The civil action was filed in Superior Court by Mariano Taitano, Roman T. Tudela and Patricia Guerrero, all members of the defined benefit plan of the pension agency.
The law firm of O’Connor Berman Dotts & Banes represents the plaintiffs.
Taitano and Tudela are retirees while Guerrero is employed with the Commonwealth Utilities Corp.
Aside from Merrill Lynch, also named defendants were the Fund’s board of trustees and several “Does.”
“The extent of the injuries are so great that the Fund may not recover,” stated attorney Michael W. Dotts.
“As members and beneficiaries of the Fund, plaintiffs bring this action to recover damages caused by Merrill Lynch and to have protections put in place so that the board is never again in a position to overly rely on the advice of the a single financial adviser,” the complaint stated.
The plaintiffs are seeking an equitable accounting of Merrill Lynch and an injunction for the Fund’s board of trustees.
The complaint said an equitable accounting is a remedy which prevents unjust enrichment by requiring disgorgement of profits that a fiduciary receives as a result of breach of the duty of loyalty.
The complaints want the board to terminate its relationship with Merrill Lynch.
The board, the complaint stated, should not “retain that firm or any of its affiliates again for at least five years.”
The complaint said if the board reasonably demonstrates to the court that such an outside investment consultant is in the Fund’s best interest, the board must change consultants every five years, and all consultants must be selected through open and competitive bidding.
According to the complaint, Merrill Lynch was originally selected as the board’s investment consultant without competitive open bidding and held its position for 20 or more years without any review.
The complaint said “bad advice, given by Merrill Lynch, particularly in 2007, and relied on by the board without properly questioning the advice, placed the Fund at unnecessary risk.”
In late 2008, when the world financial markets nearly collapsed, the Fund sustained injuries beyond what would have occurred had Merrill Lynch not been negligent, the complaint stated.
It added that Merrill Lynch has never held a commonwealth business license, and only obtained a commonwealth brokerage license in 2005.
“[It] has been doing business in the commonwealth and collecting fees and other revenues for its services, unlawfully, and Merrill Lynch knew or should have known that it was not properly licensed.
“The lack of proper licensing, the failure to follow procurement rules in its retention, the unfair compensation plan, and the failure to obtain conflict waivers…were all known or should have been known to Merrill Lynch, and thus were willful,” the complaint said.
It stated that Merrill Lynch gave the board its “bad advice” on or about Oct. 15, 2003 when “Merrill Lynch knew or should have known that the Fund was no longer receiving employer contributions.”
Merrill Lynch recommended an asset allocation of 70 percent equities and 25 percent fixed income.
Following Merill Lynch’s advice in Oct. 2003 up until April 2007, “the risk to the Fund increased as unpaid employer contributions grew,” the complaint said.
Merrill Lynch created and submitted for adoption of the board in April 2007 a defective Investment Policy Statement, or IPS, the complaint added.
“In developing the April 2007 IPS, and in continuing to advise the board thereafter, Merrill Lynch failed to monitor the status of its client and/or negligently failed to take into account the deteriorating condition of the Fund.”
The complaint said the board, for its part, “failed in its duty to give independent intelligent scrutiny to its advisor’s conclusions.”
“Instead, the board continued its unquestioning reliance on Merrill Lynch after April 2007. In doing so, the board breached its fiduciary duties to the fund and its members and beneficiaries,” the complaint added.
On Sept. 16, 2008, as financial markets in the United States began to collapse, the complaint said the negligence and breaches of duty resulted in an asset allocation for the Fund that was overly and inappropriately risky.
The fund initially lost almost $150 million — in excess of 25 percent of its capital, the complaint said.
The board had to withdraw its principal to pay benefits between Sept. 19, 2008 and March 9, 2009 and continuing thereafter.
“Because benefits were paid out of principal after the Fund’s corpus was reduced the Fund was not able to recover what was lost after March 9, 2009, when the financial markets began to recover,” the complaint said.
“As a direct and proximate result of the negligence of Merrill Lynch and the board…the Fund will be depleted of all of its assets and fail before all benefits that will be owed to the plaintiffs will have been paid.”
