Frank J. Wsol, Sr. v. Fiduciary Management Associates, Inc. and East West Institutional Services, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 00-2703, 01-1685
Frank J. Wsol, Sr., et al.,
Plaintiffs-Appellants,
v.
Fiduciary Management Associates, Inc.
and East West Institutional Services, Inc.,
Defendants-Appellees.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 1719--Suzanne B. Conlon, Judge.
Argued (No. 00-2703) March 27, 2001;
Submitted (No. 01-1685) August 28, 2001--
Decided September 12, 2001
Before Posner, Manion, and Williams,
Circuit Judges.
Posner, Circuit Judge. The plaintiffs,
trustees of a Teamsters pension fund,
brought this ERISA suit for breach of
fiduciary duty by an investment advisor
that the fund had retained, Fiduciary
Management Associates, and an
"introducing broker" that FMA had in turn
retained, East West Institutional
Services. At trial (a bench trial), at
the close of the plaintiffs’ case, the
district judge entered judgment for the
defendants on the basis of findings of
fact that she made on the authority of
Fed. R. Civ. P. 52(c). Rule 52(c), added
to the civil rules in 1991, streamlines
bench trials by authorizing the judge,
having heard all the evidence the
plaintiff has to offer, to make findings
of fact adverse to the plaintiff,
including determinations of credibility,
without waiting for the defense to put on
its case, since the evidence presented by
the defendant would be unlikely to help
the plaintiff.
The plaintiffs are also appealing from
the judge’s denial of their motion under
Fed. R. Civ. P. 60(b)(2) to vacate the
judgment on the ground of newly

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discovered evidence. We have consolidated
the two appeals for decision. East West
has settled with the plaintiffs, though
the settlement is, as we understand it,
contingent on the reversal of the
judgment. East West has not filed a
brief; we do not understand the
plaintiffs to be seeking relief against
it any longer; and so we’ll not discuss
its liability.
The appeals raise a number of questions,
but one is dispositive and so we ignore
the rest. The plaintiffs cannot prevail
unless the breach of fiduciary duty
either imposed a loss on the plan or
generated a profit for FMA "through use
of assets of the plan" by FMA. 29 U.S.C.
sec. 1109(a); Leigh v. Engle, 727 F.2d
113, 121-22 (7th Cir. 1984); Etter v. J.
Pease Construction Co., 963 F.2d 1005,
1009-10 (7th Cir. 1992); Felber v. Estate
of Regan, 117 F.3d 1084, 1087 (8th Cir.
1997); James F. Jorden et al., Handbook
on ERISA Litigation 3-104 to 3-106 (2d
ed., Supp. 2000). If the former, they are
entitled to damages, and if the latter,
to the recovery ("disgorgement," as the
cases call it) of FMA’s profit on a
theory of unjust enrichment or,
equivalently, constructive trust, a
standard remedy against malfeasant
fiduciaries. The plaintiffs have not
established a basis for either remedy,
however, and so they lose.
The keys to understanding the case are
three terms, "introducing broker,"
"directed brokerage," and "best
execution." An introducing broker (we’ll
get to the other terms later) is a broker
who doesn’t actually execute the
customer’s trades but instead acts as an
intermediary between the customer and the
executing broker, collecting a fee from
the customer that covers the fee charged
by that broker. Gilman v. BHC Securities,
Inc., 104 F.3d 1418, 1423 (2d Cir. 1997).
East West was the introducing broker that
FMA used on the trades it made for the
plaintiffs’ pension fund. FMA paid East
West 6 cents per trade and East West
turned around and paid the executing
broker 2 cents. This spread is common,
but the introducing broker does not
pocket the entire difference; instead he
passes part of it back to the customer
(in this case FMA) in the form either of
a rebate or of "soft money" consisting of
securities analysts’ reports and other

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investment information. The fund
reimbursed FMA for the 6 cents that FMA
paid East West.
It turns out that East West was paying
a kickback to one of the fund’s trustees
(since indicted and convicted), who in
turn steered FMA to East West. The
plaintiffs argue in their main appeal
that had FMA investigated East West, as
it should in the exercise of due care
have done, not only would it have
discovered the unsavory connection
between the trustee and East West; it
would also have discovered that East
West’s principals were shady and the firm
itself little more than a mailbox.
Instead FMA treated the trustee later
unmasked as a crook to expensive golf
outings and hired East West as its
introducing broker in order to curry
favor with him.
The district judge found that FMA had
exercised all due care. But if she was
wrong, as the plaintiffs argue with
particular vehemence in their Rule 60(b)
motion, which presents newly discovered
evidence of skullduggery, and not merely
of negligence, by FMA, it makes no
difference to the outcome of the case.
For surprising as this may seem, the
shady operation that was East West
appears to have given the fund all the
benefits it would have received had FMA
either retained a reputable introducing
broker or dealt directly with the
executing brokers. In either case, FMA,
which is to say the fund, would have paid
6 cents a share per trade; that is the
standard fee and there is no proof that
FMA could have obtained comparable
trading services for less.
The fund could, it is true, have reduced
the execution cost by "directed
brokerage," that is, by directing FMA to
execute trades through a particular
broker. See SEC Release IA-1862, 65 Fed.
Reg. 20524, 20538 (Apr. 17, 2000); Donald
J. Myers, "Directed Brokerage and ’Soft
Dollars’ Under ERISA: New Concerns for
Plan Fiduciaries," 42 Business Lawyer
553, 568-69 (1987). By thus bypassing the
introducing broker, FMA and so the fund
would have paid only 2 cents a share per
trade. But with directed brokerage, the
broker does not guarantee "best
execution," which means getting the best
terms for the customer that are available

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in the market at the time, e.g., Newton
v. Merrill, Lynch, Pierce, Fenner &
Smith, Inc., 135 F.3d 266, 270 (3d Cir.
1998) (en banc); Tannenbaum v. Zeller,
552 F.2d 402, 411 (2d. Cir. 1977); SEC
Release 34-37619A, 61 Fed. Reg. 48290,
48322-23 (Sept. 12, 1996), a duty the
executing broker owes by virtue of his
fiduciary relationship to his customer.
See, e.g., United States v. Dial, 757
F.2d 163, 168 (7th Cir. 1985); Magnum
Corp. v. Lehman Brothers Kuhn Loeb, Inc.,
794 F.2d 198, 200 (5th Cir. 1986). For
with directed brokerage the
responsibility for making the best deal
is with the director, that is, the fund
manager. SEC Release 34-23170, 51 Fed.
Reg. 16004, 16011 (Apr. 30, 1986). Anyway
the fund’s trustees had not authorized
directed brokerage; so it’s a moot point
whether FMA would have conferred a net
benefit on the fund if, at its customer’s
direction, it had bypassed East West and
dealt directly with the executing brokers
on a directed-brokerage basis, paying
only 2 cents per trade rather than 6
cents but forgoing best execution.
Was "best execution" worth 4 cents per
share? Because best execution has
multiple dimensions that tend to be in
conflict (such as speed of execution and
transaction price), Jonathan R. Macey &
Maureen O’Hara, "The Law and Economics of
Best Execution," 6 J. Fin. Intermediation
188, 219-20 (1997), its net advantage
seems unlikely to equal fully two-thirds
of the total cost of executing the
transaction (4 6), although remember
that part of the 4 cents is rebated
either in cash or in investment advice.
But these considerations are not material
in this case. What is material is that
the district judge found as a fact that
what the fund got for its 6 cents per
share was as good as what it could have
bought in a market free of kickbacks and
undue influence and that her finding is
not clearly erroneous on the record
compiled at trial, even as supplemented
by the additional evidence that the
plaintiffs presented in their Rule 60(b)
motion. Despite the disreputable
character of East West and the scandalous
provenance of its relationship with FMA,
the fund received best execution at the
same cost that it would have incurred had
FMA hired a choir of heavenly angels as
introducing brokers or had dealt directly
with the executing brokers; and while 4

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cents per share seems a stiff price to
pay for best execution, it is the
standard price and there is no proof that
FMA could have gotten a lower price by
using an introducing broker other than
East West. Although it is conceivable
that FMA received less valuable
investment advice from East West than it
would have from a reputable introducing
broker and as a result made poorer
investments for the fund, the district
judge found the contrary and her finding
is not clearly erroneous. So far as
appears, FMA’s investment performance was
as good as it would have been had East
West never entered the picture.
Nor is it contended that FMA’s
management fee was excessive; and the 6
cents a share per trade that it charged
back to the fund was, as we have noted
already, the standard charge. There is no
evidence that FMA obtained a profit that
it would not have obtained but for the
alleged breach of its fiduciary
obligation. If the newly discovered
evidence that the plaintiffs unavailingly
pressed on the district judge in their
Rule 60(b) motion is credited, not only
would FMA not have gotten the fund’s
business had it not retained East West as
introducing broker, but FMA knew about
the crooked relationship between East
West and one of the fund’s trustees. But
that is just to say that if the evidence
is believed, FMA committed a very serious
breach of its fiduciary duty. Even so,
the fund was not harmed and FMA obtained
no greater profit than it would have
obtained had it not retained East West.
Besides FMA’s management fee, the
plaintiffs are seeking the profit that
East West made from acting as introducing
broker. But East West did not annex a
profit opportunity that belonged to the
fund. Had FMA used a reputable
introducing broker, it might have
received more valuable investment
information and might as a result have
given the plaintiffs better advice; but,
as we have said, the plaintiffs failed to
prove this.
The remedy of disgorgement is limited to
cases in which the breach of the
fiduciary obligation enables the
fiduciary to make a profit "through [the
fiduciary’s] use of assets of the plan."
The kind of misconduct contemplated is

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the fiduciary’s appropriating plan assets
or investing them in a risky fashion in
order to maximize his fee. If no misuse
of the funds occur, if no losses are
incurred or profits obtained that differ
from what they would have been had there
been no breach of fiduciary duty, there
is no remedy. See Leigh v. Engle, supra,
727 F.2d at 137-39; Etter v. J. Pease
Construction Co., supra, 963 F.2d at
1009-10; Felber v. Estate of Regan,
supra, 117 F.3d at 1087.
Affirmed.

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