In both the written statement and in an interview with the Variety last week, O’Connor and Dotts said they had experts from Florida and Hawaii to make presentations before the NMIRF board to present pieces of evidence to corroborate that there’s a strong case versus Merrill Lynch.
Dotts and O’Connor said Atty. Peter J. Mougey and Atty. Gerald Clay, from Florida and Hawaii respectively, flew in on separate occasions to make presentations before the Fund board; however, the two lawyers said the board refused to meet with them.
O’Connor said, “Every time we tried to meet with them, to show what Merrill Lynch did wrong and why they should join the lawsuit, they refused to look at the evidence. They refused to come to the meeting. They refused to look at the documents.”
In the meantime, he said, the Fund hired an independent auditor to investigate to see whether there should be a case against Merrill Lynch.
“One thing I can see about to take place is they are going to come up with this whitewash report,” O’Connor said.
“So, we, in trying to persuade the Fund to join us in the lawsuit, we obtained expert opinion…experts to come here from Florida and Hawaii to sit down with the board and board lawyers and explain to them exactly what Merrill Lynch did wrong and why they have a good case,” O’Connor added.
He claimed the Fund hired the company to white wash and come back with a report that Merrill Lynch did nothing wrong.
He explained that the reason that he knew there’s a whitewash was because the “independent” auditor never contacted them.
“We have the evidence — the information — against Merrill Lynch to show what they did wrong, and this independent auditor who is supposed to be investigating what they did wrong doesn’t make a phone call, doesn’t come by, doesn’t talk to us what these pieces of evidence are,” said O’Connor.
He said aside from their law firm, three other firms volunteered to take the case on behalf of the pension agency but the latter refused.
He said in a written statement that the trustees of the Fund want proof that their former investment consultant has harmed the Fund.
“The Board refused to meet with these attorneys, boycotting the meetings. Even my law firm went to the Fund to make a third presentation and only one board member showed up,” O’Connor said.
Dotts said Fund chairman Sixto K. Igisomar was present during that presentation.
The law firm O’Connor, Berman, Dotts, & Banes sued the Merrill Lynch 18 months ago—Oct. 2009—on behalf of the retirees.
Since then, O’Connor said they have been trying to get the Retirement Fund to join them on the lawsuit because they are trying to get back from Merrill Lynch $15M more money that they thought should belong to the Fund.
“It’s better that the Retirement Fund becomes a plaintiff in the case to help us get money for the retirees,” said O’Connor.
Senate Bill 17-43
Owing to the Fund’s refusal to sue their former investment consultant, O’Connor said they introduced legislation to ask the Legislature to allow the retirees to force them into the lawsuit, make the lawsuit on behalf of the Retirement Fund without their consent and it passed the Senate by 8-0 and it passed the House by 15-4 vote.
“It’s a pretty overwhelming support for this legislation despite the Retirement Fund fighting against it to the nail. All the arguments they made against the bill we addressed by amending the bill and the House of Representatives to fix all the problems,” the lawyer said.
A couple of months ago, because of this legislation—Senate Bill 17-43 or beneficiary derivative lawsuit— to show the legislators that the Fund is doing the best to try to solve the problem, O’Connor said they were invited by the Fund to give a presentation with one trustee in attendance—Fund chairman Igisomar himself.
Dotts said Senator Reyes sent the Fund a letter and “chastised” them for not talking to them.
Body of evidence
Attorney Michael Dotts told Variety in an interview that Levin Papantonio Thomas Mitchell Rafferty & Proctor, PA, a big law firm in Pensacola, Florida, with a conglomerate of lawyers, has retained the services of college professors who review the materials they give to their experts.
The services of the attorneys, Dotts said, are on a contingent fee basis—lawyers don’t get paid unless they win.
“The attorneys look very carefully at the case. If the case is not good, they don’t take the case because why spend two to three years litigating then lose,” explained Dotts.
He told Variety, “The Florida attorneys have a cadre of experts—university professors and economists who have offered their services for free to say whether or not there is a case.”
He said in contrast to the “whitewash report” that O’Connor was talking about, Dotts’ understanding was the Fund is paying $25,000 of basically the retirees’ money to get the fiduciary report.
O’Connor said the Fund could have gotten it for free from them.
The lawyers said at no cost to the Fund they would have told them if there’s a case or not.
In a phone interview, Scott I. Batterman of Clay Chapman Iwamura Pulice & Nervell in Hawaii, told Variety, “We have consulted experts on this matter and one leading expert at least in the area of broker malfeasance looked at this case and he felt we have a very strong case. We feel that it’s a very strong case otherwise we wouldn’t have gotten involved.”
Batterman said they handle the case on a contingency basis. “Given the amount of time and effort that these things take up, we don’t get involved in a case unless we believe there is merit to it.”
Moreover, O’Connor said, “For some reason they don’t want to sue Merrill Lynch. It’s in the public interest, in the retirees’ interest that at least they try to get back $15 million or so.”
Securities and Exchange Commission and GAO report
The lawyers cited the action of the U.S. Securities and Exchange Commission charging Merrill Lynch, Pierce, Fenner, & Smith Inc. and former investment adviser representatives Jeffrey Swanson and Michael A. Callaway with securities laws violations for misleading pension consulting clients about its money manager identification process and failing to disclose conflicts of interest when recommending the clients to use Merrill Lynch’s affiliated services.
Merrill Lynch settled with SEC and agreed to pay $1 million penalty.
Based on the SEC order, Merrill Lynch breached its fiduciary duty by misrepresenting and omitting to disclose material information. The order stated that Merrill Lynch failed to advise clients of conflicts of interest and it made misleading statements to clients served by Merrill Lynch’s Ponte Vedra South Florida office which oversees close to 100 pension funds.
The Fund’s investment consultant was found by SEC to have violated Section 206 (2) of the Investment Advisers Act of 1940 as well as Section 204 and Section 204-2 (a) (14) by failing to maintain records of the offer or delivery of disclosure statements.
Meanwhile, a study conducted by the Government Accountability Office revealed that there is a statistical association between inadequate disclosure and lower investment returns for ongoing plans, that there is a possible adverse effect of undisclosed conflicts.
The GAO econometric analysis found lower annual rates—ranging from 1.2 to 1.3 percentage points in 2000-2004 period—of return for those ongoing plans associated with consultants who failed to disclose conflicts of interest.
The study further showed that those with no disclosure violations had an average of 4.5 percent while those with significant conflicts averaged 3.2-3.3 percent for the said period.
