76 F.3d 1245 (1st Cir. 1996), 95-1699, J. Geils Band Employee Ben. Plan v. Smith Barney Shearson, Inc.

Docket Nº:95-1699.
Citation:76 F.3d 1245
Party Name:J. GEILS BAND EMPLOYEE BENEFIT PLAN, et al., Plaintiffs-Appellants, v. SMITH BARNEY SHEARSON, INC., et al., Defendants-Appellees.
Case Date:February 20, 1996
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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76 F.3d 1245 (1st Cir. 1996)

J. GEILS BAND EMPLOYEE BENEFIT PLAN, et al., Plaintiffs-Appellants,


SMITH BARNEY SHEARSON, INC., et al., Defendants-Appellees.

No. 95-1699.

United States Court of Appeals, First Circuit

February 20, 1996

Heard Oct. 2, 1995.

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[Copyrighted Material Omitted]

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Thomas J. Butters, with whom Cullen & Butters was on brief, Boston, MA, for appellants.

Barry Y. Weiner, with whom Christopher P. Litterio, William E. Ryckman and Shapiro,

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Israel & Weiner, P.C. were on brief, Boston, for appellees.

Before TORRUELLA, Chief Judge, BOWNES, Senior Circuit Judge, and STAHL, Circuit Judge.

TORRUELLA, Chief Judge.

Appellants, the J. Geils Band Employee Benefit Plan (the "Plan"), and Stephen Bladd (the "Trustee"), John Geils, Jr., Richard Salwitz and Seth Justman (the "Participants"), brought this suit alleging fraud and breach of fiduciary duty under the Employment Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. (1994), in connection with certain investment transactions made by Appellees in 1985, 1986 and 1987. The district court granted the motion for summary judgment brought by Appellees, Smith Barney Shearson ("Shearson"), Matthew McHugh, and Kathleen Hegenbart, on the grounds that Appellants' claims are time barred under ERISA's six-year statute of limitations. For the following reasons, we affirm.


The following facts are summarized in the light most favorable to Appellants, the party opposing summary judgment. Barbour v. Dynamics Research Corp., 63 F.3d 32, 36 (1st Cir.1995).

The Plan, also known as T & A Research and Development, Inc., was formed as a pension and profit sharing plan for the employees of the J. Geils Band and, as a common plan and trust, it is subject to ERISA. In April of 1985, Bladd as the Plan's Trustee 1 opened accounts for the Plan with Shearson Lehman Brothers, Inc., a registered broker-dealer and a member firm of both the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE). This appeal stems from Shearson's management between 1985 and 1990 of the Plan's account and, specifically, its purchase of three limited partnerships (the first in June of 1985, the second in September of 1985, and the third in June of 1987) and execution of a "bond swap" in May of 1986.

The Plan's accounts were handled by Hegenbart, a Shearson employee who acted as the Plan's stock broker from 1985 until Appellants transferred the accounts from Shearson in 1990. McHugh, a Shearson branch manager, supervised the accounts. Hegenbart would make a recommendation, and if Appellants accepted it and executed an order, she would receive a commission. If the recommendation was not accepted, she would not receive any compensation from Appellants. While Appellants communicated to Hegenbart that they knew very little about financial management or investment, Appellants retained decision-making authority over the Plan accounts. At no time was Hegenbart given power of attorney or discretionary authority over the accounts.

Upon opening the Plan's accounts, Hegenbart sold the securities transferred to it and one month later, in June of 1986, purchased over $500,000 of long-term zero coupon bonds ("CATS"), Shearson-managed mutual funds, and certificates of deposit. In May of 1986, Appellants swapped the CATS purchased in 1985 for other bonds upon Hegenbart's recommendation. The bond swap resulted in an overall loss to the Plan and generated over $90,000 worth of commissions--$32,000 for the bonds purchased in 1985 and $61,000 for their sale in May of 1986, and the subsequent purchase of the new bonds. The Plan was charged commissions of about 3.5% for the sale of the CATS purchased in 1985, 3.5% for the 1986 sale, and approximately 6% for the 1986 purchase of the new CATS.

Between 1985 and 1987, Appellants purchased a total of $165,000 worth of three Shearson-packaged limited partnership interests. The first was purchased in June of 1985, for $100,000. On or about the purchase date, Bladd, as Trustee, and Justman executed a Subscription Agreement under penalty of perjury. According to this agreement, they acknowledged, inter alia, that (i) they received the prospectus; (ii)

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there was not expected to be a public market for their investment; and (iii) there were risks involved, which the prospectus disclosed. Appellants were sent prospectuses which similarly disclosed risks involved when they purchased $40,000 worth of the second limited partnership interest in September of 1985, and when they purchased $25,000 of the third in June of 1987.

Each of the Participants, including Bladd as Trustee, received monthly statements, as did Justman's accountant, Nick Ben-Meir ("Ben-Meir"). The monthly statements disclosed the transactions which occurred during the particular month as well as a summary of the Plan's portfolio but did not separately break out the amount of commissions charged. The monthly statements listed the "face amount" of the limited partnerships, but not the market value. As of January 1986 they included the following statement: "The face amount does not necessarily reflect current market value." Appellants also received quarterly "Portfolio Reviews," which consisted of two documents: (i) a chart setting forth the Plan's portfolio, including the investment, date of purchase, amount invested, current market value, and yield, among other information; and (ii) an investment pyramid showing the relative safety of each investment and its market value, including the total account value. Unlike the monthly statements, the record shows that the portfolio review dated October 1988 lists as the market value what was actually the face amount of the interests in the limited partnerships. In the May 1990 portfolio review, the limited partnerships are listed in the "amount invested" column, with two of them appearing with undefined subtractions for "ROC" which exceed $19,000; the corresponding "market value" column is blank. Bladd, as Trustee, also received letters from McHugh as early as June of 1985 in which he offered both to help him review the Plan's investment objectives and results obtained and to discuss how Shearson could be of greater assistance.

While Ben-Meir did not receive the statements with the purpose of reviewing Hegenbart's investment decisions, the record shows he did review some potential investments as early as May of 1986. In October of 1988, Justman received a letter from Ben-Meir regarding an analysis of Justman's portfolio. In the letter, Ben-Meir communicated that he had exchanged "some extremely sharp words" with Hegenbart regarding some of the figures shown in the analysis, particularly with respect to the limited partnership interests. The letter stated that all of them are worth "far below their cost" and "strongly advise[d] [Justman] not to enter into any more of these types of investments," because the " 'loading' charges (fees and commissions off the top ), together with their continuingly reduced value for tax purposes ... make them unattractive...." (Emphasis in original). Ben-Meir then expressed that "[d]espite [Hegenbart's] repeated statements to me that she only has your best interest at heart, my instincts say otherwise, and I would urge you, once again, to request and obtain an accounting of the fees and commissions earned by Shearson and her as a result of her placing you in all these [l]imited [p]artnerships." Finally, the letter closed with the recommendation that "[i]f you decide to continue using [Hegenbart] to manage your portfolio, that's okay, but you should clearly change the amount of discretion you have been allowing, so that no purchases or sales are made without your complete review of all proposals and direction."

In late July to August 1990, the Plan accounts were transferred from Shearson. Some time thereafter, the Plan's new broker informed Bladd that the limited partnerships were unsuitable for investors desiring safety and were worth less than the amount reflected in the latest review, confirming Ben-Meir's October 1988 observations. Between the summers of 1991 and 1992, internal Shearson "activity reports" produced during arbitration proceedings brought by Justman against Shearson 2 revealed information regarding the excessive commissions, also confirming

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Ben-Meir's observations. Appellants maintain that they only learned of the Plan's losses resulting from the bond swap in January of 1994, when they were informed by counsel whom they had retained in October of 1992.

Pursuant to an agreement between the parties to arbitrate disputes, Appellants commenced arbitration proceedings with the NASD by filing a Uniform Submissions Agreement dated August 20, 1993, seeking recovery for alleged breaches of fiduciary duty by Appellees. On motion by the Appellees, the NASD Director ruled on May 15, 1994, that virtually all of the claims were ineligible for arbitration under Section 15 of the NASD Code of Arbitration Procedure, because all trades giving rise to the claims occurred more than six years prior to the filing of the arbitration in August of 1993.

On October 7, 1994, Appellants filed the civil action below. In their complaint, Appellants allege that Appellees violated their purported fiduciary duty 3 to the Plan under ERISA with respect to the three limited partnership interests and the "bond swap." Appellants contend the following: (i) that these transactions were unsuitable for the Plan and were inconsistent with its investment objectives; (ii) that Hegenbart, in order to obtain higher commissions, made fraudulent statements to induce the Participants, whom she knew were unsophisticated investors relying on her investment advice...

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