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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.
1

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
American 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. 壯 1001 et seq. After a bench
trial, the district court determined that ANB's purchase of
interest-only mortgage-backed securities (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
portfolio has two types of accounts: fixed-income (bonds and
mortgage-backed securities) 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 September
2

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 1992, generating
approximately $18 million.1
Interest-only mortgage-backed securities (IOs) were created in
the late 1980s. An IO is a right to receive a portion of the
interest only from 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 refinance. 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-backed securities
generally decline as interest rates rise. Id. at 3-4.
1In 1991, six investment managers handled the Fund's assets.
During that 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

The Fund and the Trustees sued ANB in 1995 for breach of
fiduciary duties pursuant to ERISA. Following a bench trial, the
district 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 guidelines; 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
portfolio as a whole made an adequate return." Based on a
conclusion that ANB failed to fulfill its fiduciary duties, the
district court awarded the Trustees $7,161,549 in damages. ANB
filed a notice of appeal, after which the district court entered an
amended 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 under the clearly erroneous standard, and its
interpretations and applications of law are reviewed de novo.
Metzler v. Graham, 112 F.3d 207, 209 (5th Cir. 1997); Reich v.
Lancaster, 55 F.3d 1034, 1044-45 (5th Cir. 1995).
Discussion
4

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, the disclosure of specified information, and the
avoidance of conflicts of interest.'" Mertens 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 explicitly enumerating all of the
powers and duties of trustees and other fiduciaries, Congress
invoked the common law of trusts to define the general scope of
their authority and responsibility."2 Central 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 of
2Traditionally, 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 In 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

prudence. Id. 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 beneficiaries; 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 sub nom., 469 U.S. 1072 (1984).
"`[ERISA's] test of prudence . . . is one of conduct, and not a
test of the result of performance of the investment. The focus of
the inquiry is how the fiduciary acted in his selection of the
investment, and not whether his investments succeeded or failed.'"
Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th 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 to
6

investigate the merits of the investment and to structure the
investment." Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th 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 with 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
satisfied 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 the
7

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 with regard to diversification; (B) The liquidity and
current return of the portfolio relative 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)." See BNA Pension Benefits Report No. 23, at 1046
(Apr. 15, 1996) (citing Department of Labor-Comptroller Letter of
Guidance 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-only strips. Id.;
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, plan fiduciaries
are required to engage in the same general procedures and
8

undertake the same type of analysis that they would in
making any 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 governing 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 man 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 and
9

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 for 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 goals 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
appropriate investments. Therefore, it will be the
policy of the Trustees to invest the assets of the Fund
with care in those vehicles which should preserve the
principal while 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,
consultants, 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 periodic 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 the Trustees in the requested format.
The reports include a review of previous actions,
current status of the portfolio, recommendations,
etc. If changing market or economic conditions or
10

other events suggest 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 associates 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 performance of IOs and the Fund's portfolio under market
conditions. 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
evaluated 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 client
11

objectives and to ascertain whether ANB's investment decisions
complied with these objectives. ANB invested in IOs on behalf of
several pension plans covered by ERISA and the Account Review
Committee approved the use of IOs in the Fund's fixed-income
account prior to their purchase. In addition, Standard Valuations,
the company retained by the Trustees to be responsible for
monitoring ANB's compliance with the Fund guidelines, considered
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 principles of trust law. Firestone 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 contractual provisions, courts construe terms in trust
agreements without deferring to either party's interpretation.
12

"`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.'" Firestone, 489 U.S. at 112 (citing 3 William F.
Fratcher, Scott on Trusts � 201, at 221 (1988)). "The terms of
trusts created by written instruments are `determined by the
provisions of the instrument as interpreted in light of all the
circumstances 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 investments 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
Trustees to "protect the interests of the participants and
beneficiaries for the purpose of providing them with [pension and
13

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 stock, 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 principal 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 Philosophy 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 many investments
having risk of principal losses. The goals of the plan are to
provide sufficient growth in assets for the payment of future
pensions and other benefits to large numbers of participants and
beneficiaries and to protect the Fund against inflation and
depreciation. These objectives dictate an investment policy of
reasonable
risk,
healthy
appreciation
and
appropriate
14

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
managers are given full discretion to make decisions within the
3In 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 mortgage-
backed 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

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.
The 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 recommendations. There is no
contention that ANB failed to cooperate with Standard Valuations in
its evaluations or failed to file its own quarterly 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,
the 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 to 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 IO
16

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 district court erroneously judged the IO
investment in isolation under the common law trust standard,
instead of according to the modern portfolio theory required by
ERISA policy as expressed by the Secretary's regulations. The
district court's reasoning, which the Fund urges again in its
argument, is clearly at odds with ERISA and the regulations. A
fiduciary 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 the
17

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 violation 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 Fund's expert witnesses conceded that IOs can serve as a
hedge against countervailing risks of a portfolio, the Fund
guidelines did not prohibit the investment in IOs, the investment
18

community did not anticipate the sudden, unprecedented decrease in
interest rates which accelerated the prepayment of mortgages 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 manager, 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 correct 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 investment goals and
guidelines; and Standard Valuations' assessment of ANB's IO
investments and overall performance for 1992. Based upon the Fund
guidelines, the economic conditions that prevailed in September
1991, the makeup of the Fund's portfolio 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.
19

Accordingly, we REVERSE the district court's judgment in favor of
the Trustees and RENDER judgment in favor of the defendants-
appellants and against the plaintiffs-appellees.
20