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WSOL v. GREAT NORTHERN ASSET MANAGEMENT

September 11, 2000

FRANK J. WSOL, SR., HUGH M. CORCORAN, ROBERT N. FALCO, NEIL J. LONDON, CHARLES SCHMALZ, TRUSTEES OF THE INTERNATIONAL BROTHERHOOD OF TEAMSTERS UNION LOCAL NO. 710 PENSION FUND, AND THE INTERNATIONAL BROTHERHOOD OF TEAMSTERS UNION LOCAL NO. 710 PENSION FUND, PLAINTIFFS,
V.
GREAT NORTHERN ASSET MANAGEMENT, INC. AND EAST WEST INSTITUTIONAL SERVICES, INC., DEFENDANTS.



The opinion of the court was delivered by: Bucklo, District Judge.

MEMORANDUM OPINION AND ORDER

In this ERISA case, Great Northern Asset Management ("Great Northern") of Minnesota, an investment advisor to Teamsters Union Local 710 Pension Fund (the "Fund"), of Illinois, used the services of East West Institutional Services ("East West"), a Connecticut corporation located in Michigan and an "introducing broker" of questionable qualifications and disputed resources. East West directed trades through certain clearinghouse brokers in exchange for receiving the lion's share of the commissions on those trades, while kicking back half a million dollars to crooked Fund trustees who, thus bribed, would approve those investments with those clearinghouse firms. Christopher Roach, president of East West, has been indicted, and one of the corrupt Fund trustees, William Close, has pleaded to 20 counts of racketeering, extortion, and money laundering, in connection with the facts underlying this civil case. Great Northern did not disclose East West's shabby background to the Fund: even apart from this conspiracy, Roach, when engaged, had only recently regained the licenses he had lost for misconduct, and East West was undercapitalized and inadequately staffed.

The Fund and named Trustees above (hereafter, the "Fund") sued Great Northern and East West under ERISA for breach of fiduciary duty and engaging in prohibited transactions and for breach of contract under state law. Great Northern moves for summary judgment on the counts in which it is named and to dismiss the related state law claims. I deny the motion.

I.

In 1995, the Fund picked Great Northern, incorporated in 1994, as its fixed income investment manager, and placed $250 million in its care. This choice was approved by the Fund's Board of Trustees and its investment consultant, Performance Analytics, Inc. Great Northern used East West as an introducing broker to put it in contact with clearing firms. East West represented that it had a larger client base than the relatively new Great Northern, although East West itself was hardly older, and that it was able to offer Great Northern direct access to the trading desks of five clearing firms: Chicago Corp., Capital Institutional Services, Bear Stearns Securities Clearing Corp., Dean Witter, and Rauscher, Pierce & Refsnes. East West was compensated in part under agreements providing for a split of a spread earned by the clearing firms. East West took 80% of the spread for each trade, or over one and a half million dollars total over the period of the arrangement. So far the parties agree: now the stories diverge.

Great Northern says that this arrangement was supposed to "incentivize" the five clearing firms to give Great Northern better execution services, e.g., to make trades promptly when indicated, because major clearing firms like Merrill Lynch that were not introduced by East West tended to be less responsive in responding to price quotes. According to Great Northern, the arrangement with East West did not cause the Fund any loss, but, on the contrary, helped to obtain the best execution of trades for the Fund; and Great Northern maintains that the Fund was apprised of East West's role through July 1995, until the Fund directed Great Northern to stop sending it confirmations of trades.

According to the Fund, however, East West was at best a sham, and at worse a scam. The Fund contends that it received nothing of value from East West, and offers expert testimony*fn1 that Great Northern would have done just as well or better on trades without East West's "introduction" services; that better known and more established brokers could have done better by the Fund in terms of trades, and with smaller spreads; and that the Fund suffered losses of many hundreds of thousands of dollars due to this arrangement and Great Northern's conduct. The Fund introduced evidence of the following facts that I must accept for purposes of this motion.

Roach, East West's President, had only two years of community college, had been fired for misconduct from Paine Webber in 1991, had lost and only recently regained some necessary licenses, and had been unemployed until he purchased the dormant firm that he made into East West in 1994. The misconduct for which Roach had lost his licenses involved opening an unauthorized account in connection with a scheme concocted in part by the other principal in East West, Richard Tringale, who was found in an SEC-initiated action in 1991 to have defrauded various clearinghouse brokers of hundreds of thousands of dollars.

Moreover, East West was a mailbox operation that owned no office equipment or other assets, did not have its own office space, and had only a few part-time employees apart from Roach and Tringale. Roach testified that the services East-West provided to the Fund, in exchange for the 80% "split," amounted to opening an account with the clearinghouse broker, passing to Great Northern research it received from those clearinghouse brokers, and negotiating the rate to be charged on the trades made in the Fund's accounts. Roach stated to Chuck Lief of Bear Stearns in October 1996 that what he did to get business was to do "a ton of PR work in telling firms what entities are doing manager searches, provide[] introductions, and a lot of schmoozing. . . . [and] receive[] and distribute[] research to people" (contact report of Nov. 11, 1999). There was also some evidence that Great Northern received no material directly from East West.

In April 2000, Roach, Tringale, and Close were indicted for a racketeering scheme including charges that they induced Great Northern to direct trades through the five clearinghouse brokers for East West's benefit. Close pleaded guilty to various crimes, including accepting about $500,000 in bribes from Roach and East West to corruptly use his vote on the Fund's Board to approve investment advisors who went along with the East West "split" scheme. As I write, Roach's and Tringale's cases are still pending.

II.

Summary judgment is appropriate where there is no material issue of fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). I take the facts in the light most favorable to the party opposing the motion, Fulk v. United Transp. Union, 160 F.3d 405, 407 (7th Cir. 1998), but the nonmoving party has the burden of coming forward with enough evidence so that a rational jury could find for it at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

A.

It is undisputed that Great Northern was an ERISA fiduciary, required by law to "discharge [its] duties with respect to a plan solely in the interest of the . . . beneficiaries for the exclusive purpose of providing benefits to participants . . . and defraying reasonable [administrative] expenses, [acting] . . . with the care, skill, prudence, and diligence . . . that a prudent man . . . would use. . . ." 29 U.S.C. ยง 1104(a)(1)(A) & (B). According to the Fund, Great Northern violated this duty, first, by paying hundreds of thousands of dollars to East West and receiving nothing in return but setting up accounts at three clearinghouse brokers, a task that Roach says was so simple that "a monkey" could do it, and performing a couple of other simple jobs; and second by engaging East West for this job at all, something no ...


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