The anti-fraud provisions of the securities laws don't apply to pension plans that are paid for entirely by employers and sign up workers automatically, the Supreme Court ruled 8 to 0 yesterday.
The ruling affects plans with assets valued at $264 billion and an enrollment of an estimated 37 million workers. They are called noncontributory and compulsory.
The decision was a victory for an extraordinary coalition including the solicitor general, speaking "on behalf on the United States;" the Labor Department; the AFL-CIO and the International Brotherhood of Teamsters, and business groups including the Chamber of Commerece of the United States and the National association of Manufacturers.
The ruling was a defeat for a relatively frail alliance consisting of the Securities and Exchange Commission, and such advocates of change as the Gray Panthers and the Pension Rights Center, which had supported John B. Daniel, the former Chicago truck driver who alleged that he was cheated of the pension on which he had conted for 18 years.
He joined Teamsters Local 705 in 1951. Three years later, it and Chilcago-area trucking firms negotiated a noncontributory, mandatory, jointly administered pension plan. At the start, it gave him five years' seniority. Then, for 18 years, employers made payments in his behalf.
Afflicated with cataracts, Daniel retired in 1973, never doubting that the pension trust fund would pay him at least $425 a month. Only then did he learn of a requirement -- which he says was news to him -- of 20 years' "continuous servie."
In 1960-1961, he'd been laid off for four months, and, for an additional three months, because of a bookkeeper's embezzlement, an employer made no payments for him.
Daniel, who died last month at 68, had filed a lawsuit alleging that with omissions and misstatements, the Teamsters, the local and the fund administrator had defrauded him in violation of the securities laws of 1933 and 1934.
The basic pension law, the Employment Retirement Income Security Act (ERISA), has no anti-fraud provisions. It couldn't have helped Daniel in any event, because he retired the year before it was enacted.
In addition, there's doubt whether ERISA covers oral misrepresenations, which he says were made to him. And there hasn't been a thorough test of the law's civil remedies and criminal penalties for misrepresentations.
It was learned last night, however, that Sen. Harrison A. Williams Jr. (D-N.J.), chairman of the Senate Human Resources Committee, is considering the possibility of amending ERISA to include anti-fraud provisions.
At Williams' request, the Labor Department, which administers ERISA, has drafted -- but hasn't yet taken a stand on -- sample amendments.
In the lawsuit, the key issue was Daniel's claim, backed by the SEC, that his interest in the pension fund was a "security" similar to a stock or a bond and therefore subject to the secruities laws' anti-fraud provisions. These bar misrepresentations -- oral or written -- and are enforced by the SEC with an arsenal of legal weapons.
On the other side, some union and industry litigants claimed that if the Daniel-SEC view was upheld, pension plans across the country would be subject to massive retroactive liability. The SEC denied this.
The 7th U.S. Circuit Court of Appeals ruled for Daniel but was over-turned by an unanimous Supreme Court. Justice John Paul Stevens did not participate in the consideration or decision of the case although he had participated in oral argument. As is routine, he gave no explanation.
In the opinion for the court, Justice Lewis F. Powell Jr. dismissed a claim by Daniel that employer contributions equate with "investments" by employes. That "ignores the economic realities," he wrote.
Moreover, Powell Found "no evidence that Congress at any time thought noncontributory plans... were subject to federal regulation as securities." And he dealt harshly with the SEC's claim that it always has regarded pension plans as within the scope of the securities laws.
The SEC's present position "is flatly contradicted by its past actions," Powell said. The public record, he added, reveals "no evidence" that the agency took that position until the Daniel case.
The court opinion didn't address contributory plans. These enroll many fewer workers, mainly publice employes.