The Trustees of the New York State Nurses Association Pension Plan v. White Oak…

Background

The Trustees of the New York State Nurses Association Pension Plan retained White Oak Global Advisors LLC under an investment management agreement effective December 31, 2013. The agreement gave White Oak broad authority to manage the Plan’s allocated assets, subject to the agreement, investment guidelines, the Employee Retirement Income Security Act of 1974 (ERISA), and the fee schedule. The agreement also allowed the Trustees to terminate the relationship without a penalty and required White Oak to transfer the Plan’s property upon termination.

The arbitrator found that White Oak and the Plan’s then-Chief Investment Officer, Russell Niemie, had undisclosed employment discussions while the Plan was considering renewing its agreement with White Oak. After the Plan investigated Niemie’s conduct and reviewed White Oak’s investment relationships, it identified possible performance and compliance problems. The Plan later demanded arbitration.

In a partial final award, the arbitrator found that White Oak had engaged in numerous prohibited ERISA transactions and breached its fiduciary duties. The findings included failing to return Plan assets after termination, preserving control over assets and continuing to collect fees, obtaining indemnification rights through subscription agreements, imposing investment exit restrictions inconsistent with the investment management agreement, and causing the Plan to pay an unauthorized “Day One Investor Fee.” The arbitrator ordered disgorgement of assets, fees, and profits, removal of White Oak as fiduciary and investment manager when a replacement was retained, and attorneys’ fees and prejudgment interest. A later final award addressed damages and fees, incorporated the partial award, required disgorgement of the Plan’s net asset value, allowed White Oak to retain certain described fees, awarded the Plan 80 percent of its attorneys’ fees and costs, and awarded prejudgment interest at New York’s 9 percent statutory rate.

White Oak’s Motion to Vacate

White Oak asked the court to vacate the arbitration award. Under the Federal Arbitration Act, a court may set aside an award on specific grounds, such as corruption, arbitrator misconduct, or an arbitrator exceeding the arbitrator’s authority. The court explained that review is extremely limited and that an award generally must be confirmed if there is at least a barely colorable justification for the result, even if the court would have decided the merits differently.

The court rejected White Oak’s argument that the final award replaced the partial award and eliminated the arbitrator’s liability findings. The final award expressly incorporated the partial award, and the court concluded that the later modifications concerned the amount and form of relief, not the underlying findings that White Oak violated ERISA and breached its fiduciary duties.

The court confirmed the disgorgement relief. It read the award as requiring White Oak to return the Plan’s net asset value as of the date of the final award, in a manner consistent with the investment management agreement and the award as a whole. White Oak could not satisfy the obligation by transferring fractional interests in investments that it controlled and that resulted from the prohibited transactions, although the court did not categorically rule out every possible in-kind transfer.

The court also confirmed the award’s requirement that White Oak disgorge profits and some fees. It found that the final award used “performance fees” to describe what the investment management agreement treated as “management fees,” rather than carried interest tied to investment returns. Because that was an evident material mistake in the description of property referred to in the award, the court corrected the award by substituting “management” for “performance.” The court held that White Oak could not retain any “Day One” fees because the arbitrator had found that those fees violated the agreement and ERISA.

Attorneys’ Fees, Interest, and Declaratory Relief

The court confirmed the award of 80 percent of the Plan’s attorneys’ fees and costs. It rejected White Oak’s arguments that the Plan had not achieved sufficient success, that the fees were unreasonable, and that expert fees and other costs were legally unavailable. The court noted that the law concerning recovery of expert fees under ERISA was unsettled and therefore could not support vacatur for disregard of clearly established law.

The court also confirmed the award of prejudgment interest at the New York 9 percent statutory rate. It declined, however, to award the Plan post-award prejudgment interest.

The Plan sought a separate declaratory judgment stating that White Oak breached its fiduciary duties, that the Trustees did not breach theirs, and that White Oak should be removed as fiduciary and investment manager. The court denied that request as moot because the arbitration award itself already contained the relevant liability findings and removal provision, and the court could not add relief that did not appear on the face of the award.

Disposition

Judge Lewis A. Kaplan granted White Oak’s motion to vacate to the very limited extent of modifying the award’s reference to “performance fees” by changing it to “management fees,” and denied the motion in all other respects. The court granted the Plan’s petition to confirm the arbitration award, consisting of the partial and final awards as modified. It denied the Plan’s requests for post-award prejudgment interest and a declaratory judgment, the latter as moot, and directed the Clerk to enter judgment and close the case.