Fort Walton Beach Council agenda — 02-09-2010 Special-BRP, Merrill Lynch lawsuit — reading text

documents. Once the City obtains the analysis of potential damages, it will be able to assess whether legal action against Merrill is warranted. I would be pleased to answer any questions you or City Council members may have concerning these matters. 39-  0 v LEWIS, LONGMAN & WALKER, P.A. A V. 1 0 +t v e s ti r L n my RP mY To: TALLAHASSEE PUMO UM TO: Joyce Shanahan, City Manager City of Fort Walton Beach PROM: Jim Linn, pension Counsel DATE: January 2, 2008 RE: General Employees' Retirement Plan -- Investment Consulting Services At its November 27, 2007 meeting, the City Council determined that the current investment consulting agreement with Merrill Lynch should be revised to incorporate new fiduciary language and other changes as recommended in our letter of October 29, 2007. IIowever, the City was recently infoxmed that Larry Cole resigned from Merrill Lynch and joined another investment consulting firm (Burgess Chambers & Associates) effective January 1, 2008. We have previously reported on a Securities and Exchange Commission ( SEC) investigation and proposed regulatory action against Mike Callaway, t-he Merx ll Lynch vice president in charge of the firm' s Florida pension consulting group. Mr. Calloway and Merrill Lynch advised the City on October 29, 2007 that the SEC had " taken issue" with some of Merrill Lynch' s and Mr. Callaway' s practices with respect to disclosure of fees and alleged conflicts of interest. Mr. Callaway has taken a leave of absence from Merrill Lynch lo, defend. himself against the SEC allegations. In view of these circumstances, I recommend that the City Council authorize staff to prepare and issue a request for proposal (RFP) for investment consulting services for the General Employees' Retirement Plan. I further recommend that Merrill Lynch be advised that an RFP is being issued. If the RFP results in the selection of a new investment consultant, Merrill Lynch should be notified in accordance with the agreement (30 days notice of termination). At your direction, we will assist with the wording of the RFP and the notice to Merrill lynch. Please call me if you have any questions. Relping Shape Florida' s Fiduree BRADMTOH JACKSONVTLLLr TALLAHASSur WCST PALK BRACR 1001 : 0 Avenue West 24.5 Riverside Avenue Post Ofllca Box 1073$ ( 32302) Suite 670 1700 Palin Beach Lakcs Blvd. Suite 150 12,5 Soil 1b Gnds(lcn Strest, Suite 300 Bradenton, FL 34205 . Suite 1000 Jacksonville, FL 322002 Tallnhassea, FL 32301 94 t) 7034040 ( West Palm Bcach, FL 3340) 90.4) 353 -64) 0 .( 850) 222-S702 ( Fnx: (941) 7084034 561) 640. 0820 Fax: M4553-7619 Ar j850) 2-M-92242 Fax: (551) 630 -3202 vwv,11w- i:{w.com 01/ 03/ 2008 40-  IN THE CIRCUIT COURT OF OKA.LOOSA`COUNTY, FLORIDA BOARD OF TRUSTEES OF THE CITY OF FT. WALTON BEACH MUNICIPAL FIREFIGHTERS PENSION TRUST FUND, Plaintiffs, V. CASE NO.: 2009 CA 004746 S MERRILL LYNCH PIERCE FENNER SMITH, INCORPORATED and MICHAEL A. CALLAWAY, Defendants. AMENDED COMPLAINT COMES NOW, The Board of Trustees of the City of Ft. Walton Beach Municipal Firefighters' Pension Trust Fund, ( hereinafter the " Fund ") and sues Defendant Merrill Lynch, hereinafter Fenner, &' Smith, Incorporated ( hereinafter " Merrill ") and Michael A. Callaway ( Callaway") and in furtherance of that suit Allege as follows: JURISDICTION AND VENUE 1. The damages alleged in this Complaint exceed the jurisdictional limits of this Court and the actions constituting the violations alleged occurred in Okaloosa County, Florida. THE PARTIES 2. Plaintiff Board of Trustees administers the Pension Trust Fund for firefighters' employed by Ft. Walton Beach. The Fund provides pensions to retired and disabled firefighters of the City of Ft. Walton Beach and their families. It is a defined benefit plan created pursuant to Chapter 175 of the Florida Statutes. 41-  3. Merrill is a Delaware Corporation with its principal place of business in New York City. It regularly transacts business in the State of Florida. Merrill is a securities broker /dealer registered with the Securities and Exchange Commission ( " SEC " ), the State of Florida and the Financial Industry Regulatory Authority. It is also a registered investment advisor. As a large corporation, Merrill acts through its employees and is by virtue of the doctrine of respondeat superior responsible for the acts of those employees. 4. Callaway was at all times relevant to this suit, one of Merrill' s employees and all acts alleged to have been performed by him were performed on behalf of Merrill and within the scope of his employment. He is a resident of the State of Florida. He was at all pertinent times employed by Merrill as a Senior Vice President for pension fund consulting in the State of Florida. In that capacity, he acted as the head of Merrill' s pension fund consulting group in Florida and shared in that group' s profits. That group was commonly called the " Callaway Group2' OVERVIEW 5. This suit arises from the relationship between the Fund on one side and Merrill and Callaway on the other. This suit arises from the relationship between the Fund on one side and Merrill on the other. The Fund' s sole purpose is to provide for the financial needs of the retired and disabled firefighters of Ft. Walton Beach and their families. It is managed by a board of trustees who have brought these claims. In order to meet its financial obligations the Fund has placed virtually all of its assets into an investment portfolio. That portfolio is divided into discrete segments each of which is managed by an investment manager retained by the Fund for that purpose. Because managing an investment portfolio is extremely complex the Fund also employed an expert consultant to advise it on investment strategies and on the performance 42-  selection and retention of its investment managers. From October 28, 1993 until June 11, 2008, that expert consultant was Merrill. Merrill' s services were provided through its Florida pension consulting group headed by Callaway. Merrill was selected for this position because it held itself out as an expert and experienced investmentadvisor and pension fund consultant. 6. The claims brought by the Fund arise from Merrill' s, Callaway' s and the Merrill' s role is reflected in its Callaway Group' s roles as expert consultants to the Fund. contract with the Fund, copies of which are attached to this claim as Exhibits " Al, A2, and A3." As the Fund' s investment advisors, Merrill and its employees, including Callaway, assumed fiduciary obligations to the Fund. Those duties are broad. They include but are not limited to the duty to place the Fund' s interest ahead of their own, the duty to fully disclose all material facts to the Fund, and the duty to disclose to the Fund all potential and actual conflicts of interest. Because Merrill and Callaway had much greater expertise in investment matters and because Merrill' s and Callaway' s duty to the Fund was fiduciary in nature, the Fund, through its Board of and Trustees, placed great trust and confidence in Merrill, Callaway and the Callaway Group, Merrill, Callaway and the Callaway Group as a result enjoyed great influence over the Fund' s decisions. It is Merrill "s and Callaway' s violation of the trust and confidence placed in them by i the Fund that lies at the heart of this case. Merrill and Callaway enjoyed significant influence over 7. As noted above, investment related decisions at -the Fund.'-. Their influence extended not just to investment decisions but included selection and retention of the money managers who were responsible for individual fund segments and how best to pay for Merrill' s and Callaway' s expert services. Their role in the selection and retention of money managers also gave Merrill and Callaway significant influence over those money managers. 43-  8. As fiduciaries to the Fund, Merrill and Callaway were required to use the influence they had acquired to further the interest of the Fund. Instead, as more fully described below, Merrill and Callaway contrary to their legal obligations, used their influence to serve their own financial interest and