National Commerce Financial (NCF) took a hit against earnings last week due to an agreement to settle a lawsuit against its subsidiaries National Bank of Commerce (NBC) and First Mercantile Trust (FMT) over 401(k) retirement plans.
That was nothing, however, compared to the hit NCF's stock took the next day. It fell 18 percent, or just over $4 a share, lopping $700 million off the market capitalization of the third-largest bank in Memphis. It isn't clear how much the settlement of the lawsuit contributed to the decline, but it certainly didn't help matters.
The settlement, which still had not been filed early this week in federal court in Memphis, gives the plaintiffs $18 million, including $10.7 million in cash and $7.3 million in future fee reductions. NCF took a charge of 6 to 7 cents per share against first-quarter earnings because of the settlement.
Investors took that as a signal to dump shares of NCF, which had been one of the best Memphis stock market performers of the past 15 years, peddling its steady-as-she-goes loan philosophy, prudent expansion, Kroger supermarket banking niche, and the leadership of former CEO Tom Garrott.
Trouble was brewing, however, in the trust department which administers 401(k) retirement plans for thousands of clients. Contemporary Media, parent company of The Memphis Flyer, was formerly a 401(k) client of NCF but is not involved in the lawsuit.
To bolster its trust services, NCF acquired Cordova-based First Mercantile in 2000 to take over administration of the 401(k) plans. The lawsuit stemmed from two things. First, the falling stock market made investors more aware of annual fees than they were when the market was climbing 20 percent a year. Second, First Mercantile's annual management fees were significantly higher than the norm of 1.5 percent -- more like 2.1 percent or 2.3 percent, it was alleged.
Who was the plaintiff? That's where the story gets strange. Last December, Corky's Bar-B-Q and owners Don Pelts and Barry Pelts and their attorneys (Richard Glassman, William Burns, and R. Douglas Hanson) filed the original lawsuit "on behalf of their own retirement plan participants and over 100,000 participants in 2,300 other 401(k) plans" managed by NBC and FMT.
Corky's is a Memphis institution, and the suit attracted attention from this and other local newspapers.
In addition to the well-known plaintiff, the lawsuit asked for the shocking sum of at least $775 million in damages. And the narrative section of the suit included sensational details about whistle-blowers, cover-ups, and alleged executive chicanery, seemingly right out of the pages of the national business press. The lawsuit even said, "based on information," that FMT CEO Kenneth Lenoir had been terminated, although a spokesperson for the company promptly denied that claim and denied it once again last week.
On January 29, 2003, Corky's suddenly and voluntarily withdrew from the lawsuit, leaving a virtually unknown company called Farm & Industrial Supply Company as the plaintiff. The withdrawal was so low-profile thatThe Commercial Appeal never got the news, and last week it reported "NCFC settles suit by Corky's" even though Corky's is no longer in the picture.
The $18 million settlement is less than 3 percent of the amount sought. If the plaintiff indeed represents a class of 100,000 401(k) plan participants, that works out to $180 per participant. But legal fees will eat up most of that. The list of attorneys involved in the case on the jacket in the federal court clerk's office is two pages long.
The lawsuit alleged "breaches of fiduciary duty and a pattern of racketeering activity," which put it in federal court. It claimed that First Mercantile charged annual fees of 2.1 to 2.3 percent while leading clients to believe they were paying roughly 1.5 percent. It blamed losses in the 401(k) accounts on the fee structure, although plunging stock prices in the 15-20 percent annual range took a far greater toll.
"NBC was reckless in not knowing that FMT had engaged in massive overcharging of undisclosed fees to the plans," the suit says. "To the contrary, NBC actively assisted the defendants in attempting to conceal the undisclosed fees and avoid liability."
An investment analyst discovered the high fees by accessing a secret database on his computer at FMT and alerted Lenoir, who did nothing, the suit said. Another investment adviser for Sector Capital Management later spilled the beans at a meeting, where he complained that it was hard for Sector to outperform the stock market averages because of FMT's 2.1 percent fee.
In announcing the settlement, NCF said it was not admitting any liability or wrongdoing.
In the end, the stock market punished NCF much worse than the lawyers did.