Corky’s Bar-B-Q is known for making some special shipments just in time for Christmas, but it’s a safe bet that the folks at National Bank of Commerce and its subsidiary First Mercantile Trust, weren’t happy with one recent delivery.
Corky’s has sued the two Memphis financial institutions for $700 million in federal court for alleged misrepresentation of fees charged for managing retirement accounts and other investments.
Corky’s and owners Don Pelts, Barry Pelts, and Andrew Woodman sued on behalf of their own retirement plan participants and over 100,000 participants in 2,300 other 401(k) plans managed by NBC and First Mercantile Trust (FMT). The suit names as defendants the corporations and FMT executives Kenneth Lenoir and Bryan Scot Lenoir. FMT’s slogan is “Someone you know, Someone you trust.”
The lawsuit alleges “breaches of fiduciary duty and a pattern of racketeering activity.”
According to the lawsuit, the custodians of the retirement plans and even FMT salesmen were led to believe that their annual fees were 1.49 percent of assets when in fact they were 2.1-2.3 percent. The lawsuit says the higher fees generated tens of millions of dollars for FMT at a time when many retirement plans were losing one-third or more of their value. It asks for restitution of all retirement plan assets entrusted to FMT and NBC plus all employee contributions and undisclosed fees and arrives at a total of $700 million.
The lawsuit has not previously been reported. Earlier this week, The Commercial Appeal carried a jolly article about NBC in which the CEO of the bank’s parent company, Ernest Roessler, made no mention of the lawsuit and said NBC’s stock is undervalued.
The lawsuit was filed by attorneys Richard Glassman, William Burns, and R. Douglas Hanson. It says Kenneth Lenoir has been terminated by FMT.
(National Commerce Financial, the parent of NBC, issued a statement Thursday saying the lawsuit contains “grossly inaccurate assertions, grossly exaggerated damages, and the parties intend to vigorously defend against this lawsuit.” A spokesman for FMT denied that Lenoir had been terminated.)
Fees on 401(k) accounts have come under greater scrutiny in the last three years because of the plunging stock market. A difference of .6 percent in annual fees is considered significant by brokers and salesmen who try to line up clients. According to the lawsuit, it was a series of incidents involving such salesmen and internal employees that led to the unraveling of the alleged scheme.
NBC acquired FMT, based in Cordova, in 1999 to take over management of retirement plans under its advisement. At the time NBC was losing a number of accounts, including Contemporary Media, the parent company of this newspaper, because of service problems and other complaints. FMT, on the other hand, has seen assets under management grown nearly seven-fold since 1995.
NBC induced hundreds of retirement plans to transfer their assets to First Mercantile.
“NBC knew or was reckless in not knowing that FMT had engaged in massive overcharging of undisclosed fees to the plans,” the lawsuit says.
“To the contrary, NBC actively assisted the defendants in attempting to conceal the undisclosed fees and avoid liability.” One strategy was to try to get the plans to sign new investment contracts which would, in effect, ratify the undisclosed fees.
An investment analyst learned that the true fees were higher than the ones disclosed in 2000 by accessing a secret database on his computer at FMT. He alerted Lenoir and NBC, but they did nothing to correct the problem, the suit says.
The higher fees were later discovered by an investment adviser for Sector Capital Management who blurted out a meeting that it was hard for Sector to outperform the stock market averages because of FMT’s 2.1 percent fee.
The suit says Lenoir first denied the higher fees until the Sector representative produced written documentation.
