Merrill Lynch fights back, sues Fund

New York-based Merrill Lynch, the former investment consultant of the NMI Retirement Fund that is being blamed for the staggering losses incurred by the Fund’s portfolio, is lashing back with its own lawsuit against the Fund.

In the lawsuit it filed yesterday in federal court, it is suing the Fund over the filing of lawsuits against the company without arbitration.

Merrill Lynch, Pierce, Fenner and Smith Inc., collectively known as Merrill Lynch, is also suing the Fund board of trustees, former Fund employee Mariano Taitano, former CNMI Ports Authority employee Roman T. Tudela, and current Commonwealth Utilities Corp. employee Patricia Guerrero.

Taitano, Tudela, and Guerrero, all Fund beneficiaries, have a pending lawsuit in the Superior Court against Merrill Lynch and the Fund.

Merrill Lynch, through counsel Sean E. Frink, asked the U.S. District Court for the NMI to declare Public Law 17-51 (Derivative Act), as amended by Public Law 17-67, to be null and void as it abrogates the Arbitration Clause in the 1998 and 2007 agreements between Merrill Lynch and the Fund and its board.

Merrill Lynch wants the court to order the Fund, Taitano, Tudela, and Guerrero to arbitrate the claims asserted in the beneficiaries’ lawsuit and any others arising between Merrill Lynch and the Fund.

According to Frink, the services provided by Merrill Lynch to the Fund included strategic allocation modeling, assistance with selection of investment managers, and investment policy advice. Merrill Lynch itself was not an investment manager or adviser for the Fund, and has no discretionary authority over the Fund’s investments, he added.

Merrill Lynch’s relationship with the Fund is governed by an agreement titled the “Merrill Lynch Consulting Services Agreement,” first executed in 1998 then amended in 2007. Both agreements, Frink said, have an arbitration clause, which provides that “all controversies which may arise between Merrill Lynch and the Fund shall be resolved by arbitration.”

Taitano, Tudela, and Guerrero sued Merrill Lynch and the Fund’s board in October 2009, seeking damages against Merrill Lynch and the board related to investment advice allegedly provided to the board by Merrill Lynch, based on alleged injuries suffered by beneficiaries. The lawsuit asserted several causes of action against Merrill Lynch, including breach of contract, breach of fiduciary duty, negligence, and malpractice. The complaint also alleged that the Fund failed to seek available remedies for Merrill Lynch’s alleged breaches of duty.

In June 2011, the Fund board filed a cross-claim against Merrill Lynch, essentially asserting the same claims. The board then filed a motion for summary judgment against Taitano, Tudela, and Guerrero, seeking to exclude them from the suit for lack of standing. The motion remains pending before the Superior Court.

In the beneficiaries lawsuit, Merrill Lynch has taken the position that Taitano, Tudela, and Guerrero are at best third-party beneficiaries and that they are therefore bound by the terms of the Agreements.

Taitano, Tudela, and Guerrero responded that the Arbitration Clause is invalid in the CNMI and that the Federal Arbitration Act does not apply.

On Sept. 5, 2011, then acting governor Eloy Inos signed into law P.L. 17-51, the “Retirement Fund Beneficiary Derivative Lawsuit Act of 2011.” That law declared that Fund beneficiaries could sue on behalf of the Fund. Frink said that P.L. 17-51 also purported, among other things, to abrogate the existing statute of limitations and replace it with a 12-year statute of limitations.

The lawyer said the intent of the Legislature in enacting Section 103 of P.L. 17-51 was to abrogate key provisions of the 1998 and 2007 Agreements.

Frink noted that the original version of the bill, as passed by the CNMI Senate, expressly announced its purpose as to “hold money managers responsible” to the Fund.

The 1998 and 2007 Agreements, Frink said, obligate the Fund to arbitrate “all controversies” with Merrill Lynch. He said that P.L. 17-51, as amended by P.L. 17-67, purports to excuse the Fund, Taitano, Tudela, and Guerrero from arbitrating claims against Merrill Lynch.

“Public Law 17-51, as amended by Public Law 17-67, was a special-interest legislation that purports to affect the enforceability only of the Fund’s contracts, and not the contracts of any other retirement fund or trust in the CNMI, and specially the Fund’s 1998 and 2007 Agreements with Merrill Lynch,” Frink said.

Frink said as an unreasonable impairment of the obligation of contracts, P.L. 17-51, as amended by P.L. 17-67, violates the Contracts Clause of the U.S. Constitution.

By failing to press the Fund’s claims in arbitration, the lawyer said, the board has permitted the Beneficiaries to seek judicial resolution, pursuant to P.L. 17-51, of the Fund’s disputes with Merrill Lynch.

Frink said P.L. 17-51, as amended by P.L. 17-67, purports to abrogate the Arbitration Clause in the 1998 and 2007 Agreements.

“The board’s decision to yield the Fund’s claims to the Beneficiaries, who may take advantage of Public Law 17-51, as amended by Public Law 17-67, effectuates the impairment of contract that the CNMI legislature prescribed,” he said.