Mealey's (June 24, 2016, 1:10 PM EDT) -- DENVER — A Colorado federal judge on June 22 granted a motion for class certification and denied a defense motion to exclude expert testimony in a case alleging that Great-West Life & Annuity Insurance Co. breached its fiduciary duties under the Employee Retirement Income Security Act (John Teets v. Great-West Life & Annuity Insurance Co., No. 14-02330, D. Colo.).
(Order available. Document #54-160713-039R.)
John Teets on June 4, 2014, filed a class action complaint against Great-West in the U.S. District Court for the Eastern District of California on behalf of more than 270,000 participants in and beneficiaries of the Great-West Key Guaranteed Portfolio Fund from six years before the filing of the lawsuit until the time of trial. The case was transferred to U.S. District Court for the District of Colorado on Aug. 21, 2014.
Teets was a participant in the Farmers’ Rice Cooperative 401(k) plan, an employee pension benefit plan that offered various investment opportunities to its participants, including the fund. Teets elected to invest his plan contributions in the fund.
Fund
The fund is an investment product commonly known as a stable value fund or guaranteed investment contract. It invests in relatively safe securities, guarantees the principal and also pays a certain amount of interest to its investors at a rate set before each quarter. The credit rate is determined unilaterally by Great-West without any specified methodology, but the effective annual interest rate is guaranteed never to be less than 0 percent. From an investor’s standpoint, it operates like a savings account.
Any plan money invested in the fund is not kept in a segregated account, but is deposited into Great-West’s general account. The fund is thus backed by Great-West’s company assets. Great-West sets a fee of 89 basis points (0.89 percent) for managing the fund, but Great-West does not charge this amount to fund participants. Instead, it is an estimate of Great-West’s actual costs to operate its general account. Eighty-nine basis points is supposedly enough to cover various expenses, including overhead, the purchase price of hedging instruments, a set-aside against the risk of investment default and various other items.
“Plaintiff believes that Defendant retains, as profit to itself, the Fund’s investment returns minus 89 basis points and the credited rate,” Judge William J. Martinez wrote. “[T]he parties vehemently dispute whether this formula properly calculates Defendant’s profits.
“Nonetheless, Plaintiff contends that Defendant reaps substantial profit from the Fund to the detriment of Fund participants and allegedly in violation of fiduciary duties imposed by ERISA.”
‘Excluded Costs’
Great-West’s Federal Rule of Evidence 702 motion to exclude expert testimony centers around how to calculate its net profits on the fund. Teets’ claim that Great-West retains, as profits for itself, the fund’s investment returns minus 89 basis points and the credit rate comes through the report of his expert, Steven Pomerantz. Pomerantz says that 89 basis points and the credited rate are the only true costs that Great-West must subtract from the fund’s investment returns to calculate net profits.
Great-West argued that Pomerantz’s choice to exclude other alleged costs makes his methodology fundamentally flawed and renders his report contradictory to established fact. Great-West pointed to five alleged costs, which it refers to as “excluded costs”: the pricing credit, which is a discount on administrative charges; the cost of capital; marketing costs; yield enhancement charges, which are charges arising when Great-West replaces one investment instrument for another; and portfolio fund adjustments.
“Although Defendant attacks Pomerantz’s methodology, the methodology per se is not in dispute,” Judge Martinez said in denying Great-West’s motion to exclude Pomerantz’s expert testimony. “All parties agree that Defendant’s net profitability equals its gross revenue minus its costs. Pomerantz applies that methodology.
“However, he disagrees with Defendant regarding what should actually count as costs. He also gives reasoned explanations for his disagreement, and a factfinder could reasonably credit those explanations, particularly given the dispute over whether Defendant, outside of this litigation, really treats the Excluded Costs as costs chargeable to the fund, and particularly whether Defendant accounts for them when evaluating the Fund and setting the credited rate. At any rate, exclusion under Rule 702 is not appropriate.”
Certification
Judge Martinez said Teets clearly met all four prerequisites for class certification under Federal Rule of Civil Procedure 23(a): numerosity, commonality, typicality and adequacy. The judge also wrote that the class should be certified under Rule 23(b)(1).
“[T]he Court finds that ‘questions of law or fact common to class members predominate over any questions affecting only individual members,’” Judge Martinez wrote. “Moreover, Defendant presents no argument calling into question the requirement that ‘a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.’”
Teets is represented by Scot David Bernstein of Law Offices of Scot D. Bernstein in Folsom, Calif., Todd F. Jackson, Nina R. Wasow and Julie H. Wilensky of Lewis Feinberg Renaker Lee and Jackson in Oakland, Calif., and Todd M. Schneider of Schneider Wallace Cottrell Brayton Konecky in Emeryville, Calif. Great-West is represented by Mark Bruce Blocker, Joel Feldman, Daniel R. Thies and Carol Lynn Thompson of Sidley Austin in Chicago.
(Additional documents available. Complaint. Document #54-160713-040C. Answer to complaint. Document #54-160713-041W.)...