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The New York Life Insurance Co. was hit Wednesday with a class action ERISA and civil RICO suit brought by current and former employees who say the company raided their pension plans to further its own interest in establishing a foothold in the institutional mutual fund market. “Using plan assets to further corporate business objectives violates the most basic fiduciary duty — the duty of loyalty — which requires plan fiduciaries to act at all times ‘solely’ in the best interest of participants and for the ‘exclusive’ purpose of providing them with benefits,” the suit says. A spokesman for the insurance company Wednesday called the suit “unfounded.” The lead plaintiff in the suit is James A. Mehling, a former New York Life vice president who says he was fired in an effort to prevent him from blowing the whistle on the alleged decade-long scheme. Also named as plaintiffs are the four employee benefits plans at issue — two in-house pension plans and two in-house 401(k) plans, one of each for employees and the others for agents. The two pension plans currently have combined assets of $3 billion, of which $1.75 billion is still invested in the NYL mutual fund, called MainStay funds. The two 401(k) plans currently have combined assets of approximately $1.1 billion, about half of which is still invested in MainStay funds. Already an Internet Web site has been established — www.newyorklifesuit.com — to allow the tens of thousands of potential class members to monitor the case which was filed in U.S. District Court in Philadelphia and assigned to U.S. District Judge Bruce W. Kauffman. The team of lawyers who filed the suit includes Clyde W. Waite of Stief Waite Gross Sagoskin & Gilman in Newtown, Pa.; Eli Gottesdiener, Michael D. Lieder and Jennifer C. Jaff of Sprenger & Lang in Washington, D.C.; and Alan M. Sandals of Sandals Langer & Taylor in Philadelphia. NYL will be defended by attorneys Michael L. Banks, Joseph J. Costello and Ellen T. Noteware of Morgan Lewis & Bockius in Philadelphia. The suit seeks to recover “hundreds of millions of dollars” that NYL and its board of trustees allegedly “improperly extracted and earned from manipulating NYL’s employees’ and agents’ pension and 401(k) plans.” For the past 10 years, the suit alleges, NYL has “knowingly and intentionally abused” its stewardship over the benefit plans “by exploiting the plans’ huge asset pools for corporate gain.” The scheme began, the suit says, when NYL “decided to use the plans’ assets to jump-start the company’s entry into the lucrative institutional mutual fund business, where NYL had no prior experience, presence or product offerings.” It alleges that rather than create and finance [its] proposed new line of institutional mutual funds using [its] own capital, NYL “raided the pension plans and converted hundreds of millions of dollars of the plans’ assets into ‘seed money’ to create the new funds, called the New York Life Institutional Funds, [and] later renamed the MainStay Institutional Funds.” The alleged “self-dealing” scheme continued in 1994 and 1995, the suit says, when NYL created additional new MainStay institutional funds, again using pension plans money. At the same time, the suit says, NYL shifted another $150 million from the employees’ and agents’ 401(k) plans into its new proprietary mutual funds. “Since their inception in 1991, the MainStay institutional funds have depended on the pension and 401(k) plans for their profitability and, indeed, their very existence,” the suit says. “… Simply put, without the captive assets of the plans, the poorly performing MainStay institutional funds would collapse.” The suit alleges that NYL’s use of plan assets to further its corporate business objectives violated the duties of loyalty and due care that ERISA imposes on plan fiduciaries. Plaintiffs’ attorney Eli Gottesdiener said in an interview: “No prudent and loyal fiduciary would have placed the assets of the plans, especially the pension plans, in even the lowest-cost mutual funds. Although a mutual fund may be an appropriate investment vehicle for relatively small investors, it is entirely inappropriate for large pension plans like the multi-billion dollar NYL pension plans, which can obtain expert, individualized investment management services for a fraction of the cost of even the least expensive mutual fund.” The suit says NYL’s conduct was so egregious that it could be deemed criminal. “In our view, the self-dealing here is breathtaking,” attorney Jennifer C. Jaff said. NYL, she said, “created the MainStay institutional funds out of whole cloth using the pension and 401(k) plans assets. … In the aggregate, one half of the money in the funds comes from the plans. NYL intentionally converted its employees’ retirement assets, using them to prop up its sagging proprietary mutual funds. I leave it to you to decide if that’s self-dealing.” The suit accuses NYL of making hundreds of millions of dollars from the scheme and intentionally concealing it from the plans’ participants, government regulators and outside investors alike. Gottesdiener said that NYL collected “tens of millions of dollars in excessive fees and expenses” from the benefit plans and made tens of millions more from outside investors, mostly third-party 401(k) plans. “To the extent that the MainStay funds have been able to attract outside investors at all, it is largely because NYL, by using the plans’ assets, was able to create the illusion that the market thought the funds were good investments,” he said. Lead plaintiff Mehling claims he discovered the scheme and was ousted when the company began to fear that he would blow the whistle. “NYL fired Mehling, a loyal, universally-admired employee, upon realizing that he might reveal the scheme and in an effort to fraudulently conceal it,” the suit alleges. Mehling is seeking damages for the losses he sustained as a result of the termination. Plaintiffs’ attorney Clyde W. Waite said, “Jim Mehling spent 10 years building up NYL’s business. He was a loyal employee with a spotless record of truly unparalleled achievement. In fact, only six days before Mehling was fired, NYL’s CEO wrote to him praising his accomplishments during the previous year. We think NYL’s fear that he was about to blow the whistle is the only plausible explanation for his firing.” NYL spokesman Bill Werfelman said the suit is “nothing more than a transparent attempt to extract money from a deep-pocket defendant.” Werfelman said the plaintiffs’ lawyers have been searching for months to find named plaintiffs and that “the only named plaintiff is a disgruntled former employee.” The suit, he said, “is designed not to help New York Life benefits-plan participants, but merely to enrich these law firms’ coffers.” Werfelman said the suit is “unfounded” because NYL’s pension plans are “guaranteed” and are currently “overfunded” by $900 million. He said the plaintiffs will be “unable to prove that any plan participants lost a single dollar.”

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