1 UNITED STATES COURT OF APPEALS

For the Fifth Circuit

No. 97-11023

LABORERS NATIONAL PENSION FUND,

an employee pension benefit plan, et al,

Plaintiffs,

BILL L HARBERT, Board of Trustee; ARTHUR A COIA, Board of

Trustee; BRUCE HUGHES, Board of Trustee; R P VINALL, Board of

Trustee; ROBERT D SHEEHAN, Board of Trustee; MASON M WARREN,

Board of Trustee; BILLY L HARBERT, JR, Board of Trustee;

CARL E BOOKER, Board of Trustee;

Plaintiffs-Appellees,

VERSUS

NORTHERN TRUST QUANTITATIVE ADVISORS, INC., a corporation;

THE FIRST NATIONAL BANK OF CHICAGO, a corporation; AMERICAN

NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a corporation;

Defendants,

NORTHERN TRUST QUANTITATIVE ADVISORS, INC., a corporation;

AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO,

a corporation;

Defendants-Appellants.2 Appeal from the United States District Court

for the Northern District of Texas

April 16, 1999

Before EMILIO M. GARZA, BENAVIDES and DENNIS, Circuit Judges.

DENNIS, Circuit Judge:

The Laborers National Pension Fund (Fund) filed suit against

Ameri can National Bank and Trust Company of Chicago (ANB) for

damages because of breach of fiduciary duties as the Fund’s

investment manager under the Employment Retirement Income Security

Act of 1974 (ERISA), 29 U.S.C. §§ 1001 e t seq

. After a bench

tri al, the district court determined that ANB’s purchase of

interest-only mortgage-backed sec urities (IOs) was not a prudent

investment and rendered a money judgment for the Fund against ANB.

We reverse and render judgment for ANB.

Factual and Procedural Background

The Fund was established in 1968 to provide retirement income

for laborers employed in several southern and central states. It

is governed by a volunteer Board of Trustees (Trustees) who

represent contributing employers and union officials. From 1971 to

1994, the Fund hired ANB as one of several investment managers

responsible for handling its $1 billion portfolio. The Fund’s

portfol io has two types of accounts: fixed-income (bonds and

mortgage-backed sec urities) and equity (stocks). In September

1991, ANB invested $11 million of the Fund’s fixed-income account

in IOs. ANB sold the IOs at a loss for $4.2 million in September1 In 1991, six investment managers hand led the Fund’s assets.

During tha t year, ANB managed approximately $170 million of the

Fund’s fixed-income account and $130 million of the Fund’s equity

account. The $11 million IO investment represented 6.5 percent of

the Fund’s fixed-income account managed by ANB and 3.7 percent of

the Fund’s total portfolio managed by ANB.

3 1992. Despite this loss, the portion of the Fund’s total portfolio

(fixed-income and equity) managed by ANB experienced a positive

return of 6 percent for calendar year 199 2, generating

approximately $18 million. 1

Interest-only mortgage-backed securities (IOs) were created in

the late 1 980s. An IO is a right to receive a portion of the

interest only f rom payments on mortgage loans. Each IO is paid

from the stream of interest payments made on mortgage loans by a

pool of homeowners. Thus, prepayment of mortgage loans by members

of the pool tends to diminish or extinguish the yield on the

related IO. The rate at which mortgages are paid off increases

more than expected if interest rates on mortgage loans decline

unexpectedly prompting an unanticipated higher number of homeowners

to r efinance. Given these characteristics, IOs can result in

significantly greater price and yield volatility than traditional

debt securities. See Olkey v. Hyperion 1999 Term Trust, Inc. , 98

F.3d 2, 6 (2d Cir. 1996), cert. denied

, 117 S. Ct. 2433 (1997). In

addition, however, IOs can serve as a hedge to prevent significant

losses in value due to interest rate changes because IOs generally

increase as interest rates rise and mortgage-back ed securities

generally decline as interest rates rise. Id. at 3-4.4

The Fund and the Truste es sued ANB in 1995 for breach of

fiduciary duties pursuant to ERISA. Following a bench trial, the

d istrict court determined that (1) ANB failed to consider the

Fund’s investment guidelines or whether IOs would violate the

spirit of the guidelines; (2) ANB’s investment in IOs was not

consistent with the Fund’s stated g uidelines; and (3) a prudent

investment manager would not consider IOs an appropriate investment

for the Fund in light of the Fund’s guidelines. In its written

opinion, the district court stated that “[i]t does not matter that

other investment consultants in the industry held the opinion that

IOs were appropriate for modern investment portfolios or that the

portfol i o as a whole made an adequate return.” Based on a

conclusion that ANB f ailed to fulfill its fiduciary duties, the

d istrict court awarded the Trustees $7,161,549 in damages. ANB

filed a notice of appeal, after which the district court entered an

amende d final judgment awarding the Trustees $281,937 for

prejudgment interest and $398,384 for attorneys’ fees.

Standards of Review

The district court’s findings and inferences of fact are

reviewed unde r the clearly erroneous standard, and its

interpretations and applications of law are reviewed de novo.

Metzler v. Graham

, 112 F.3d 207, 209 (5 t h Cir. 1997); Reich v.

Lancaster , 55 F.3d 1034, 1044-45 (5 th Cir. 1995).

Discussion2 Traditionally, fiduciaries have abided by the common law of

trusts which held that the riskiness of each investment in a

portfolio must be measured in isolation. Leslie J. Bobo, Comment,

Nontraditional Investments of Fiduciaries: Re-Examining the Prudent

Investor Rule , 33 Emory L.J. 1067, 1078 (1984); see also Chase v.

Pevear

, 419 N.E. 2d 1358, 1366 (Mass. 1981) and I n re Bank of New

York

, 323 N.E.2d 700, 703 (N.Y. 1974) (stating that under common

law, trustee must exercise prudence in making each investment and

is chargeable with any loss for failing to do so).

5 ERISA was enacted to regulate employee benefit plans and

protect the funds invested in such plans. 29 U.S.C. § 1302(a).

ERISA assigns to plan fiduciaries “a number of detailed duties and

responsibilities, which include ‘the proper management,

administration, and investment of [plan] assets, the maintenance of

proper records, t he disclosure of specified information, and the

avoidance of conflicts of interest.’” M ert ens v. Hewitt

Associates

, 508 U.S. 248, 251-52, 113 S. Ct. 2063, 124 L.Ed.2d 161

(1993) (citation omitted).

In ERISA, “[r]ather than ex plicitly enumerating all of the

powers and duties of trustees and other fiduciaries, Congress

invoked the common law of trusts to defin e the general scope of

their authority and responsibility.” 2 C entral States, Southeast

and Southwest Areas Pension Fund v. Central Transport, Inc. , 472

U.S. 559, 570, 105 S. Ct. 2833, 86 L.Ed.2d 447 (1985). The manner

in which trustees and other fiduciaries may exercise their powers,

however, is further defined in the statute through the provision of

strict standards of conduct, also derived from the common law of

trusts – most prominently a standard of loyalty and a standard of6

prudence. I d. at 570-71 (citing 29 U.S.C. § 1104(a)(1)(A) (“a

fiduciary shall discharge his duties with respect to a plan solely

in the interest of the participants and beneficiaries and for the

exclusive purpose of: (i) providing benefits to participants and

their ben eficiaries; and (ii) defraying reasonable expenses of

administering the plan”) and 29 U.S.C. § 1104(a)(1)(B) (a fiduciary

must act “with the care, skill, prudence, and diligence under the

circumstances then prevailing that a prudent man acting in a like

capacity and familiar with such matters would use in the conduct of

an enterprise of a like character and with like aims”)).

In determining compliance with ERISA’s prudent man standard,

courts objectively assess whether the fiduciary, at the time of the

transaction, utilized proper methods to investigate, evaluate and

structure the investment; acted in a manner as would others

familiar with such matters; and exercised independent judgment when

making investment decisions. Katsaros v. Cody , 744 F.2d 270, 279

(2d Cir.), cert. denied s ub nom. , 469 U.S. 1072 (1984).

“‘[ERISA’s] test of prudence

. . . is one of co nduct, and not a

test of the result of performance of the investment. The focus of

the inquiry is how the fiduciary acted in his sel ection of the

investment, and not whether his investments succeeded or failed.’”

Donov an v. Cunningham , 716 F.2d 1455, 1467 (5 t h Cir. 1983), cert.

denied

, 467 U.S. 1251 (1984). Thus, the appropriate inquiry is

“whether the individual trustees, at the time they engaged in the

challenged transactions, employed the appropriate methods to7

investigate the merits of the investment and to structure the

investment.” D onovan v. Mazzola

, 716 F.2d 1226, 123 2 (9 t h Cir.

1983), cert. denied , 464 U.S. 1040 (1984).

The Secretary of Labor may prescribe such regulations as he

finds necessary to carry out the provisions of ERISA. 29 U.S.C. §

1135. In 1979 the Secretary prescribed regulations under ERISA

further defining a fiduciary’s investment duties. 29 C.F.R. §

2550.404a-1. In general, the regulations provide that the

fiduciary shall be required to act as a prudent investment manager

under the modern portfolio theory rather than under the common law

of trusts standard which examined each investment wi th an eye

toward its individual riskiness. Specifically, they state that a

fiduciary’s investment duties under 29 U.S.C. § 1104(a)(1)(B) are

s atisfied if he has given appropriate consideration to facts he

knows or should know to be relevant to the particular investment or

investment course of action involved, “including the role the

investment or investment course of action plays in that portion of

the plan’s investment portfolio with respect to which the fiduciary

has investment duties” and has acted accordingly. 29 C.F.R. §

2550.404a-1(b)(1)(i)-(ii). For these purposes, “appropriate

consideration” includes determining that the investment or

investment course of action “is reasonably designed, as part of the

portfolio (or, where applicable, that portion of the plan portfolio

with respect to which the fiduciary has investment duties), to

further the purposes of the plan, taking into consideration the8

risk of loss and the opportunity for gain (or other return)

associated with the investment or investment course of action,” and

consideration of the following factors: “(A) The composition of the

portfolio wi th regard to diversification; (B) The liquidity and

current return of the portfolio relativ e to the anticipated cash

flow requirements of the plan; and (C) The projected return of the

portfolio relative to the funding objectives of the plan.” 29

C.F.R. § 2550.404a-1(b)(2)(i)-(ii).

In investments, the term “derivative” refers to “financial

instruments whose performance is derived in whole or in part from

the performance of an underlying asset (such as a security index of

securities).” S ee BNA Pension Benefits Report No. 23, at 1046

(Apr. 15, 1996) (citing Department of Labor-Comptroller Letter of

G uidance and Statement on Derivatives signed by Assistant Labor

Secretary Olena Berg on Mar. 28, 1996). Examples of these

financial instruments include futures, options, options on futures,

forward contracts, swaps, structured notes and collateral mortgage

obligations, and interest-only and principal-on ly strips. I d. ;

David R. Levin & Tess J. Ferrera, ERISA Fiduciary Answer Book 7-73,

7-74 (3d ed. 1998). In the Letter of Guidance and Statement on

Derivatives, the Department of Labor and the Comptroller made the

following statements:

Investments in derivatives are subject to the

fiduciary responsibility rules in the same manner as are

any other plan investments

. . . . In determining whether

to invest in a particular derivative, pl an fiduciaries

are required to engage in the same general procedures and9

undertake the same type of analys is that they would in

making an y other investment decision. This would

include, but not be limited to, a consideration of how

the investment fits within the plan’s investment policy,

what role the particular derivative plays in the plan’s

portfolio, and the plan’s potential exposure to losses.

* * *

Plan fiduciaries have a duty to determine the

appropriate methodology used to evaluate market risk and

the information which must be collected to do so. Among

other things, this would include, where appropriate,

stress simulation models showing the projected

performance of the derivatives and of the plan’s

portfolio under market conditions. Stress simulations

are particularly important because assumptions which may

be valid for normal markets may not be valid in abnormal

markets, resulting in significant losses . . . .

* * *

Investment managers are also charged with making investments

in accordance with documents and instruments govern ing the plan

insofar as the plan documents are consistent with the provisions of

ERISA. 29 U.S.C. § 1104(a)(1)(D). The Fund investment guidelines

in the present case, in pertinent part, provide:

1. Investments are limited to holdings which would be

permitted under the prudent ma n rule as set forth

in the Employee Retirement Income Security Act of

1974.

* * *

4. Bond investments shall be limited to Federal or

Federal Agency obligations or corporate bonds of

the first three quality grades (at the time of

purchase) as established by one or more of the

nationally recognized bond rating services . . . .

5. The investment managers are not authorized to

engage in investment transactions involving stock

options, short sales, purchases on margin, letter

stocks, private placement debt, commodities,

venture capital. Future investments in foreign

securities will not be made without prior

consultation with, and approval by, the Board of

Trustees . . . .

The parties treated the Pension Fund Investment Philosophy and10

General Policy on Investments as part of the plan documents. The

Investment Philosophy, in pertinent part, provides:

The Trustees of the Laborers National Pension Fund,

in order to protect the interests of the participants and

beneficiaries f or the purpose of providing them with

benefits and defraying the reasonable expenses of

administering the Plan, are committed to protect the

corpus of the Fund, meet the actuarial assumptions, and

comply with applicable Federal and state laws. In order

to accomplish these go als in a prudent manner, the

Trustees believe that the investments of the Fund must be

diversified among government securities, bonds,

mortgages, common stock, real estate, insurance company

contracts, money market instruments, and other

appro p riate investments. Therefore, it will be the

policy of the Trustees to invest the assets of the Fund

with care in those vehicles which should preser ve the

principal w h ile recognizing the need for income and

appreciation with a minimal risk. This policy will be

carried out by the Trustees in a prudent manner with the

assistance of reputable professional money managers,

consultant s, insurance companies and banks to make the

investments. The performance of these investments will

be reviewed at least quarterly using various evaluation

techniques that prove reliable and face-to-face

discussion and review among the parties . . . .

And the General Policy on Investments, in pertinent part, states

that:

a) It is the intention of the Board of Trustees to

allow the investment manager full discretion within

the scope of the agreed upon investment guidelines

and restrictions. The manager’s performance in

meeting the Fund’s objectives will be reviewed on a

regular perio dic basis. Results based on a total

rate of return (including both realized and

unrealized gains and losses) will be evaluated

quarterly by a professional service retained by the

Trustees.

* * *

c) All investment managers will be providing quarterly

reports to t he Trustees in the requested format.

The reports include a review of previous acti ons,

current status of the portfolio, recommendations,

etc. If changing market or economic conditions or11 other events sugges t that a special meeting or

action of the Trustees is necessary it is expected

that the manager will communicate with the Trustees

promptly rather than waiting for submission of the

scheduled report.

d) If in the judgment of the investment manager strict

adherence to one or more of the following

investment guidelines in connection with a specific

transaction is not in the best interests of the

Laborers National Pension Fund or would produce an

undesirable investment result the manager shall

consult with the Trustees before proceeding with

the transaction.

The district court clearly erred in determining that ANB

failed to consider Fund guidelines before purchasing IOs. During

the period at issue, Tom Pierce was ANB’s Director of Fixed Income.

Before Mr. Pierce authorized the purchase of IOs in 1991 he and his

ANB associate s consulted the ANB documents that incorporated the

Fund guidelines, reviewed general literature on IOs and discussed

the merits of investing in IOs with brokers. Mr. Pierce also

utilized electronic Bloomberg stress simulation models to project

the perfo rmance of IOs and the Fund’s portfolio under market

cond itions. The Bloomberg stress simulation models based their

projections on the prepayment histories of various securities based

upon interest rate changes. Mr. Pierce considered the whole

universe of investment grade, fixed-income alternatives and

evaluat ed the risks and rewards associated with these securities

relative to a Lehman Brothers Aggregate Index.

Not only did Mr. Pierce consider the risks associated with IOs

in the context of the goals of the Fund; ANB also convened an

Account Review Committee which met quarterly to review client12

objectives and to a scertain whether ANB’s investment decisions

complied with these objectives. ANB invested in IOs on behalf of

s everal pension plans covered by ERISA and the Account Rev iew

Committee approved the use of IOs in the Fund’s fixed-income

account prior to their purchase. In addition, Standard Valuations,

the compa ny retained by the Trustees to be responsible for

monitoring ANB’s compliance with the Fund guidelines, consi dered

the IO investment permissible under the Fund guidelines. In fact,

at least one other investment manager, Lazard Freres, made an IO

investment for the Fund under the same investment guidelines during

the same period of time.

As we read the plan documents and instruments, ANB’s

investment in IOs was not a violation of the investment guidelines

or their spirit. The documents and instruments governing the plan

must generally be construed in light of ERISA’s policies, and those

documents cannot excuse either the trustees or the investment

managers from their duties under ERISA. Central States , 472 U.S.

at 568. In interpreting the provisions of plan documents and

instruments such as the investment guidelines with this view, we

are also guided by the princip les of trust law. F irestone v.

Bruch

, 489 U.S. 101, 111, 109 S. Ct. 948, 103 L.Ed.2d 80 (1989)

(citing Central States Southeast and Southwest Areas Pension Fund

v. Central Transport, Inc.

, 472 U.S. 559, 570 (1985)). As they do

with cont ractual provisions, courts construe terms in trust

agreements without deferring to either party’s interpretation.13

“‘The extent of the duties and powers of a trustee is determined by

the rules of law that are applicable to the situation, and not the

rules that the trustee or his attorney believes to be applicable,

and by the terms of the trust as the court may interpret them, and

not as they may be interpreted by the trustee himself or by his

attorney.’” F irestone

, 489 U.S. at 112 (citing 3 William F.

Fratcher, Scott on Trusts § 201, at 221 (1988)). “The terms of

t rusts created by written instruments are ‘determined by the

provisions of the instrument as interpreted in light of all the

circums tances and such other evidence of the intention of the

settlor with respect to the trust as is not inadmissible.’”

Firestone , 489 U.S. at 112 (citing Restatement (Second) of Trusts

§ 4, Comment d (1959)). Giving the written words of the guidelines

their plain meaning within the context of trust law principles and

ERISA policies, we conclude that the guidelines neither expressly

nor implicitly prohibit investmen ts in IOs of the first three

quality grades; and that there is no reasonable basis for reading

such a prohibition into the plan documents.

On the other hand, we find the interpretation of the Fund

guidelines by the district court and the Trustees to be

unreasonable under the ordinary meaning of the words of the

document and especially so in light of the ERISA policies and the

principles of trust law. The Investment Philosophy requires the

Tru stees to “protect the interests of the participants and

beneficiaries for the purpose of providing them with [pension and14

other] benefits

. . . protect the corpus of the Fund, meet the

actuarial assumptions, and comply with applicable Federal and state

laws . . . diversif[y] [investments] among government securities,

bonds, mortgages, common st ock, real estate, insurance company

contracts, money market instruments, and other appropriate

investments

. . . [and] invest the assets of the Fund with care in

those vehicles which should preserve the pr incipal while

recognizing the need for income and appreciation with a minimal

risk.” The Trustees contend that the last clause implies a ban

against IOs because derivatives involve a risk of loss of

principal. We do not think that ambiguous clause standing alone

justifies such an inference. Reading it together with the balance

of the Investment Phi losophy and plan documents, we are certain

that it does not. The clear words of the Investment Philosophy and

other plan documents require the Trustees to invest in many types

of assets involving the risk of loss of principal, such as common

stocks, real estate, insurance contracts, and money market

instruments. Indeed, the evidence indicates that the Fund’s equity

and fixed-income portfolios have long contained man y investments

having risk of principal losses. The goals of the plan are to

provide suffic ient growth in assets for the payment of future

pensions and other benefits to large numbers of p articipants and

beneficiaries and to protect the Fund against inflation and

depreciation. These objectives dictate an investment policy of

reasonable risk, healthy appreciation and appropriate3 In 1994, the Trustees revised the Fund guidelines, adding IOs

to the list of prohibited investments. The Fund’s counsel advised

that the Fund guidelines should specifically state how mortgagebacked securities were to be treated. The fact that the Trustees

and the Fund’s counsel recognized the need to revise the guidelines

indicates that the guidelines did not prohibit this type of

investment when ANB purchased the IOs.

15 diversification. ERISA and the federal regulations likewise impose

prudent fiduciary duties of careful investments for the same

purposes.

The Fund guidelines expressly prohibit investments “involving

stock options, short sales, purchases on margin, letter stocks,

private placement debt, commodities [or] venture capital. . . .”

IOs are not among the prohibited investments. 3 The Fund guidelines

stated that investments should be limited to federal agency

obligations or corporate bonds of the first three quality grades.

The IOs at issue met this requirement, as they were rated “AAA” at

the time of their purchase. Furthermore, the Investment Philosophy

indicated that investments should be diversified among “government

securities, bonds, mortgages, common stock, real estate, insurance

company contracts, money market instruments, and other appropriate

investments.” ANB’s investment in IOs was reasonably designed as

part of the Fund’s portfolio to further the purposes of

diversification as a hedge against possible interest rate hikes and

consequent declines in values of fixed income securities.

The Fund’s general policies further provide that investment

manager s are given full discretion to make decisions within the16

scope of the Fund guidelines and that the results of their

investment decisions would be evaluated quarterly by a professional

service retained by the Trustees based on a total rate of return.

T he Trustees retained Standard Valuations for this purpose. The

general policies also directed ANB to provide quarterly reports to

the Trustees in a requested format reviewing previous actions,

current portfolio status, and recomm endations. There is no

contention that ANB failed to cooperate with Standard Valuations in

its evaluations or failed to file its own quart erly reports,

properly disclosing detailed information concerning fund

investments and management.

The Trustees argue that ANB breached its obligation to consult

with them prior to the IO investment. On the contrary, however,

t he Fund guidelines and supporting documents require investment

managers to consult with the Trustees and obtain prior approval of

an individual investment in only two instances: (1) future

investments in foreign securities; and (2) if in the judgment of

the investment manager strict adherence t o the guidelines in

connection with a specific transaction is not in the best interests

of the Fund or would produce an undesirable investment result. The

Trustees do not contend that the IOs involved foreign securities.

ANB considered the purchase of the small quantity of IOs to be a

prudent investment within the portfolio designed as a hedge and to

produce a desirable result for the portfolio as a whole.

Therefore, because in the investment manager’s judgment the IO17

investments were in the best interest of the Fund, ANB was not

required to obtain prior approval of those investments.

In support of its conclusion that IOs were inconsistent with

the Fund guidelines, the district court stated: “It does not matter

that other investment consultants in the industry held the opinion

that IOs were appropriate for modern investment portfolios or that

the portfolio as a whole made an adequate return.” This statement

indicates that the distr ict court erroneously judged the IO

investment in isolation under the common law tr ust standard,

instead of accordi ng to the modern portfolio theory required by

ERISA policy as expressed by the Secretary’s regulations. The

district court’s reasoning, which th e Fund urges again in its

argument, is clearly at odds with ERISA and the regulations. A

f iduciary may not discharge his duties in a manner inconsistent

with ERISA provisions. 29 U.S.C. § 1104(a)(1)(D); see also Gruby

v. Brady

, 838 F. Supp. 820, 829 (S.D.N.Y. 1993) (“ERISA section

404(a)(1)(D), 29 U.S.C. § 1104( a)(1)(D), requires fiduciaries to

discharge their duties in accordance with plan documents only

‘insofar as such documents and instruments are consistent with the

provisions of [ERISA].’”). Since 1979, investment managers have

been held to the standard of prudence of the modern portfolio

theory by the Secretary’s regulations. 29 C.F.R. § 2550.404a-1;

Bobo, supra

, at 1078. In case of a conflict, the provisions of the

ERISA policies as set forth in the statute and regulations prevail

over those of the Fund guidelines. There is no conflict in the18

present case because the plan documents do not require that the

prudence of the IO investments be judged in isolation, as the

district court and the Trustees suggest. If they did, the plan

documents and guidelines would be forced to yield to the

regulations’ requirement that the investment be reasonably designed

as part of the portfolio to further the purposes of the plan.

Under a proper application of the correct legal principles to

the evidence in the present case, there is not a reasonable basis

for concluding that ANB or Mr. Pierce acted imprudently or in

violation of their fiduciary responsibilities with regard to the

1991 investments in IOs. ANB considered the characteristics of IOs

and utilized stress simulation models to project the performance of

IOs and the Fund’s portfolio under various market conditions before

investing in IOs. The Fund’s expert witnesses, none of whom were

active or experienced ERISA plan investment managers, failed to

point out any specific vi o lation by Mr. Pierce or ANB of a

fiduciary duty required by the prudent investor and modern

portfolio standards of ERISA and the related federal regulations

and guidance. Instead, the Fund’s experts based their opinions

that ANB’s IO investments were imprudent on analysis of those

investments standing alone, in isolation from the relevant

portfolio. Also, despite their ultimate conclusions, one or more

of the Fun d’s expert witnesses conceded that IOs can serve as a

hedge aga inst countervailing risks of a portfolio, the Fund

guidelines did not prohibit the investment in IOs, the investment19

community did not anticipate the sudden, unprecedented decrease in

interest rates which accelerated the prepayment of m ortgages in

1992, and Mr. Pierce sufficiently investigated the available data

on the nature of the particular IOs prior to purchasing them.

ANB’s expert witness, Mr. Henderson, an experienced ERISA plan

investment manage r, testified that ANB’s IO investments were not

imprudent when analyzed under the prudent investor, modern

portfolio principles of ERISA and the pertinent Department of Labor

regulations and guidances. He was the only expert witness who

properly assessed ANB’s IO investments as of the time they were

made using the co rrect prudent man, modern portfolio ERISA

principles. Mr. Henderson testified that in forming his opinion,

he reviewed the quarterly reports issued by ANB to the Fund in 1991

and 1992; the data on the pertinent IOs available to ANB prior to

the 1991 IO investments; the portfolio and i nvestment goals and

guidelines; and Standard Valuations’ assessmen t of ANB’s IO

investments and overall performance for 1992. Based upon the Fund

guidelines, the economic conditions that prevai led in September

1991, the makeup of the Fund’s portfoli o and Mr. Pierce’s

objectives for the portfolio, Mr. Henderson concluded that the IO

investments were appropriate.

From our review of the record, we conclude that the Trustees

failed to produce evidence from which it reasonably could be found

that Mr. Pierce or ANB acted imprudently or that the IO investments

in the present case violated the guidelines or ERISA policies.20

Accordingly, we REVERSE the district court’s judgment in favor of

the Trustees and RENDER j udgment in favor of the defendantsappellants and against the plaintiffs-appellees.