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Machinery Movers v. Nationwide Life Insurance Co.

October 10, 2006

MACHINERY MOVERS, RIGGERS AND MACHINERY ERECTORS, LOCAL 136 DEFINED CONTRIBUTION RETIREMENT FUND; MACHINERY MOVERS, RIGGERS AND MACHINERY ERECTORS, LOCAL 136 SUPPLEMENTAL PENSION FUND; MACHINERY MOVERS, RIGGERS AND MACHINERY ERECTORS, LOCAL 136 HEALTH AND WELFARE FUND; MACHINERY MOVERS, RIGGERS AND MACHINERY ERECTORS, LOCAL 136 SUPPLEMENTAL UNEMPLOYMENT FUND; MACHINERY MOVERS, RIGGERS AND JUDGE VIRGINIA M. KENDALL MACHINERY ERECTORS, LOCAL 136 SAVINGS AND VACATION FUND; AND ERIC DEAN, JEFFREY HOPKINS, WILLIAM JOYCE, AND VERN STOUB, IN THEIR OFFICIAL CAPACITY AS THE TRUSTEES OF THE PLAINTIFF FUNDS, PLAINTIFFS,
v.
NATIONWIDE LIFE INSURANCE COMPANY, NATIONWIDE FINANCIAL SERVICES, INC., AND NATIONWIDE INVESTMENT SERVICES CORP., DEFENDANTS.



The opinion of the court was delivered by: Virginia M. Kendall, United States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs are employee benefit plans (the "Plans" or "Plaintiffs") for members of Local 136 of the Machinery Movers, Riggers and Machinery Erectors. Plaintiffs engaged Joseph/Anthony and Associates, Inc. ("JAA") as a third party plan administrator and plan consultant. JAA's president was Michael Linder. Liz/Mar and Associates, Inc. ("Liz/Mar"), a brokerage firm controlled by Linder, received the fees for JAA's and Linder's services. Through JAA and Liz/Mar, Linder allegedly engaged in certain unlawful transactions with Nationwide Life Insurance Company ("Nationwide Life"), National Investment Services Corp. ("Nationwide Investment") and Nationwide Financial Services, Inc. ("Nationwide Financial")(collectively, "Defendants"). In particular, Linder, JAA and Liz/Mar allegedly received exorbitant fees and commissions from Defendants in violation of § 406(b)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. § 1001, et. seq. Linder, JAA and Liz/Mar also failed to diversify the Plans' investments and made investments with Defendants outside the Plans' guidelines in violation of § 404(a)(1) of ERISA.

Defendants have now moved to continue the stay of this action pending resolution of the criminal proceedings against Linder or, alternatively, to dismiss the claims against them. Because Defendants have not met their burden of demonstrating that a stay is necessary in the interest of justice, the stay is lifted. However, Linder's and Brdecka's depositions will not be taken before they are sentenced on November 17, 2006. As to the merits, even though Defendants are not fiduciaries with respect to the Plans and ERISA does not impose any specific duty on Defendants, they can be held liable under § 502(a)(3) for their alleged participation in Linder's violation of his fiduciary duties. If Plaintiffs can establish their claims, they are entitled to pursue equitable relief against Defendants' ill-gotten profits. No claim, however, lies in equity to recover from Defendants the allegedly excessive commissions and fees that Defendants paid to Linder and his controlled entities. Finally, Plaintiffs have stated a claim under Rule 12(b)(6) against all Defendants for allegedly profiting from their participation in the unlawful transactions involving Plan assets.

Background

Plaintiffs filed their original complaint on December 2, 2003, naming as Defendants Linder, JAA, Liz/Mar and Nationwide Investment Services Corp. On January 27, 2004, a federal grand jury sitting in the Northern District of Illinois indicted Linder and Fred Scheier, at the time a trustee and President of the Plans, for violating 18 U.S.C. § 1954 (offer, acceptance of solicitation to influence operation of employee benefit plan). On March 1, 2004, the parties to this action agreed to "stay all further proceedings pending the final and non-appealable resolution of all pending criminal matters." On June 29, 2004, the federal grand jury issued superseding indictments against Linder and Schreier, adding charges for embezzlement from an employee benefit plan in violation of 18 U.S.C. § 664 to the pending 18 U.S.C. § 1954 charges. Schreier pleaded guilty on October 20, 2004, and was sentenced on February 2, 2005. Linder pleaded guilty on December 10, 2004, but his sentencing was postponed as the Government continued its investigation of Linder, his companies, and others. None of Defendants or their employees have been the subject of this criminal investigation. On June 30, 2006, Linder pleaded guilty to seven additional charges of defrauding and embezzling from several union pension funds, including the Plans. Linder's sentencing is set for November 17, 2006. Also set to be sentenced on November 17, 2006 is Michael J. Brdecka, who pleaded guilty to giving a $9,700 fee and kickback to Linder.

Plaintiff's Allegations

On February 21, 2006, Plaintiffs filed their First Amended Complaint, which dropped Linder, JAA and Liz/Mar as defendants and instead named Nationwide Life, Nationwide Financial and Nationwide Investment. Plaintiffs hired JAA to serve as its third-party plan administrator and plan consultant -- a fiduciary for ERISA purposes. (Am. Compl. ¶ 8.) JAA exercised discretionary authority and control over the assets of the Plans by paying plan expenses and by making investment decisions for the Plans. (Id.) Linder, himself a fiduciary to the Plans, performed these functions on behalf of JAA. (Id. ¶ 9.) Linder and JAA negotiated for their fees for these services to be received by Liz/Mar. (Id. ¶ 10.) Liz/Mar, a brokerage firm, shared a business address with JAA and its president and primary owner was Linder's wife, Elizabeth Linder. (Id.) In 1997, JAA entered a Master Service Agreement with Nationwide Life, through which JAA would perform certain services on behalf of Defendants for investors that JAA referred to Defendants. (Id. ¶ 11.) Linder and JAA then caused the Plans to invest with Defendants under contracts with Nationwide Life. (Id. ¶¶ 12-13.) As a result, Linder was paid commissions and other fees from the invested assets of the funds. (Id. ¶¶ 12, 14-15.) Defendants knew that the commissions and consideration that Linder and JAA charged were excessive. (Id. ¶ 25.) Defendants knew or should have known that the investments that Linder and JAA made were risky and were outside the Plans' guidelines for investments, yet Defendants allowed Linder and JAA to make the investments anyway. (Id. ¶¶ 16, 17, 19.) These investments resulted in financial gains for Defendants and substantial losses for the Plans. (Id. ¶¶ 18, 20.)

DISCUSSION

I. Motion to Continue the Stay

Defendants originally requested that the Court continue the stay of this action pending the final and non-appealable resolution of all criminal proceedings initiated against Linder, his companies, and others, including Schreier and other fund trustees and managers. Based on the recently entered pleas of guilty by Linder and Brdecka, Defendants now request that the Court continue the stay until Linder and Brdecka are sentenced on November 17, 2006.

"[A] district court possesses substantial discretion to control its docket," including the inherent power to stay a case when justice requires. Employers Ins. of Wausau v. Shell Oil Co., 820 F.2d 898, 902 (7th Cir. 1987). "The proponent of a stay bears the burden of establishing its need." Clinton v. Jones, 520 U.S. 681, 708 (1997). In determining whether to stay civil proceedings because of a pending criminal action, a court may consider:

(1) whether the two actions involve the same subject matter; (2) whether the two actions are brought by the government; (3) the posture of the criminal proceeding; (4) the effect on the public interests at stake if a stay were to be issued; (5) the interest of the plaintiffs in proceeding expeditiously with this litigation and the potential prejudice to plaintiffs of a delay; and (6) the burden that any particular aspect of the proceedings may impose on defendants.

Cruz v. County of DuPage, 1997 WL 370194, *2 (N.D. Ill. 1997).

Defendants previously moved to stay proceedings in a civil action brought against them by other pension funds pursuant to the Racketeering Influence and Corrupt Organizations Act ("RICO"), 18 U.S.C. ยง 1961 et seq. See Bd. of Trustees of the Ironworkers Local No. 498 Pension Fund v. Nationwide Life Ins. Co., 2005 WL 711977 (N.D. Ill. 2005). Judge Guzman in Ironworkers denied Defendants' motion to stay. Defendants' arguments in favor of a stay were essentially the same as those presented to this Court, the only notable difference being that this case involves ERISA and Ironworkers involved RICO. Under ERISA, Defendants cannot be held liable unless Linder himself violated ERISA. For this reason, Defendants contend that without full discovery from ...


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