Perez v. Aubrey Needham involving imprudent investments causing losses to the Ditch Witch Equipment of Tennessee Inc. Profit-Sharing Plan

Date of Action: April 29, 2014

Type of Action: Complaint

Names of Defendants: Ditch Witch Equipment of Tennessee Inc., Aubrey Needham and the Ditch Witch Equipment of Tennessee Inc. Profit-Sharing Plan

Allegations: In 2005, defendant Aubrey Needham entered the company’s Profit-Sharing Plan into a margin agreement account which allowed him to make plan investments on margin. Defendant Needham began purchasing stock warrants as plan investments, and as a result of purchases on margin, the plan’s margin account had a negative balance of more than $500,000 by the end of 2005. To satisfy the margin calls, Needham liquidated other plan investments in various mutual funds. In late 2006, Needham had liquidated all of the plan’s mutual fund investments and all plan assets were invested in stock warrants of a publicly traded company, Star Maritime Acquisition Corp. In April 2007, Needham liquidated the SMAC stock warrants and began purchasing stock warrants of another publicly-traded company, Health Care Acquisition Co., which became PharmAthene Inc. In August 2007, 100 percent of plan assets were invested in PharmAthene stock warrants, and plan assets remained solely invested in PharmAthene stock warrants and stock through April 2009. As a result of the plan’s investments in PharmAthene, the plan suffered net losses totaling at least $359,770.91.   

The complaint charges defendant Needham with failing to give appropriate consideration to whether the investments or investment course of action was reasonably designed to further the purposes of the plan and failing to take into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action. The defendant also failed to appropriately consider: the composition of the plan’s investment portfolio with regard to diversification; the liquidity and return of the portfolio relative to the anticipated cash flow requirements of the plan; and the projected return of the portfolio relative to the funding objectives of the plan.

Resolution: The department is seeking a court order requiring the defendants to restore all losses to the plan, including interest; to disgorge any benefits or profits received by a fiduciary as a result of fiduciary violations; to set off any restitution or other monetary recovery, which defendants may be ordered to pay, against any claims which they may have against the plan, including any claims for benefits; and to remove defendants from their positions as fiduciaries with respect to the plan, and permanently bar them from serving as fiduciaries for, or having control over the assets of, any employee benefit plan subject to Employee Retirement Income Security Act.

Court: United States District Court for the Eastern District of Tennessee, Knoxville Division.

Docket Number: 3:14-cv-00171

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