Myers v. Nebraska Inv. Council
| Decision Date | 08 December 2006 |
| Docket Number | No. S-05-532.,S-05-532. |
| Citation | 724 N.W.2d 776,272 Neb. 669 |
| Parties | Larry W. MYERS, for himself and all other persons similarly situated, Appellant v. NEBRASKA INVESTMENT COUNCIL, an agency of the State of Nebraska, et al., Appellees. |
| Court | Nebraska Supreme Court |
H. Daniel Smith and David J. Koukol, of Dwyer, Smith, Gardner, Lazer, Pohren, Rogers & Forrest, L.L.P., Omaha, and J. Patrick Green, of Creighton University School of Law, for appellant.
Jon Bruning, Attorney General, and Dale A. Comer, and Tim Engler and Christopher R. Heinrich, of Harding, Shultz & Downs, Lincoln, Special Assistant Attorneys General, for appellees Nebraska Investment Council et al.
Shawn Renner, of Cline, Williams, Wright, Johnson & Oldfather, L.L.P., Lincoln, and Earl H. Nemser and David S. Hoffner, of Dechert, L.L.P., New York City, for appellees WG Trading Company, L.P., and Westridge Capital Management, Inc.
Larry W. Myers appeals from a district court order dismissing a class action he filed on behalf of himself and other taxpayers to recover an alleged illegal expenditure of state funds. Myers sought an order declaring illegal, ultra vires, and void two contracts entered into between the Nebraska Investment Council (NIC) and private entities, WG Trading Company Limited Partnership (WG Trading) and Westridge Capital Management, Inc. (Westridge). Myers alleged that the State had lost $40 million or more in public retirement funds because the contracts were speculative and illegal and were statutorily and constitutionally prohibited investments. The investment of these funds was governed by the Nebraska State Funds Investment Act, Neb.Rev.Stat. §§ 72-1237 through 72-1260 (Reissue 1996 & Cum. Supp. 2000).
Myers asked for the following relief from Westridge and WG Trading: (1) a repayment to the State of all losses, (2) a disgorgement of all fees received or denied under the contracts, and (3) an equitable accounting of all transactions occurring under the contracts. From the NIC officials, Myers sought a money judgment for the funds transferred to Westridge and WG Trading and the amount necessary to reimburse the retirement funds for all losses suffered by the State because of the investment contracts.
We glean the following from Myers' operative complaint and attachments and evidence submitted at a hearing to determine whether the case was moot. On April 24, 2001, the NIC members voted to invest 10 percent of the domestic equity assets from the State's defined-benefit retirement plans in an "enhanced index strategy" managed by Westridge. According to the report prepared by the NIC's counsel, this amount represented about 5 percent of the State's approximate $4.5 billion in defined-benefit retirement funds.
In June 2001, the investment officer, Rex W. Holsapple, signed a contract on behalf of NIC with Westridge for investment management services. In the contract, Westridge offered services for an enhanced index strategy, as measured against the total return of Standard & Poor's 500 total return index. The strategy consisted of (1) "a separately managed account that invests in securities, futures and options," for which account Westridge served as the investment manager, and (2) an investment in Westridge's affiliated partnership, WG Trading. WG Trading is a Delaware limited partnership that invests in an "index arbitrage strategy." The managing general partners of WG Trading are Paul R. Greenwood and Stephen Walsh.
In the Westridge contract, the NIC granted Westridge broad discretion to invest and reinvest the State's assets in the managed account, and the contract required 80 percent of the State's assets to be invested in WG Trading. Also in the contract, the NIC acknowledged that WG Trading could have conflicting loyalties between the NIC and Westridge and that its fee schedule created an incentive for Westridge "to make investments that are riskier or more speculative than would be the case in the absence thereof." The parties could terminate the Westridge contract upon 30 days' notice, but the NIC's withdrawal from the WG Trading contract was not governed by the Westridge contract.
On June 14, 2001, the NIC executed a subscription contract to purchase limited partnership interests in WG Trading for $200 million. See Black's Law Dictionary 1427 (6th ed. 1990) (defining subscription contract as "any contract by which one becomes bound to buy"). Around June 27, the NIC transferred $200 million to Westridge or WG Trading, with $160 million invested with WG Trading and $40 million invested with Westridge. The NIC later transferred an additional $35 million to Westridge and WG Trading.
The WG Trading partnership contract provided: "The purposes of the Partnership are (i) to buy, sell, sell short, lend, borrow, hold, trade, invest, deal in and otherwise exercise all rights, powers, privileges and other incidents of ownership in Securities, Options, commodities, futures and any and all other types of investments . . . ." The partnership contract authorized WG Trading to engage in any transaction necessary to accomplish this purpose, "including, without limitation, borrowing money, engaging in margin or short sale transactions, repurchase transactions and reverse repurchase transactions."
Paragraph 17.1 of the contract provided:
The Limited Partners acknowledge that the Partnership has been organized to invest primarily in arbitrage and other hedged strategies but that this type of investing is speculative and may involve a high degree of risk, including both market and credit risks. . . . Moreover, the Limited Partners acknowledge that allocation of Net Profits to the General Partners may create an incentive for the Managing General Partners to make investments that are riskier or more speculative than would be the case in the absence thereof. . . .
After entering into this contract, Holsapple requested from the Nebraska Attorney General an opinion that the NIC had authority to enter into the WG Trading partnership contract. The Attorney General responded by letter that the NIC and Holsapple had exceeded their authority by entering into the limited partnership. He opined that the contract violated § 72-1247, which expressly prohibited "purchasing securities or investments on margin and the buying of call and put options." In addition, the Attorney General concluded that the investment violated the "prudent man standard" of § 72-1247, which required the funds to be managed "not for speculation but for investment." The Attorney General concluded that the State was not bound by the contract and that the NIC should take immediate steps to secure the retirement funds.
Holsapple later sought to address the Attorney General's concerns about the investments and submitted a report to the Attorney General. The Attorney General repeated, by letter, its earlier conclusions that the partnership contract violated § 72-1247. The Attorney General agreed, however, to allow the NIC to obtain an opinion from outside legal counsel.
The law firm retained by the NIC, Kutak Rock, issued a report to Holsapple in January 2002. The firm acknowledged that § 72-1247 prohibited the NIC from directly making the investments that the contract authorized WG Trading to make. It concluded, however, that this circumstance was similar to many investments that are made in entities Based on this reasoning, Kutak Rock framed the issue as whether WG Trading was acting as an agent or alter ego for the NIC. The firm concluded that the NIC's investment in WG Trading did not violate § 72-1247 because the NIC could not direct WG Trading to make investments, prohibited or otherwise.
Kutak Rock further concluded that the prudent investor standard of § 72-1247, prohibiting speculation, was ambiguous on its face. It asserted that any investment in equity securities was speculative and that options and futures could be methods to decrease overall risk, i.e., hedging. Citing commentary in the Restatement (Third) of Trusts, ch. 7, topic 5 (1992), the firm concluded that specific investments should not be judged in isolation but on the roles they play in overall portfolio strategies.
In January 2002, the Attorney General sent a letter to the chair of the Legislature's executive board, explaining the investment contracts and disagreeing with Kutak Rock's conclusions. The Attorney General acknowledged that the NIC was not required to transfer additional funds to WG Trading for margin calls because the investment was through a limited partnership, but he argued that the State's assets could still be lost if the underlying securities decreased 50 percent in value.
Also, in January 2002, Holsapple's tenure as the investment officer ended. In April, the Legislature repealed § 72-1247. In August, the NIC appointed Carol L. Kontor, who had been an NIC member, as the new investment officer.
In April 2003, Myers filed this class action against (1) the NIC, (2) the five NIC voting members, (3) Holsapple, (4) WG Trading, and (5) Jane Doe and John Doe, representing other unknown business entities that may have entered into partnership agreements or investment contracts with the State. In June, the NIC, Holsapple, the NIC members, and WG Trading moved to dismiss because the court lacked personal and subject matter jurisdiction and Myers' pleading failed to state a cause of...
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