DISTRICT 65 v. Prudential Securities

• Decision Date: 13 March 1996
• Docket Number: Civil Action No. 1:94-cv-3224.
• Citation: 925 F. Supp. 1551
• Parties: DISTRICT 65 RETIREMENT TRUST FOR MEMBERS OF the BUREAU OF WHOLESALE SALES REPRESENTATIVES, Harrison J. Goldin, Its Trustee, NBA Residual Benefit Fund, NBA Special Purpose Fund, Bureau Deferred Compensation Fund, Michael A. Wolyn, Their Trustee, and The Bureau Foundation, Inc., Plaintiffs, v. PRUDENTIAL SECURITIES, INC., and William L. Kicklighter, Jr., Defendants.
• Court: U.S. District Court — Northern District of Georgia

925 F. Supp. 1551

DISTRICT 65 RETIREMENT TRUST FOR MEMBERS OF the BUREAU OF WHOLESALE SALES REPRESENTATIVES, Harrison J. Goldin, Its Trustee, NBA Residual Benefit Fund, NBA Special Purpose Fund, Bureau Deferred Compensation Fund, Michael A. Wolyn, Their Trustee, and The Bureau Foundation, Inc., Plaintiffs, v. PRUDENTIAL SECURITIES, INC., and William L. Kicklighter, Jr., Defendants.

Civil Action No. 1:94-cv-3224.

United States District Court, N.D. Georgia, Atlanta Division.

March 7, 1996.

Order Amending Decision March 13, 1996.

Order Denying Stay March 22, 1996.

Order Amending Decision, April 29, 1996.

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John Allen Howard, Marion Smith, II, Linda Susan Pacer, Smith Howard & Ajax, Atlanta, GA, for District 65 Retirement Trust for Members of the Bureau of Wholesale Sales Representatives, Harrison J. Goldin, NBA Residual Benefit Fund, NBA Special Purpose Fund, Bureau Deferred Compensation Fund, Michael A. Wolyn, and the Bureau Foundation, Inc.

David G. Russell, William J. Holley, II, Alexandra Coulter Cross, Nancy H. Baughan, Parker Hudson Rainer & Dobbs, Atlanta, GA, for Prudential Securities Incorporated.

Jo Lanier Meeks, Pursley Howell Lowery & Meeks, Atlanta, GA, for William L. Kicklighter, Jr.

CORRECTED ORDER¹

HUNT, District Judge.

Before the Court are defendants' motions to dismiss 8 or, in the alternative, to join persons needed for just adjudication of the issues presented to the Court 7. Also before the Court is plaintiffs' motion for a pretrial conference and scheduling order 27. This Court has jurisdiction pursuant to 29 U.S.C. § 1132(e)(1), 18 U.S.C. § 1964, and 28 U.S.C. § 1331.

Standard for Motion to Dismiss

Pursuant to Federal Rule of Civil Procedure 12(b)(6), this Court may dismiss an action if the plaintiff has failed to state a claim upon which relief can be granted. Fed. R.Civ.P. 12(b)(6). The Court must ascertain whether, under any set of facts which may be proven from the complaint, the claims made are so insufficient as to never succeed in court. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957); see Oladeinde v. Birmingham, 963 F.2d 1481, 1485 (11th Cir.1992), cert. denied, 507 U.S. 987, 113 S.Ct. 1586, 123 L.Ed.2d 153 (1993). Therefore, for the purposes of the motion to dismiss, the Court accepts all of plaintiffs' factual allegations as true and liberally construes the complaint. See Hartford Fire Ins. Co. v. California, 509 U.S. 764, ___, 113 S.Ct. 2891, 2917, 125 L.Ed.2d 612 (1993). Defendants contend that, even accepting the plaintiffs' factual allegations as true, the complaint fails as a matter of law.

I. BACKGROUND

In compliance with the above standard, below is a summary of the facts as alleged in plaintiffs' complaint. These facts are not binding on the Court in deciding future motions.

District 65 Retirement Trust for Members of the Bureau of Wholesale Sales Representatives ("District 65"), through its trustee Harrison J. Goldin, brings this action as an employee benefit plan within the meaning of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1002(3). The National Benevolent Auxiliary ("NBA") Residual Benefit Fund² and the NBA Special Purpose Fund,³ through their trustee Michael A. Wolyn, bring this action as employee welfare benefit plans under ERISA, 29 U.S.C. § 1002(1); the Bureau Deferred Compensation Fund⁴ (collectively the "Bureau Funds"), also through Wolyn as trustee, brings this action as an employee pension benefit plan under ERISA, 29 U.S.C. § 1002(2). The fifth plaintiff, the Bureau Foundation, Inc., provides financial assistance to elderly members of the Bureau and their spouses; it is not governed by ERISA, but is a tax-exempt charitable organization under Internal Revenue Code ("IRC") section 501(c)(3).⁵

District 65 is a voluntary pension plan and trust that provided employee benefits for retirement, death and disability to members of the Bureau of Wholesale Sales Representatives, Inc. ("Bureau") who were also members of United Automobile, Aerospace and Agricultural Implement Workers of America, UAW ("Union"). The Union is a labor union affiliated with the AFL-CIO. The benefits were paid out of earnings generated from payments made by plan participants or on their behalf. District 65 has not paid any benefits to its participants since December 1992. Until 1993, a seven-member Board of Trustees ("Board") administered District 65.⁶

In 1983, the District 65 trustees appointed a former District 65 trustee and retiring Bureau member, Marshall J. Mantler, as their investment advisor pursuant to ERISA, 29 U.S.C. §§ 1002(38), 1102(c)(3), and 1103(a)(2). District 65 hired Mantler as investment manager primarily to assist him financially during his retirement. At the time of his appointment, Mantler was sixty-five years old. Mantler was to manage the accounts in coordination with a hired full-service broker. In 1984, Mantler registered individually with the Securities Exchange Commission as an investment advisor.

In 1984, Mantler became acquainted with defendant William L. Kicklighter, Jr. at Prudential Securities, Inc. ("Prudential"). Mantler and Kicklighter, despite an approximate forty-year age difference, developed a close relationship. Kicklighter sought and obtained Mantler's trust and confidence regarding the plaintiffs' investments. Mantler told Kicklighter that the plaintiffs were facing financial trouble because of declining membership; he speculated that the plaintiffs' accounts had to earn a high rate of interest, approaching twenty-one percent, to avoid reducing members' benefits. Mantler also stressed to Kicklighter the need to avoid speculative investments and to build the portfolio from safe, conservative and diversified investments. Mantler conducted several discussions with Kicklighter prior to opening an account on behalf of District 65 at Prudential's Atlanta office in November 1985. Despite Mantler's discussions with him, Kicklighter noted on the new customer information form that the account's investment objectives were "speculation" and "long-term growth." Kicklighter did not provide this document to Mantler or to any of the District 65 trustees. The Bureau Funds opened accounts with Kicklighter and Prudential in April 1986.

During his term as investment manager, Mantler suffered from severe health problems, including alcoholism, peritonitis and abdominal abscesses. He had several surgeries and was hospitalized for a great deal of time. As a result of his medical problems, Mantler was under heavy medication for most of this period; the drugs he took included Demerol, Valium, Narcan, Percocet and Percodan. The combined effect of the drugs and alcohol rendered Mantler ineffective at monitoring the accounts at Prudential.

Prior to his appointment as investment manager, Mantler had advised the plans informally regarding certain investments. After his appointment and the opening of the accounts at Prudential, the plans' trustees relied on Mantler to make the independent investment decisions based on Prudential's recommendations. The trustees were also elderly and in ill health. Several of the former trustees died before, and several since, the commencement of this action. As a result of Mantler's infirmities and the delegation of the trustees' responsibilities to Mantler, Kicklighter was able to propose transactions which were "rubber stamped" and executed the transactions without the prior knowledge or consent of Mantler or the former trustees. Kicklighter churned the accounts and executed numerous trades without advising Mantler.

The accounts had been opened only a few months when Kicklighter and Prudential began liquidating the plans' conservative portfolio investments and replacing those investments with speculative securities, junk bonds and Prudential proprietary products, limited partnerships and mutual funds. By 1987, Kicklighter was executing trades without ever advising Mantler or the trustees.

In 1986, Kicklighter proposed a highly risky trading strategy to boost the income on the accounts. Mantler and the District 65 trustees agreed, and Mantler and Dicker, on behalf of the Bureau Funds, executed option forms and agreements authorizing Kicklighter to engage in option trading on the plans' accounts. Prudential's own rules as well as ERISA regulations prohibited option trading on accounts of this type. Nevertheless, Prudential required that the trustees execute a Trustee Certification Form in December 1987, after the October 1987 stock market crash. The trustees executed the document. Accompanying that form, trustee Livingston sent a letter to Kicklighter and Prudential, which stated that margin trading should be limited to twenty percent of the portfolio and used to cover only short term situations or high yield bonds the return of which would exceed the cost of margin. Mantler was authorized to write only covered calls. Trustee Livingston's letter "had little effect on trading on the account" and it was "business as usual" for Kicklighter. Prudential and Kicklighter selected securities based primarily on their commissions and profitability to the firm rather than on their suitability as ERISA investments. During their relationship, the plans paid between $3,276,588 and $4,777,004 as commissions and fees to Kicklighter and Prudential for their investment advice.

Kicklighter met with Mantler frequently and spoke to him daily by telephone. Additionally, Kicklighter met with District 65 trustees Dicker and Brown and with trustee Syna for the Bureau Funds and the Bureau Foundation. Through these meetings, Kicklighter became aware that the parties were relying completely on Kicklighter to protect their investments.

In early 1989, Kicklighter was suspended by the SEC for activities unrelated to this case. On April 3, 1989, District 65's ERISA counsel, Michael C. Gordon, wrote to the trustees...