Speaking "on behalf of the United States," the Justice Department has urged the Supreme Court to rule that the anti-fraud provisions of federal securities laws don't apply to union pension funds that employers pay for and that enroll employes automatically.
"There has not been a single affirmative indication from the Congress or any member of Congress in more than 40 years since the securities acts were passed that those acts apply to employe interests in involuntary, non-contributory pension plans," Solicitor General Wade H. McCree wrote in a friend-of-the-court brief filed August 4.
The long-awaited brief was a major victory for the Labor Department and a major defeat for the Securities and Exchange Commission. They had taken irreconcilable positions before the 7th U.S. Circuit Court of Appeals.
In the first ruling by an appellate court on the issue, the 7th Circuit held a year ago that the antifraud provisions protected John B. Daniel, a Chicago truck driver whose employers, for 18 years, made payments in his behalf to the Pension Trust Fund of Local 705 of the International Brotherhood of Teamsters.
He collected nothing when he retired because, unbeknownst to him, the jointly-administered fund required unbroken service. Daniel once had been laid off, for four months, by an employer who fell on hard times.
McCree asked the Supreme Court to reverse the ruling. He acknowledged that "formulation of the position of the United States has been unusually difficult . . . because the government agencies most familiar with the operation and administration of pension plans have had little experience in the interpretation and application of the securities laws, while the Securities and Exchange Commission has had little experience with the operation and administration of pension plans."
The agencies to which he referred are the Treasury Department and the Pension Benefit Guaranty Corp. Each has responsibilities under the Employe Retirement Income Security Act (ERISA) of 1974.
The SEC, it was learned, intends to file a brief of its own urging the High Court to affirm the ruling.
Meanwhile, the chairman and senior Republican member of the Senate Human Resources Committee, Sens. Harrison A. Williams Jr. (D-N.J.) and Jacob K. Javits (R-N.Y.), have introduced legislation to overturn the ruling. If they succeed the court case will be made moot.
The stakes in the battle are high. Involuntary, non-contributory pension plans are the largest single source of private investment capital. The Labor Department estimates their assets at $264 billion and the number of workers they enroll at 39 million.
Resolution of the issue "may have a great impact upon the financial soundness and administration of the country's pension plans," Solicitor General McCree wrote.
According to a recent Labor Department study cited by Williams, an ultimate victory for the SEC and Daniel could lead union members to file claims similar to Daniel's at a cost of billions of dollars to jointly administered pension funds.
But Karen Ferguson of the Pension Reform Group, a nonprofit organization, says such estimates incorrectly assume that the Supreme Court would approve retroactivity for claims made by large numbers of disappointed retired union members.
In the Justice Department brief, McCree contended not only that the securities laws did not authorize Daniel to bring his lawsuit, but also that there is "no basis for arguing that Congress has 'plainly commanded' retroactive liability . . . liability, if imposed at all, should be entirely prospective . . ."
At the same time, he said, the securities laws do enable a private lawsuit when there have been "affirmative misrepresentations," such as a plan sponsor who intentionally tries to deceive by telling an employe that he will be eligible for a pension after 10 years' service, when he knows in fact that he must have 15 years' service.
If the SEC and Daniel prevail, rank-and-file union members would have to be told all material facts about a pension plan. Such facts could include the possibility, never disclosed to Daniel, that retirement benefits might never be collected.
The Labor Department, union leadership, and various business groups, while not questioning that Daniel got a raw deal, say that Congress specifically enacted ERISA - a year after cataracts forced him to retire - to cope with pension a buses.
In the government brief, McCree argued that the interest of an employee in an employer-financed, automatic plan is not a "security" within the meaning of the securities laws. He added:
"Employes in such plans make no investment in the statutory sense of the term; they do not decide whether to participate in the plan or to invest any particular amount in it. They have nothing to say about what is to be done with the money in the plan or how and where it is to be invested. They have no redeemable or transferable interst in the plan."
Calling ERISA "a comprehensive statute to establish and protect workers' pension rights," McCree said, "Any interpretation of the securifieslaws that would engraft onto ERISA remedies under those [securities] laws enacted 40 years earlier and never before applied to pension plans should be adopted with caution lest the carefully designed scheme of Congress be disrupted."
The 7th Circuit's conclusion rested not on any explicit statement in the legislative history of the securities laws that pensions are securities (there was no such statement), but said McCree, on "certain inferences" drawn "from various changes Congress made in the legislation and its treatment of certain proposed amendments . . ."