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Rivera v. Allstate Insurance Co.

United States District Court, N.D. Illinois, Eastern Division

January 20, 2017



         Before the court are post-trial motions after the return of jury verdicts totaling $27, 114, 848 in favor of four plaintiffs based on claims of defamation and violations of the Fair Credit Reporting Act ("FCA"), 15 U.S.C. § 1681a(y)(2). Jurisdiction of the court is based on the FCA. The defamation claims are governed by Illinois law.

         Plaintiffs Daniel Rivera, Stephen Kensinger, Deborah Meacock, and Rebecca Scheuneman, formerly employed by defendant Allstate Insurance Company ("Allstate") as professional security analysts, each claim that Allstate made false statements in a 10-K public report to the Securities and Exchange Commission and in a memorandum issued to its employees. Each plaintiff also claims that Allstate violated the FCA by failing to provide a summary of the communication on which it based its decision to terminate each of them for violation of its code of ethics.

         A tortuous interference claim was previously dismissed. See Rivera v. Allstate Ins. Co., 2010 WL 4024873 (N.D. Ill. Oct. 13, 2010) (Grady, J.). Plaintiffs voluntarily dismissed claims against defendant Judy Greffin and dismissed an age discrimination claim against Allstate. Defendant's subsequent motion for summary judgment was denied. Rivera v. Allstate Ins. Co., 140 F.Supp.3d 722 (N.D. Ill. 2015) (Feinerman, J.).

         The jury was instructed[1] with respect to the defamation claims that each plaintiff was required to prove that any published statement identified and pertained to such plaintiff. In recognition of Allstate's qualified privilege of publication, the jury was instructed that malice--defined as with knowledge that the statement was false or in reckless disregard of whether it was false--must be proven by clear and convincing evidence. Because the case was submitted as per quod claims, plaintiffs were required to prove actual damages.

         Also, the jury was instructed that to prove a violation of the FCA, each plaintiff was required to prove that, at the time of termination, Allstate, "having received a communication in connection with an investigation of suspected misconduct relating to employment, " "failed to disclose the nature and substance of the communication" when each plaintiff was fired. The jury was told that to award statutory damages, the failure must be found to be willful.

         The motions before the court are Allstate's motions for judgment as a matter of law, or for a new trial and for a remittitur. Plaintiffs' motions, pursuant to the FCRA, are for punitive damages and for attorney fees.

         The Evidence

         Allstate is engaged in the property, casualty, life insurance, retirement and investment products business. It is the second largest company in the United States engaging in such business, having assets in excess of $132 billion. Plaintiffs are professional security analysts who were employed as buy-side portfolio managers in the equity division of the Allstate investment department. During the relevant time period, the equity division was managing and investing approximately $10 billion in capital-growth and capital-value portfolios, including two pension security portfolios.

         Each of the plaintiffs has attained a C.F.A. designation, Chartered Financial Analyst or Charterholder. All of the plaintiffs have undergraduate degrees and each, other than Deborah Meacock, has an M.B.A. degree. Stephen Kensington is also a C.P.A. and a Certified Market Technician. According to the C.F.A. Society, which gathers such information, plaintiffs were compensated in the top quadrille of professional security analysts.

         Daniel Rivera joined Allstate in 2004. At the time of his termination, he was managing director of the 19-employee equity division and reported to Judy Greffin, Allstate's chief investment officer. Rebecca Scheuneman joined Allstate in 1999. She became an equity portfolio manager and was assigned to the growth team. Deborah Meacock joined Allstate in 2006. At the time of her termination, she was a senior equity portfolio manager on the growth team. Stephen Kensinger joined Allstate in 2007. At the time of his termination, he was an equity portfolio manager on the growth team.

         Plaintiffs were paid an annual salary and eligible to earn additional bonus compensation under Allstate's "pay-for-performance" plan. Rivera and Scheuneman earned a bonus in 2005, 2006, and 2007; Meacock in 2006 and 2007; and Kensinger in 2007. The plan included a cap. In certain years the bonuses also included a subjective amount, at the discretion of senior management. All pay-for-performance compensation was suspended in 2008. Bonuses were discretionary in that year. Starting in 2009, Allstate changed its pay-for-performance measure from a relative return to an absolute return on portfolio values.

         In June 2009, Allstate's chief risk and investment compliance officer received an anonymous report that equity division employees might be timing trades to inflate their bonuses. Suspicions focused on an algorithm called the "Dietz method, " which had been used by Allstate since the mid-1990s to estimate daily portfolio returns. Owners of security portfolios that have multiple daily cash flows use this formula because it is impractical to use a true time-weighted return to recalculate a portfolio's value when there is a high volume of cash flows.[2] The formula was also used to calculate security analysts' bonuses.

         Implementing the Dietz formula requires the selection of a factor, which establishes an assumption regarding the point during the day when cash flows occur or peak. The Dietz factor used by Allstate assumed that the portfolio's net cash flow occurred at mid-day, to provide a rough average of cash flows occurring throughout the day. The Dietz formula used by Allstate was as follows:

Return = (EMV - BMV) - (P - S) / BMV DF(P - S).

         EMV is the market value of the portfolio at the end of the day; BMV is the market value of the portfolio at the beginning of the day; P is purchases; S is sales; and, DF is the Dietz factor. In Allstate's formula, the Dietz factor was .5, which produces a mid-day return value. A Dietz factor of .0, for example, will measure return at the end of the day.

         It was speculated that, when the mid-day Dietz formula is used, analysts had the ability to do better than the daily measurement by waiting to know whether the market will end up or down. Delaying trading is a market technique used by all professional security analysts, and it is not alone improper conduct. If the market is going down, they may execute buy transactions and if the market is going up, they may execute sell transactions which may be more favorable than the daily calculation. While it is reasonably assumed that all portfolio managers seek to sell on an up day and buy on a down day, if that timing calculation does not take into account the adverse effects in the market of waiting through several down days to sell or several up days to buy in order to obtain a performance bump, the portfolio could be disadvantaged. However, when it was adopted Allstate considered that the way the bonus system worked, realized gains or losses on a particular day would offset over time.

         When the report of possible improper timing of trades occurred, Allstate became concerned that its public reports to the Securities and Exchange Commission could be inaccurate and that its fiduciary obligations to the pension funds governed by the Employee Retirement Income Security Act, under the oversight of the Department of Labor ("DOL"), could have been violated. Allstate hired the law firm of Steptoe & Johnson LLP to conduct an investigation of trading practices. The law firm hired NERA Economic Consulting ("NERA"), an economic consulting firm to aid in the investigation. An attorney for Allstate testified that the results of the investigation were not submitted to Allstate in writing but reported only orally. However, after meeting with DOL attorneys in December 2009, Steptoe & Johnson submitted a letter and memorandum to the DOL providing details of the investigation.[3]

         It was reported to the DOL that none of the anecdotal information provided the parameters of potential disadvantage to the pension plans. A search was made through almost two million e-mails from or to 26 individuals working in Allstate's equity investment management and trading group for the period from May 2003 to May 2009. Only a half dozen e-mails were uncovered which seemed problematic. NERA then analyzed 1, 511 trading days during this period which consisted of over 110, 000 trades for the pension plans. The report states that there was no evidence that e-mails captured all trading instructions.

         NERA used the e-mails to identify 24 instances of delayed trading for one pension plan and 25 instances of delayed trading for the other plan. NERA calculated that the plans' disadvantage from these e-mails indicated delays costing as much as $8.2 million. However, some delays produced gains to the plans of about $6.8 million, resulting in an estimate of a possible net disadvantage of approximately $1.4 million. In addition, for four of the e-mails, tracking the data showed that the trades were made on the same day as the e-mail, which eliminated the trade from the problematic trade group.

         The equities group personnel and their supervisors were interviewed by Steptoe & Johnson lawyers. No interviews were reduced to writing. The equities group understood how the Dietz factor affected its bonuses. No one suggested that the Dietz effect was the only reason or even the primary reason for the timing of a trade. It was, apparently, only one of a few factors used to determine when to execute a trade. Information from the interviews was reported to Allstate's inside counsel orally.

         Allstate wanted to be sure that other violations of the law did not occur, such as cross trading, or principal trading. NERA searched for trades where a security with the same identifier would have been bought and sold in the same amount in the same day. No such trades were discovered. Tests were run to determine if the equities group was engaging in any "round trip" transactions--selling a security, only to buy it back, in order to obtain a performance "bump, " or buying a security and then selling it out promptly. No such trades were uncovered.

         NERA created an algorithm, an analysis assuming that any sale executed on a market up day (if it was preceded by a down day) and all purchases occurring on a market down day (if preceded by an up day) could have been improperly delayed trades. Looking back to the next preceding day it was assumed that if the instruction had been received on that day, the trade would have been executed on that day. Based on these assumptions, a calculation was made to determine what a purchase would have cost the plan had it been executed on the first down day after the next preceding up day. If the amount was greater than the actual trade results, it was assumed that the difference should be reimbursed. (The converse analysis was made for sales.)

         Using the stated assumptions, it was reported that the disadvantage to one plan was $61.5 million and for the other about $17 million. Adding DOL underpayment rates brought the total possible reimbursement to approximately $91 million for the two plans. However, this calculation ignored all delayed trades that produced gains to the portfolios which would have reduced the $91 million figure to at least $53 million.

         The conclusion of the report states:

We believe that this amount, which assumes that nearly every trade was inappropriately delayed, overstates any actual economic disadvantage suffered by the plans for several reasons. It is unlikely, based on the interviews, that small trades were delayed. Nonetheless, no de minimis exclusion was used. The figures do not exclude the trades made prior to midday, even though the Dietz motivation would have assumed late afternoon trading. No time related exclusion was used. In addition, during the past several years of equity market volatility, a very large amount of trading throughout the markets occurred near the end of the day and it is not unreasonable to assume that the Allstate traders were acting in a similar manner, regardless of any Dietz factor motivation. And, as noted above, there was no netting of "gain days" against "loss days." That netting would have reduced the $91 million to about $53 million. Finally, as discussed earlier, the economic disadvantage calculation was not limited to those trades for which we had clear e-mail indication of Dietz motivation. If we limited the reimbursement to the trades for which we had e-mails showing such motivations the reimbursement would have been $8.2 million and with netting, $1.4 million.
We want to emphasize that the effect of this trading on the total bonuses paid to this group was minimal over the six-year period. Allstate, taking account returns recalculated by NERA, estimated the impact of this trading to the 25 employees who were in the equity group for some or all of 2003 through 2008 as an increase in the aggregate bonuses for the entire group of 25 employees over those years of approximately $1.2 million.

         On October 14, 2010, the Vice President, Secretary, and Deputy General Counsel of Allstate wrote, in response to an inquiry from DOL, as follows:

[T]he NERA algorithm was a way for counsel and Allstate to estimate a possible maximum impact of any potential "Dietz" motivated equity trading. No one believed, then or now, that this was an accurate description of the activity on the equity desk, nor that any actual impact on portfolios was anywhere near the result produced by using the NERA algorithm. Just as we wanted to see a possible maximum portfolio impact, we wanted to estimate the corresponding impact on bonuses. If one looked only at the ...

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