In Schupak Group, Incorporated v. Travelers Casualty and Surety Company of America, No. 10-1873-cv (2nd Cir. 2011), the Court dealt with the aftermath of the Bernard Madoff schemes. In this case the plaintiff, Schupak Group, Incorporated (“Schupak”), is a sponsor of an ERISA plan, which the complaint alleges was victimized by Madoff’s fraud. The defendant, Travelers Casualty and Surety Company of America (“Travelers”), had provided the ERISA compliance bond (the “Bond”), as required by 29 U.S.C. § 1112(a), which insured Schupak’s plan against fraud and other dishonest acts committed by any “employee.” The insurance policy underlying the bond defined the term “employee” as a trustee, an officer, employee, administrator or manager, except an administrator or manager who is an independent contractor, of the plan covered by the policy.
After Madoff’s arrest, Schupak filed a claim with Travelers seeking to recover the value of the plan’s investment losses due to Madoff’s schemes. In the “Proof of Loss” form, Schupak stated that Madoff was “Custodian and Investment Trustee,” as “delegated by the Plan Trustee.” The question for the Court: Is Madoff an “employee” of the plan within the meaning of the insurance policy?
The Court ruled that Madoff was not a plan “employee”, as so defined. It said that Schupak’s complaint, read liberally, contains no factual allegations giving rise to a reasonable inference that Madoff was a “trustee” for the purposes of the Bond. The complaint was utterly conclusory with respect to Madoff’s status under the Bond. Moreover, the complaint asserts, on its face, that the funds in question were placed in Madoff’s control after passing through a third party intermediary, FGLS, LLC, thereby negating the plausibility of any assertion that Madoff was affiliated with Shupak’s plan. As Madoff was not an employee of Shupak’s plan, the Court found that the plan was not entitled to any recovery under the Bond.