Don’t have enough reading material on your night stand? Try adding your ERISA bond to the pile of murder mysteries; it’s a quick read, and you’ll be glad you did. Just ask the trustees of the Colorado Operating Engineers Health and Welfare Fund. (Colo. Operating Engineers Health & Welfare Trust Fund v. Clarke & Sampson, Inc.).
When an investment manager for the Fund engaged in fraudulent conduct and caused the Fund to lose over $500,000, the trustees turned to their ERISA bond for recompense. With limited exceptions, every plan fiduciary and all other persons who “handle” plan funds must be bonded. This clearly included the Fund’s investment manager. The purpose of ERISA’s bonding requirement is to protect plans from losses caused by fraud or dishonesty of the kind in which the investment manager was alleged to have engaged.
In this case the Fund had a fidelity bond, but neither the trustees nor the broker who obtained the bond for them read the fine print. If they had, they would have discovered that the bond did not cover independent contractors like the investment manager (and thus did not comply with ERISA). The result was that the trustees could not recover on the bond, but were forced to sue the broker for professional malpractice.