CalSavers Survives Legal Challenge | Chief Investment Officer

A US appellate court has upheld a district court’s ruling to dismiss a lawsuit challenging the legality of the CalSavers Retirement Savings Program, a state-managed individual retirement account (IRA) program for private sector workers whose employers do not provide a tax-qualified retirement savings plan.

In 2017, the California Legislature enacted the CalSavers Retirement Savings Trust Act—which implemented the CalSavers program—to help improve retirement savings. CalSavers’ automatic enrollment requirement applies only to an “eligible employee” of an “eligible employer.” Eligible employees are defined as California employees who are at least 18 years old and employed by an eligible employer. An eligible employer is defined as a nongovernmental employer in the state with five or more employees.

Howard Jarvis Taxpayers Association (HJTA) and two of its employees filed a lawsuit seeking to stop the CalSavers program. Although HJTA is a public interest organization that promotes taxpayer rights, it filed its legal challenge as a California employer. HJTA alleged that the Employee Retirement Income Security Act (ERISA) pre-empts CalSavers and that CalSavers is “a waste of taxpayer funds.”

Circuit Judge Daniel Bress said the case “presents a novel and important question in the law governing retirement benefits,” which is whether ERISA pre-empts a California law that creates a state-managed IRA program. “To our knowledge, this is the first case challenging such a program on ERISA pre-emption grounds,” Bress added.

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The US District Court for the Eastern District of California had granted California’s motion to dismiss, concluding that ERISA does not pre-empt CalSavers. The district court also declined to exercise supplemental jurisdiction over HJTA’s state law claim. HJTA then appealed to the 9th US Circuit Court of Appeals.

“CalSavers is simply a new, wasteful bureaucracy to fix a problem that does not exist,” HJTA said in a statement in February when it argued its case in court. “The problem is not the lack of access to save. The problem is that, sadly, most hardworking Californians cannot afford to save for retirement in the first place. … Hopefully the Ninth Circuit will agree and declare CalSavers pre-empted by federal law.”

However, the Ninth Circuit did not agree with HJTA. The court sided with the district court’s view that ERISA does not pre-empt CalSavers. The panel also held that Congress’ repeal of a 2016 Department of Labor (DOL) rule that sought to exempt CalSavers from ERISA under a safe harbor did not answer the pre-emption question.

“Further, even if ERISA’s safe harbor did not apply to CalSavers, the panel would still need to determine whether CalSavers otherwise qualified as an ERISA program,” the court said in an opinion written by Bress. The court concluded that because CalSavers is established and maintained by the state, not employers, it is not an ERISA plan.

“It does not require employers to operate their own ERISA plans; and it does not have an impermissible reference to or connection with ERISA,” Bress wrote. “Nor does CalSavers interfere with ERISA’s core purposes. Accordingly, ERISA does not pre-empt the California law.”

“We are very pleased with the court’s ruling,” California State Treasurer Fiona Ma, who chairs the CalSavers Retirement Savings Board, said in a statement. “CalSavers is a simple solution to level the playing field for workers who for too long haven’t had access to workplace-based retirement plans. There is no reason to deny millions of hardworking Californians access to this savings program when the alternative is to see them work until they are physically unable to, or suffer the hardships that come with little to no savings.”

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Tags: Automatic Enrollment, California, CalSavers Retirement Savings Program, Daniel Bress, Daniel BressCalSavers Retirement Savings Program, Employee Retirement Income Security Act, ERISA, HJTA, Howard Jarvis Taxpayers Association, individual retirement account, IRA

The founder and former CEO of reverse mortgage originator Live Well Financial has been convicted of securities fraud, wire fraud, and bank fraud charges for fraudulently inflating the value of a bond portfolio owned by the company.

According to the US Attorney’s Office for the Southern District of New York, Michael Hild grossly inflated the value of the bond portfolio in order to borrow more money than Live Well would have otherwise been able to, had lenders known the true value of the bonds.

Live Well, which was based in Richmond, Virginia, originated, serviced, and securitized government-guaranteed reverse mortgages known as home equity conversion mortgages, or HECMs. In 2014, Live Well added a new line to its business by acquiring a portfolio of approximately 20 bonds called home equity conversion real estate mortgage investment conduit, interest only, or HECM IOs. The bonds were effectively reverse mortgage-backed securities.

Live Well financed the acquisition through repurchase, or repo agreements, which are short-term loans in which both parties agree to the sale and future repurchase of an asset within a specified time frame. The seller sells an asset to the lender with a promise to buy it back at a specific date and at a price that includes an interest payment. A repo agreement is essentially a collateralized loan in which title of the collateral is transferred to the lender. When the loan is repaid, the collateral is returned to the borrower through a repurchase.

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All but one of Live Well’s financing agreements with the lenders required any bond the company wanted to borrow against to be priced by a third-party pricing source. The lenders then used the value of the bond, along with a “haircut” of 10% to 20%, to determine the amount of money to lend Live Well. The purpose of a “haircut” is to provide the lender a cushion from price fluctuations in the security if it needs to retain and liquidate the collateral in case the borrower doesn’t pay back the loan.

According to court documents, at Hild’s direction, Live Well convinced a third-party pricing service to stop publishing its own independent valuations of bonds that Live Well owned or wanted to buy, and instead publish the valuations Live Well provided the service verbatim. Live Well then sought out and entered into financing relationships with additional lenders that Hild knew would rely on that particular pricing service’s valuations for the bonds that would serve as loan collateral.

The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), which also charged Hild, said the scheme allowed Live Well to grow its bond portfolio to approximately 50 bonds with a stated value of more than $500 million by the end of 2016 from approximately 20 bonds with a stated value of $50 million in 2014. Hild allegedly called the scheme “a self-generating money machine.” In May 2019, as part of an effort to wind down the company, Live Well wrote down the value of its portfolio by over $200 million.

“Hild deceived a third-party pricing service by providing it with inflated marks, resulting in the pricing service publishing valuations for the bonds far in excess of market value,” Audrey Strauss, the US attorney for the Southern District of New York, said in a statement. “Lenders were hoodwinked into lending far more than they otherwise would have. The house of cards came crashing down with the unwinding of Live Well.”

Hild, 46, was convicted of one count of conspiracy to commit securities fraud; one count of conspiracy to commit wire and bank fraud; one count of securities fraud; one count of wire fraud; and one count of bank fraud.

The first count carries a maximum sentence of five years in prison; the third count carries a maximum sentence of 20 years in prison; and the second, fourth, and fifth counts each carry a maximum sentence of 30 years in prison. The charges also contain a maximum fine of $5 million, or twice the gross gain or loss from the offense. Hild is scheduled to be sentenced Aug. 20.