Principal To Face Westgate Fiduciary Breach Claims
By Evan Weinberger
A New York federal judge on Thursday allowed to continue a class action alleging Principal Financial Group Inc. breached its fiduciary duty to retirement account holders by letting them unwittingly invest in a Ponzi scheme run by Westgate Capital Management LLC.
U.S. District Judge Robert W. Sweet ruled that the motion to dismiss phase was not the proper forum for pursuing questions about Principal Financial’s fiduciary duties under state law in its role as custodian of the retirement accounts. The judge cited an earlier ruling in Anwar v. Fairfield Greenwich Ltd. in finding that the Westgate fund was not a covered security under the Securities Litigation Uniform Standards Act and that the suit therefore was allowed to move forward.
“This is a most significant decision for investors. It’s the first time that a court held that a financial institution could be responsible for investors’ losses in a Ponzi scheme, that there are legal duties of IRA custodians to investors,” said Jacob H. Zamansky of Zamansky & Associates, one of the firms representing the plaintiffs.
“This could change the landscape in this area of the law,” he added.
Des Moines, Iowa-based Principal Financial could not immediately be reached for comment.
The suit, brought in September 2009 on behalf of individuals and businesses who held pension or individual retirement accounts in custody and trust with Principal Financial and whose funds were then invested with Westgate.
In February 2009, FBI agents arrested James Nicholson, president and general partner of Westgate. The same day, the U.S. Securities and Exchange Commission filed a separate complaint against Nicholson and Westgate, alleging the fund was in effect a $140 million Ponzi scheme.
Nicholson is currently serving a 40-year prison sentence after pleading guilty to securities fraud charges.
Nicholson lured investors with false claims that several of Westgate’s funds exceeded performance of the S&P 500 nearly 100 percent of the time, but actually used the invested funds for his own benefit, the SEC said.
According to the amended complaint, Principal failed to perform required reviews that would have ensured that the investments made on behalf of proposed class members’ IRAs, 401(k)s and other retirement accounts were safe, violating its obligations as a custodian of the accounts.
Principal essentially transferred the cash and custody of the pensions and IRA accounts directly to Westgate, but did nothing to confirm that Westgate was running legal and proper investment funds, the complaint alleges.
Judge Sweet dismissed a host of other counts in the complaint, including federal breach of fiduciary duty and contract claims as well as those brought under the Employee Retirement Income Security Act, but Zamansky said the most important of the class claims survived.
“The heart of this case is that the IRA custodian owes a fiduciary duty to investors,” he said.
The plaintiffs are represented by Fred T. Isquith and Christopher Lovell of Lovell Stewart Halebian Jacobson LLP and Jacob H. Zamansky, Kevin Dugald Galbraith and Edward H. Glenn Jr. of Zamansky & Associates.
Principal Financial is represented by Joel S. Feldman, Michael C. Andolina, Kevin M. Fee, Simone R. Cruickshank and Lynn A. Dummett of Sidley Austin LLP.
The case is Grund et al. v. Principal Financial Group Inc. et al., case number 1:09-cv-08025, in the U.S. District Court for the Southern District of New York.