments, which is the category into which the Sigma investment falls.
A source argued that the transaction was not particularly risky, but also noted that the AFTRA Plan no longer permits its money managers to engage in securities lending on its behalf.