The recently published California decision in Nasrawi v. Buck Consultants LLC, issued by the Court of Appeal, Sixth District, has the potential to expand an actuarial firm’s liability well beyond its current limits under California law.
In Nasrawi, the appellate court reversed a trial court order which sustained a demurrer filed by defendants Buck Consultants and one of its actuaries, which sought the dismissal of an “aiding and abetting breach of fiduciary duty” claim against them. The plaintiffs in the case were beneficiaries of the Stanislaus County Employees Retirement Association, the administrator of the County’s public employee retirement system (the “Association”). The Court of Appeal ruled that the plaintiffs’ fifth amended complaint adequately alleged a claim against Buck for “aiding and abetting” various breaches of fiduciary duty allegedly owed to plaintiffs by the Association itself.
The Nasrawi plaintiffs alleged in their lawsuit that the Association breached its fiduciary duties to plaintiffs by failing to sue Buck for actuarial malpractice in connection with an actuarial valuation prepared for the Association. The Court of Appeal affirmed the dismissal of the plaintiffs’ claim against the Association. However, it ruled that the Nasrawi plaintiffs’ aiding and abetting allegations against Buck could nonetheless proceed, because they were based on different fiduciary duty breaches alleged against the Association in a separate lawsuit. The fiduciary duty breaches asserted against the Association in that separate lawsuit included: (1) using an imprudent rate of return assumption of 8.16%; (2) adopting a schedule of negative amortization of the pension plan’s unfunded liability for earned benefits; (3) intentionally managing the pension fund so that it was always less than 90% funded in order to avoid employer contributions; (4) using pension fund assets to substitute for the County’s employer contributions; and (5) transferring assets from non-valuation reserves to valuation reserves. Plaintiffs alleged that Buck knew about the Association’s conduct and concealed it by way of omissions and by affirmative misrepresentations that the Association’s practices were actuarially sound.
The appellate court identified the following California requirements for pleading an aiding and abetting claim under these circumstances. Specifically, it held that the plaintiffs were required to allege that: (1) the Association’s alleged schemes to underfund the pension plan breached fiduciary duties the Association owed to the plaintiffs; (2) Buck knew about the Association’s conduct and resulting breaches; (3) Buck’s conduct provided substantial assistance to the Association in committing its alleged breaches; and (4) Buck’s conduct was a substantial factor in harming plaintiffs.
The Court of Appeal found that the plaintiffs’ complaint adequately pleaded all of those facts. In particular, the Court relied on plaintiffs’ allegations that Buck knew about the Association’s conduct and that Buck knew the Association was breaching its duty to plaintiffs. The Court also relied on plaintiffs’ allegation that Buck gave “substantial encouragement and assistance” to the Association’s alleged breaches by (1) failing to disclose or warn of the consequences of the Association’s practices, (2) verifying the actuarial soundness of the Association’s practices, and (3) falsely representing to trust fund beneficiaries at public meetings that the Association’s practices were actuarially sound, allegedly causing injury to the pension trust fund itself.
The Court of Appeal acknowledged at least two California aiding and abetting cases that required as an additional element that the defendant specifically intended to facilitate the underlying tort. The appellate court side-stepped the determination of whether specific intent was a required element of the aiding and abetting claim, however, based on its view that plaintiffs’ allegations sufficiently alleged Buck’s intent to “participate in tortious activity.”
Of perhaps greatest concern is the appellate court’s finding that Buck could be liable for aiding and abetting the Association’s breach of fiduciary even though Buck itself admittedly owed no duty to the plaintiffs. This is particularly troubling since, according to plaintiffs’ own allegations, the misconduct asserted against Buck was in substance actuarial negligence. Under California law, as established in the Bily and Paulsen cases, an actuary owes a duty sufficient to support a professional negligence claim only to its client, not to third parties like the Nasrawi plaintiffs.
By allowing the plaintiffs’ claims against Buck to proceed on this aiding and abetting theory, the Court of Appeal has increased the risk of an actuary’s potential liability to non-clients. The decision also highlights how important it is for an actuary to maintain its independence from its client’s conduct and to decline to endorse or participate in conduct by a pension plan client which could be perceived to be acting in its own self-interest to the potential detriment of the plan’s beneficiaries.
Susan Allison is a litigation partner at Jeffer Mangels Butler & Mitchell LLP where she handles defendants’ professional malpractice issues and other complex litigation matters. Reach her at SAllison@jmbm.com.
 231 Cal.App.4th 328 (November 6, 2014). In February 2015, the California Supreme Court denied both the plaintiffs’ and Buck’s petitions for review of the appellate court’s decision despite submissions by various county employee retirement associations and others urging review.
 231 Cal.App.4th at 345.
 Bily v. Arthur Young &Co., 3 Cal.4th 370 (1992) (auditor conducting audit owes no general duty of care to persons other than its client).
 Paulsen v. CNF, Inc., 559 F.3d 1061 (2009) (actuarial consultant owed no general duty to non-client plan participants to support negligence claim).
 Both Bily and Paulsen noted as a possible exception that non-client plaintiffs might be able to establish the required duty to support a negligence claim if they were determined to be intended third party beneficiaries under the terms of the services agreement between the accountant or actuary and its client.