The opinion of the court was delivered by: Michael A. Telesca United States District Judge
Plaintiff Elaine Chao, the Secretary of Labor for the United States Department of Labor("Department of Labor" or "DOL"), brings this action against Defendants Emerald Capital Management, Ltd., a now defunct investment company,*fn1 and William Robert Goodhue ("Goodhue" or "defendant") the former president of Emerald Capital and an investment advisor and benefit-plan manager, claiming that the defendants violated the Employee Retirement Security Act of 1974, ("ERISA") codified at 29 U.S.C. § 1001 et seq., by engaging in excessive trading of plan assets to the detriment of the plans which they managed. Specifically, plaintiff alleges that Goodhue engaged in excessive trading of assets in an effort to receive financial benefits from Merrill Lynch, the company through which the trades were executed, which provided benefits to Goodhue based on the number of trades he ordered.
Defendant denies the plaintiff's allegations, and moves for summary judgment on grounds that the statute of limitations in this case expired prior to the filing of the plaintiff's complaint. Specifically, the defendant contends that the statute of limitations in this case expired three years after the plaintiff acquired actual knowledge of the defendant's alleged unlawful trading, which knowledge Goodhue claims was acquired by the DOL on or about April 18, 1998. Defendant therefore claims that the Complaint, which was filed on July 20, 2001, was untimely by more than three months.
The DOL denies that it had actual knowledge of Goodhue's alleged excessive trading in 1998, and instead argues that it did not acquire actual knowledge of the alleged excessive trading until January, 2001. The DOL contends that because it did not have actual knowledge of the alleged ERISA violations until January, 2001 its Complaint filed in July 2001, is timely.
For the reasons set forth below, I find that the Department of Labor had actual knowledge of the facts giving rise to a claim for excessive trading against the defendants on or before April 17, 1998, and accordingly, the Complaint filed in this action is untimely. I therefore grant defendant's motion for summary judgment and dismiss plaintiff's Complaint with prejudice.
Defendant William Goodhue is a private asset and investment manager, and was the President of Emerald Capital Management, Ltd., a now defunct asset management firm. Prior to forming Emerald Capital and serving as its President, Goodhue worked for Merrill Lynch. As an investment manager at Emerald Capital, Goodhue managed benefit plans for several clients including an ERISA benefit plan maintained by the Young Insurance Agency ("the Young Agency"). In July 1997, the Department of Labor initiated an investigation of certain ERISA plans held by the Young Agency, and based on its investigation, the DOL determined that plan assets had been traded excessively.
By November, 1997, DOL investigators had learned that William Goodhue, as the President of Emerald Capital, was the investment manager for the Young Agency ERISA Plans during the time of the allegedly excessive trading. By December, 18, 1997, DOL investigators had concluded that Goodhue had directed a "huge" number of trades, and had learned that many stocks had been purchased and resold within a matter of weeks. James Murphy, ("Murphy") the primary investigator of this matter at the time, had also seen information indicating that Goodhue had been participating in a "soft dollar" program with Merrill Lynch whereby Goodhue received a financial benefit from Merrill Lynch for every trade that Goodhue ordered from Merrill Lynch.
Based on information he uncovered during his investigation, Murphy requested trading records from Merrill Lynch for other accounts for which Emerald Capital had acted as the Investment Manager. On or about April 17, 1998, Merrill Lynch responded to Murphy's request by sending Murphy a list of all accounts for which Emerald Capital had acted as the Investment Manager, and by providing the trading records for all accounts managed by Emerald Capital. Merrill Lynch also sent documents describing the "soft dollar" program. According to Murphy, the trading records revealed that Emerald Capital had engaged in excessive trading for all of its ERISA plans for which Merrill Lynch served as a broker.
On August 4, 1998, Murphy and another DOL investigator interviewed the defendant regarding his participation in the ERISA plans managed by Emerald Capital. According to the DOL, the Department confirmed at that meeting that Goodhue was the Investment Manager who had discretionary authority over the funds in those ERISA plans.
The extent of the investigation immediately following the DOL's interview of Goodhue is not clear from the record. The record does indicate, however, that the investigation was referred to the Pension Welfare Benefits Administration ("PWBA") in Boston for further consideration. On February 24, 2000, the PWBA referred the case to the Solicitor's Office of the Department of Labor for possible legal action. The PWBA concluded that Goodhue's excessive trading was "a clear violation" of ERISA provisions.
On August 10, 2000 the DOL sent Goodhue a letter offering to delay the initiation of any lawsuit against him in return for his agreement to toll any statute of limitations. At that time, the DOL's internal analysis of the statute of limitations suggested that the limitations period would expire on November 4, 2000. Nevertheless, on August 21, 2000, the DOL attorney assigned to the case wrote that in the event that Goodhue did not sign the tolling agreement, the DOL should not threaten to bring a lawsuit immediately because despite the fact that the DOL "believes and has believed since (probably) September 1997 that the trades violated ERISA . . ." the DOL could argue that it "didn't know" there were ERISA violations because no expert had as of yet offered an opinion on that subject. A second and final statute of limitations analysis was prepared by the DOL on September 7, 2000. According to that analysis, the statute of limitations for claims against Emerald Capital and Goodhue would expire on September 8, 2000 unless the DOL could successfully argue that it did not have knowledge of the ERISA violations because it had not received an opinion from an expert opining that Goodhue had been involved in excessive trading. Goodhue refused to sign the tolling agreement.
At approximately the same time that the DOL had requested that Goodhue enter into a tolling agreement, the Department retained an outside expert, Richard Ennis ("Ennis") to review Goodhue's trading records and determine whether or not Goodhue had engaged in excessive trading in violation of ERISA. After reviewing the records, Ennis contacted an attorney with the DOL by telephone on January 9, 2001 and opined that Goodhue had engaged in excessive trading ...