Gray, et al. v. Citigroup, Inc., et al., No. 09-3804 (2d Cir. 2011)
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Plaintiffs, participants in retirement plans offered by defendants and covered by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. 1001 et seq., appealed from a judgment dismissing their ERISA class action complaint. Plan documents required that a stock fund consisting primarily of Citigroup common stock be offered among the plan's investment options. Plaintiffs argued that because Citigroup stock became an imprudent investment, defendants should have limited plan participants' ability to invest in it. The court held that plan fiduciaries' decision to continue offering participants the opportunity to invest in Citigroup stock should be reviewed for an abuse of discretion and the court found that they did not abuse their discretion here. The court also held that defendants did not have an affirmative duty to disclose to plan participants nonpublic information regarding the expected performance of Citigroup stock and that the complaint did not sufficiently allege that defendants, in their fiduciary capacities, made any knowing misstatements regarding Citigroup stock. Accordingly, the court affirmed the judgment.
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09-3804-cv Gray v. Citigroup, Inc. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term 2010 (Argued: September 28, 2010 Decided: October 19, 2011) Docket No. 09-3804-cv ------------------------------------------------------x IN RE: CITIGROUP ERISA LITIGATION ------------------------------------------------------x STEPHEN GRAY, JAMES BOLLA, and SAMIER TADROS, Lead Plaintiffs-Appellants, SANDRA WALSH, ANTON K. RAPPOLD, and ALAN STEVENS, Plaintiffs-Appellants, -- v. -CITIGROUP INC., CITIBANK, N.A., THE PLANS ADMINISTRATION COMMITTEE, THE PLANS INVESTMENT COMMITTEE, CHARLES O. PRINCE, ROBERT E. RUBIN, JORGE BERMUDEZ, MICHAEL BURKE, STEVE CALABRO, LARRY JONES, FAITH MASSINGALE, THOMAS SANTANGELO, ALISA SEMINARA, RICHARD TAZIK, JAMES COSTABILE, ROBERT GROGAN, ROBIN LEOPOLD, GLENN REGAN, CHRISTINE SIMPSON, TIMOTHY TUCKER, LEO VIOLA, DONALD YOUNG, MARCIA YOUNG, and JOHN DOES 1-20, Defendants-Appellees. ------------------------------------------------------x B e f o r e : WALKER, CABRANES, and STRAUB, Circuit Judges. 39 Plaintiffs, participants in retirement plans offered by 40 defendants Citigroup Inc. and Citibank, N.A., and covered by the 1 1 Employee Retirement Income Security Act ( ERISA ), 29 U.S.C. 2 § 1001 et seq., appeal from a judgment of the United States 3 District Court for the Southern District of New York (Sidney H. 4 Stein, Judge) dismissing their ERISA class action complaint. 5 Plan documents required that a stock fund consisting primarily of 6 Citigroup common stock be offered among the plans investment 7 options. 8 imprudent investment, defendants should have limited plan 9 participants ability to invest in it. Plaintiffs argue that because Citigroup stock became an We hold that plan 10 fiduciaries decision to continue offering participants the 11 opportunity to invest in Citigroup stock should be reviewed for 12 an abuse of discretion, and we find that they did not abuse their 13 discretion here. 14 affirmative duty to disclose to plan participants nonpublic 15 information regarding the expected performance of Citigroup 16 stock, and that the complaint does not sufficiently allege that 17 defendants, in their fiduciary capacities, made any knowing 18 misstatements regarding Citigroup stock. 19 20 We also hold that defendants did not have an AFFIRMED. Judge STRAUB dissents in part and concurs in part in a separate opinion. 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 MARC I. MACHIZ, Cohen Milstein Sellers & Toll PLLC, Philadelphia, PA (Robert I. Harwood, Samuel K. Rosen, Tanya Korkhov, Harwood Feffer LLP, New York, NY; Marian P. Rosner, Andrew E. Lencyk, James Kelly-Kowlowitz, Wolf Popper LLP, New York, NY, on the brief), for Plaintiffs-Appellants. LEWIS RICHARD CLAYTON, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY (Brad S. Karp, Susanna Michele Buergel, Douglas M. Pravda, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY; Lawrence B. Pedowitz, Jonathan M. Moses, John F. Lynch, Wachtell, Lipton, Rosen & Katz, New York, NY, on the brief), for DefendantsAppellees. THOMAS TSO, Attorney (Deborah Greenfield, Acting Deputy Solicitor of Labor, Timothy D. Hauser, Associate Solicitor for Plan Benefits Security, Elizabeth Hopkins, Counsel for Appellate and Special Litigation, on the brief), United States Department of Labor, Washington, DC, for amicus curiae Hilda L. Solis, Secretary of the United States Department of Labor. JAY E. SUSHELSKY, AARP Foundation Litigation, Washington, DC (Melvin Radowitz, AARP, Washington, DC), for amicus curiae AARP. ELLEN M. DOYLE, Stember Feinstein Doyle & Payne, LLC, Pittsburgh, PA (Rebecca M. Hamburg, National Employment Lawyers Association, San Francisco, CA; Jeffrey Lewis, Lewis, Feinberg, Lee, Renaker & Jackson P.C., Oakland, CA), for amicus curiae National Employment Lawyers Association. 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 IRA G. ROSENSTEIN, Orrick, Herrington & Sutcliffe LLP, New York, NY (Ira D. Hammerman, Kevin M. Carroll, Securities Industry and Financial Markets Association, Washington, DC; Joseph Liburt, Orrick, Herrington & Sutcliffe LLP, Menlo Park, CA), for amicus curiae Securities Industry and Financial Markets Association. CHARLES C. JACKSON, Morgan, Lewis & Bockius, LLP, Chicago, IL (David Ackerman, Morgan, Lewis & Bockius, LLP, Chicago, IL; John A. Kober, Morgan, Lewis & Bockius LLP, New York, NY; Jamie M. Kohen, Morgan, Lewis & Bockius, LLP, New York, NY), for amicus curiae ESOP Association. THOMAS L. CUBBAGE III (John M. Vine), Covington & Burling LLP, Washington, DC, for amicus curiae ERISA Industry Committee and American Benefits Council. JOHN M. WALKER, JR., Circuit Judge: 31 Plaintiffs, participants in retirement plans offered by 32 defendants Citigroup Inc. and Citibank, N.A., and covered by the 33 Employee Retirement Income Security Act ( ERISA ), 29 U.S.C. 34 § 1001 et seq., appeal from the judgment of the United States 35 District Court for the Southern District of New York (Sidney H. 36 Stein, Judge) dismissing their ERISA class action complaint.1 1 2 3 1 This case was argued in tandem with Gearren v. McGraw-Hill Cos., Nos. 10-0792, 10-0934, which we resolve in a separate opinion filed today. 4 1 Plan documents required that a stock fund consisting primarily of 2 employer stock (the Citigroup Common Stock Fund) be offered among 3 the investment options. 4 Citigroup stock became an imprudent investment, defendants 5 failure to limit plan participants ability to invest in the 6 company violated ERISA. 7 decision to continue offering participants the opportunity to 8 invest in Citigroup stock should be reviewed for an abuse of 9 discretion, and we find that they did not abuse their discretion Plaintiffs allege that, because We hold that the plan fiduciaries 10 here. We also hold that defendants did not have any affirmative 11 duty to disclose to plan participants nonpublic information 12 regarding the expected performance of Citigroup stock, and that 13 the complaint does not sufficiently allege that defendants, in 14 their fiduciary capacities, made any knowing misstatements to 15 plan participants regarding Citigroup stock. 16 the district court s dismissal of plaintiffs complaint. 17 18 19 We therefore AFFIRM BACKGROUND I. Factual Background Plaintiffs are participants in the Citigroup 401(k) Plan 20 (the Citigroup Plan ) or the Citibuilder 401(k) Plan for Puerto 21 Rico (the Citibuilder Plan ) (collectively, the Plans ). These 22 employee pension benefit plans are governed by ERISA, which 5 1 characterizes them as eligible individual account plans. 2 2 U.S.C. § 1107(d)(3); see also 29 U.S.C. § 1002(2)(A) (defining 3 employee pension benefit plan ). 4 ( Citigroup ), a Delaware corporation and financial services 5 company, is the sponsor of the Citigroup Plan. Defendant 6 Citibank, N.A. ( Citibank ), a subsidiary of Citigroup, is the 7 sponsor of the Citibuilder Plan and the trustee of the Citigroup 8 Plan. The Citibuilder Plan s trustee not a defendant in this 9 action - is Banco Popular de Puerto Rico. Each Plan is managed by 29 Defendant Citigroup Inc. 10 the same two committees: 11 consisting of eight members, charged with administering the Plans 12 and construing the Plans terms, and the Investment Committee, 13 consisting of ten members, responsible for selecting the 14 investment fund options offered to Plan participants. 15 the Administration Committee, The Citigroup Plan is offered to Citigroup employees, and 16 the Citibuilder Plan is offered to Puerto Rico employees of 17 Citibank. 18 Participants in each Plan may make pre-tax contributions, up to a 19 certain percentage of their salary, to individual retirement 20 accounts. 1 2 3 4 5 6 In all material respects, the Plans are the same. The participants are then free to allocate the funds 2 An eligible individual account plan is a defined contribution plan that is (i) a profit-sharing, stock bonus, thrift, or savings plan; (ii) an employee stock ownership plan; or (iii) a money purchase plan which . . . [is] invested primarily in qualifying employer securities. 29 U.S.C. § 1107(d)(3)(A). 6 1 within their accounts among approximately 20 to 40 investment 2 options selected by the Investment Committee. 3 that participants accounts are to be invested in these 4 investment options in the proportions directed by the 5 Participant. 6 Both Plans state The Citigroup Common Stock Fund (the Stock Fund or the 7 Fund ) is an investment option offered by both Plans, which 8 define the Fund as an Investment Fund comprised of shares of 9 Citigroup Common Stock. By offering the Stock Fund, the Plans 10 provide a vehicle that enables Plan participants to invest in the 11 stock of their employer. 12 hold cash and short-term investments in addition to shares of 13 Citigroup Common Stock, [s]olely in order to permit the orderly 14 purchase of Citigroup Common Stock in a volume that does not 15 disrupt the stock market and in order to pay benefits hereunder. 16 The Plans also authorize the Fund to Both Plans mandate that the Fund be included as an 17 investment option. Section 7.01 of each provides that the Plan 18 trustee shall maintain, within the Trust, the Citigroup Common 19 Stock Fund and other Investment Funds, and section 7.01 of the 20 Citigroup Plan adds that the Citigroup Common Stock Fund shall 21 be permanently maintained as an Investment Fund under the Plan. 22 Section 7.09(e) of each Plan states that provisions in the Plan 23 mandate the creation and continuation of the Citigroup Common 24 Stock Fund. Further, section 15.06(b) of the Citigroup Plan 7 1 requires that the Trustee maintain at least 3 Investment Funds 2 in addition to the Citigroup Common Stock Fund. 3 II. Procedural History 4 Plaintiffs filed their Consolidated Class Action Complaint 5 on September 15, 2008, following a sharp drop in the price of 6 Citigroup stock that began in late 2007 and continued into 2008. 7 Citigroup, Citibank, and the Administration and Investment 8 Committees are all defendants, as are Charles Prince ( Prince ), 9 Citigroup s CEO from 2003 through November 2007, and each member 10 of Citigroup s Board of Directors (with Prince, the Director 11 Defendants ). 12 Plans and, in particular, the Stock Fund. 13 putative class of participants in or beneficiaries of the Plans 14 who invested in Citigroup stock from January 1, 2007 through 15 January 15, 2008 (the Class Period ), during which Citigroup s 16 share price fell from $55.70 to $26.94. 17 Plaintiffs challenge defendants management of the Plaintiffs represent a Plaintiffs allege that Citigroup s participation in the ill- 18 fated subprime-mortgage market caused the price drop during the 19 Class Period. 20 downplayed its exposure to that market, even as it recognized the 21 need to start reducing its subprime-mortgage exposure in late 22 2006. 23 subprime-related loss of $18.1 billion for the fourth quarter, 24 and further substantial losses continued through 2008. Citigroup, according to plaintiffs, consistently At the end of 2007, Citigroup publicly reported a 8 1 Count I of the Complaint (the Prudence Claim ) alleges that 2 the Investment Committee, the Administration Committee, 3 Citigroup, and Citibank breached their fiduciary duties of 4 prudence and loyalty by refusing to divest the Plans of Citigroup 5 stock even though Citigroup s perilous operations tied to the 6 subprime securities market made it an imprudent investment 7 option. 8 foreseen a drop in the price of Citigroup stock and either 9 suspended participants ability to invest in the Stock Fund or Plaintiffs argue that a prudent fiduciary would have 10 diversified the Fund so that it held less Citigroup stock. 11 II (the Communications Claim ) alleges that Citigroup, the 12 Administration Committee, and Prince breached their fiduciary 13 duties by failing to provide complete and accurate information to 14 Plan participants regarding the Fund and its exposure to the 15 risks associated with the subprime market. 16 Count Counts III-VI, in substance, are derivative of the 17 violations alleged in Counts I and II. 18 Citigroup and the Director Defendants failed to properly monitor 19 the fiduciaries that they appointed; Count IV alleges that the 20 same defendants, who had some authority to appoint members of the 21 Administration and Investment Committees, failed to disclose 22 necessary information about Citigroup s financial status to these 23 members; Count V alleges that all defendants breached their 24 fiduciary duty of loyalty by putting the interests of Citigroup 9 Count III alleges that 1 and themselves above the interests of Plan participants; and 2 Count VI alleges that Citigroup, Citibank, and the Director 3 Defendants are liable as co-fiduciaries for the actions of their 4 co-defendants. 5 On August 31, 2009, the district court granted in full 6 defendants motion to dismiss. In re Citigroup ERISA Litig., No. 7 07-cv-9790, 2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009). 8 district court held that plaintiffs failed to state a claim 9 against defendants related to the Plans continued investment in 10 Citigroup stock because defendants had no discretion whatsoever 11 to eliminate Citigroup stock as an investment option, and 12 defendants were not acting as fiduciaries to the extent that they 13 maintained Citigroup stock as an investment option. 14 (internal citation omitted). 15 alternatively, that even if defendants did have discretion to 16 eliminate Citigroup stock, they were entitled to a presumption 17 that investment in the stock, in accordance with the Plans 18 terms, was prudent and that the facts alleged by plaintiffs, even 19 if proven, were insufficient to overcome this presumption. 20 at *15-19. 21 held that defendants had no duty to disclose information about 22 Citigroup s financial condition and that any alleged 23 misstatements made by defendants were either not knowingly false 24 or not made by defendants acting in their fiduciary capacities. The Id. at *8 The district court found, Id. As for the Communications Claim, the district court 10 1 Id. at *20-25. 2 claims regarding defendants failure to monitor Plan fiduciaries, 3 failure to disclose information to co-fiduciaries, and breach of 4 the duty of loyalty. 5 6 The district court also dismissed plaintiffs Id. at *25-27. Plaintiffs now appeal from the district court s judgment dismissing the complaint. 7 8 9 DISCUSSION We review de novo a district court s dismissal under Federal Rule of Civil Procedure 12(b)(6). See, e.g., Maloney v. Soc. 10 Sec. Admin., 517 F.3d 70, 74 (2d Cir. 2008). 11 the facts alleged in the complaint, and may consider documents 12 incorporated by reference in the complaint and documents upon 13 which the complaint relies heavily. 14 LLC, 622 F.3d 104, 111 (2d Cir. 2010) (internal quotation marks 15 omitted). 16 contain sufficient factual matter, accepted as true, to state a 17 claim to relief that is plausible on its face. Ashcroft v. 18 Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. 19 Twombly, 550 U.S. 544, 570 (2007)). 20 We accept as true DiFolco v. MSNBC Cable To survive a motion to dismiss, a complaint must ERISA s central purpose is to protect beneficiaries of 21 employee benefit plans. Slupinski v. First Unum Life Ins. Co., 22 554 F.3d 38, 47 (2d Cir. 2009). 23 fiduciary duties of prudence and loyalty on plan fiduciaries. 24 The duty of prudence requires that fiduciaries act with the The statute does so by imposing 11 1 care, skill, prudence, and diligence under the circumstances then 2 prevailing that a prudent man acting in a like capacity and 3 familiar with such matters would use in the conduct of an 4 enterprise of a like character and with like aims. 5 § 1104(a)(1)(B). 6 solely in the interest of plan participants and beneficiaries. 7 Id. § 1104(a)(1). 8 29 U.S.C. The duty of loyalty requires fiduciaries to act A person is only subject to these fiduciary duties to the 9 extent that the person, among other things, exercises any 10 discretionary authority or discretionary control respecting 11 management of such plan or has any discretionary authority or 12 discretionary responsibility in the administration of such plan. 13 29 U.S.C. § 1002(21)(A). 14 fiduciary with respect to certain matters but not others. 15 Harris Trust & Sav. Bank v. John Hancock Mut. Life Ins. Co., 302 16 F.3d 18, 28 (2d Cir. 2002) (quoting F.H. Krear & Co. v. Nineteen 17 Named Trustees, 810 F.2d 1250, 1259 (2d Cir. 1987)). 18 in suits alleging breach of fiduciary duty, the threshold 19 question is whether the defendants were acting as fiduciaries 20 when taking the action subject to complaint. 21 Herdrich, 530 U.S. 211, 226 (2000). As a result, a person may be an ERISA Therefore, Pegram v. 22 In their Prudence Claim, plaintiffs allege that the 23 Investment Committee, the Administration Committee, Citigroup, 24 and Citibank violated their duties of prudence and loyalty by 12 1 continuing to offer the Stock Fund as an investment option and by 2 refusing to divest the Fund of Citigroup stock. 3 Communications Claim alleges that Citigroup, Prince, and the 4 Administration Committee violated their duties of prudence and 5 loyalty by failing to provide participants with complete and 6 accurate information about Citigroup s financial status. 7 reasons that follow, we agree with the district court that 8 plaintiffs have failed to state a claim for relief as to any 9 defendant. 10 I. Plaintiffs For the Prudence Claim 11 While plaintiffs bring the Prudence Claim against the 12 Investment Committee, the Administration Committee, Citigroup, 13 and Citibank, only the Investment Committee and Administration 14 Committee were fiduciaries with respect to plaintiffs ability to 15 invest through the Plan in Citigroup stock. 16 to the Investment Committee the authority to add or eliminate 17 investment funds, and the Plans delegated to the Administration 18 Committee the authority to impose timing and frequency 19 restrictions on participants investment selections. 20 and Citibank, by contrast, lacked the authority to veto the 21 Investment Committee s investment selections. 22 nevertheless allege that Citigroup and Citibank acted as de 23 facto fiduciaries with respect to investment selection. 24 Plaintiffs allege that Citigroup had effective control over the 13 The Plans delegated Citigroup Plaintiffs 1 activities of its officers and employees on the Investment and 2 Administration Committees, but do not provide any example of this 3 effective control, nor do they suggest what actions Citigroup 4 took as a de facto fiduciary. 5 provide any description whatsoever of how Citibank retained 6 certain duties delegated under the Citibuilder Plan to the 7 Investment and Administration Committees. 8 9 Similarly, plaintiffs do not However, even if we assume that each of the defendants and not just the Investment Committee - was a fiduciary for 10 investment-selection purposes, plaintiffs claims are still met 11 with two obstacles: (1) the Plan language mandating that the 12 Stock Fund be included as an investment option and (2) the 13 favored status Congress has granted to employee stock 14 investments in their own companies. 15 Sys. Corp., 476 F.3d 299, 308 (5th Cir. 2007). 16 lead us to conclude that the Investment and Administration 17 Committees decisions not to 18 or impose restrictions on participants investment in that stock 19 are entitled to a presumption of prudence and should be reviewed 20 for an abuse of discretion, as opposed to a stricter standard. 21 We hold that plaintiffs have not alleged facts that would 22 establish such an abuse. 23 24 25 A. Langbecker v. Elec. Data These obstacles divest the Plans of Citigroup stock A Presumption of ERISA Compliance in Employee Stock Ownership Plans and Eligible Individual Account Plans 14 1 Plaintiffs claims place in tension two of ERISA s core 2 goals: (1) the protection of employee retirement savings through 3 the imposition of fiduciary duties and (2) the encouragement of 4 employee ownership through the special status provided to 5 employee stock ownership plans ( ESOPs ) and eligible individual 6 account plans ( EIAPs ).3 7 employee pensions and other benefits. 8 U.S. 489, 496 (1996). 9 ESOPs, by definition, are designed to invest primarily in Congress enacted ERISA to protect[] Varity Corp. v. Howe, 516 As many courts have recognized, however, 10 qualifying employer securities, 29 U.S.C. § 1107(d)(6)(A), and 11 therefore place[] employee retirement assets at much greater 12 risk than does the typical diversified ERISA plan, 13 Feilen, 965 F.2d 660, 664 (8th Cir. 1992); see also Quan v. 14 Computer Scis. Corp., 623 F.3d 870, 879 (9th Cir. 2010) (citing 15 the tension between the duty of prudence and Congress s 16 preference for employees investment in employer stock). 17 the risk inherent in employees placing their retirement assets 18 in a single, undiversified stock fund, Congress has expressed 19 concern that its goal of encouraging employee ownership of the 1 2 3 4 5 6 7 8 3 Martin v. Due to An ESOP is a type of EIAP. 29 U.S.C. § 1107(d)(3)(A). Because EIAPs, like ESOPs, promote investment in employer securities, they are subject to many of the same exceptions that apply to ESOPs. Edgar v. Avaya, Inc., 503 F.3d 340, 347 (3rd Cir. 2007). We therefore agree with the district court that nearly all of the points made about [ESOPs encouragement of employer-stock ownership] apply equally to EIAPs. In re Citigroup ERISA Litig., 2009 WL 2762708, at *11 n.5. 15 1 company s stock could be made unattainable by regulations and 2 rulings which treat employee stock ownership plans as 3 conventional retirement plans. 4 No. 94-455, § 803(h), 90 Stat. 1520, 1590. 5 has encouraged ESOP creation by, for example, exempting ESOPs 6 from ERISA s prudence requirement (only to the extent that it 7 requires diversification) and from the statute s strict 8 prohibitions against dealing with a party in interest, and 9 against self-dealing. 10 Tax Reform Act of 1976, Pub. L. Accordingly, Congress Moench v. Robertson, 62 F.3d 553, 568 (3d Cir. 1995). 11 ERISA requires that fiduciaries act in accordance with the 12 documents . . . governing the plan insofar as such documents . . 13 . are consistent with the provisions of [ERISA]. 14 § 1104(a)(1)(D). 15 ever, plan language requiring investment in employer stock might 16 become inconsistent with the statute s fiduciary obligations, 17 such that fiduciaries would be required to disobey the 18 requirements of the ESOP and halt the purchase of, or perhaps 19 even require the sale of, the employer s stock. 20 29 U.S.C. The Act does not, however, explain when, if The Third, Fifth, Sixth, and Ninth Circuits have addressed 21 this question, and we find their decisions helpful. 22 Circuit, in Moench v. Robertson, 62 F.3d 553 (3rd Cir. 1995), 23 adopted a presumption of compliance with ERISA when an ESOP 24 fiduciary invests assets in the employer s stock. 16 The Third There, a 1 participant in an ESOP challenged the ESOP s continued investment 2 in employer stock after the stock s share price dropped from 3 $18.25 per share to $0.25 per share over a two-year period. 4 at 557. 5 are not intended to guarantee retirement benefits, id. at 568, 6 ESOPs are covered by ERISA s stringent requirements, and [except 7 for in enumerated circumstances not directly applicable here] 8 ESOP fiduciaries must act in accordance with the duties of 9 loyalty and care, id. at 569. Id. The court noted that while ESOPs, unlike pension plans, The court proceeded to describe 10 the standard by which it would judge an ESOP fiduciary s refusal 11 to divest an ESOP of employer stock: 12 13 14 15 16 17 18 19 [A]n ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision. However, the plaintiff may overcome that presumption by establishing that the fiduciary abused its discretion by investing in employer securities. Id. at 571. 20 for a summary judgment determination under this new standard. 21 Id. at 572. 22 to include situations where, as here, an employer stock fund is 23 one of many investment options in an EIAP. 24 Inc., 503 F.3d 340, 347-48 (3d Cir. 2007) ( [W]e conclude that 25 the District Court correctly determined that Moench s abuse of 26 discretion standard governs judicial review of defendants 27 decision to offer the Avaya Stock Fund as an investment 28 option. ). The court remanded the case to the district court More recently, the Third Circuit expanded this rule 17 See Edgar v. Avaya, 1 The Sixth, Fifth, and Ninth Circuits have all adopted the 2 Moench presumption. In Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 3 1995), the employer s stock price had dropped from more than $50 4 per share to just over $10 per share. 5 agree[d] with and adopt[ed] the Third Circuit s holding that a 6 proper balance between the purpose of ERISA and the nature of 7 ESOPs requires that we review an ESOP fiduciary s decision to 8 invest in employer securities for an abuse of discretion. 9 at 1459. Id. at 1451. The court Id. A failure to properly investigate the prudence of 10 continued investment in employer stock could not alone overcome 11 the presumption; rather, plaintiffs were required to demonstrate 12 that conducting such an investigation would have revealed to a 13 reasonable fiduciary that the investment at issue was 14 improvident. 15 also applied the presumption to situations in which employer 16 stock funds were offered as investment options within EIAPs. 17 Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254 (5th Cir. 18 2008) ( The Moench presumption . . . applies to any allegations 19 of fiduciary duty breach for failure to divest an EIAP or ESOP of 20 company stock. ); Quan v. Computer Scis. Corp., 623 F.3d 870, 881 21 (9th Cir. 2010) (adopting the presumption because it is 22 consistent with the statutory language of ERISA and the trust 23 principles by which ERISA is interpreted ). 24 has rejected the presumption of prudence. Id. at 1460. The Fifth and Ninth Circuits have 18 See No court of appeals 1 We now join our sister circuits in adopting the Moench 2 presumption and do so with respect to both EIAPs and ESOPs 3 because, as those courts have recognized, it provides the best 4 accommodation between the competing ERISA values of protecting 5 retirement assets and encouraging investment in employer stock. 6 An ESOP or EIAP fiduciary s decision to continue to offer plan 7 participants the opportunity to invest in employer stock should 8 therefore be reviewed for an abuse of discretion. 9 presumption may be rebutted if an EIAP or ESOP fiduciary abuses This 10 his discretion in continuing to offer plan participants the 11 opportunity to invest in employer stock. 12 principle recognized in Quan that judicial scrutiny should 13 increase with the degree of discretion a plan gives its 14 fiduciaries to invest. 15 Kirschbaum, 526 F.3d at 255 & n.9). 16 to divest from company stock is less likely to constitute an 17 abuse of discretion if the plan s terms require rather than 18 merely permit investment in company stock. 19 We endorse the guiding See Quan, 623 F.3d at 883 (citing Thus a fiduciary s failure We reject plaintiffs argument endorsed by the dissent 20 that we should analyze the decision to offer the Stock Fund as we 21 would a fiduciary s decision to offer any other investment 22 option. 23 otherwise, fiduciaries would be equally vulnerable to suit either 24 for not selling if they adhered to the plan s terms and the We agree with the Sixth and Ninth Circuits that were it 19 1 company stock decreased in value, or for deviating from the plan 2 by selling if the stock later increased in value. 3 Kirschbaum, 526 F.3d at 256 n.13; Quan, 623 F.3d at 881. 4 result would be particularly troublesome in light of the long- 5 term horizon of retirement investing, which requires protecting 6 fiduciaries from pressure to divest when the company s stock 7 drops. 8 254). 9 adequately account for Congress s concern that employees ability See Such a Quan, 623 F.3d at 882 (quoting Kirschbaum, 526 F.3d at Also, as a general matter, plaintiffs proposal fails to 10 to invest in employer stock would be endangered were courts to 11 apply ERISA to ESOPs and EIAPs in the same way they apply the 12 statute to other retirement plans. 13 1976, Pub. L. No. 94-455, § 803(h), 90 Stat. 1583, 1590 14 (expressing the concern that treating ESOP plans as conventional 15 retirement plans will block the establishment and success of 16 these plans ). 17 See, e.g., Tax Reform Act of The dissent argues that, rather than providing an 18 accommodation between competing interests, our adoption of the 19 Moench presumption allows the policies favoring ESOPs to 20 override the policies of ERISA. 21 concerns we cite today do not, in Judge Straub s view, justify 22 the adoption of a standard of review that renders moot ERISA s 23 prudent man standard of conduct. 24 emphasize in response that, more than simply accommodating 20 Dissent at [11]. Id. at [4, 10]. The policy We 1 competing policy considerations, the Moench presumption balances 2 the duty of prudence against a fiduciary s explicit obligation to 3 act in accordance with plan provisions to the extent they are 4 consistent with ERISA. 5 here, plan documents define an EIAP as comprised of shares of 6 employer stock, and authorize the holding of cash and short-term 7 investments only to facilitate the orderly purchase of more 8 company stock, the fiduciary is given little discretion to alter 9 the composition of investments. See 29 U.S.C. § 1104(a)(1)(D). When, as If we were to judge that 10 fiduciary s conduct using the same standard of review applied to 11 fiduciaries of typical retirement plans, we would ignore not only 12 the policy considerations articulated by Congress but also the 13 very terms of the plan itself. 14 therefore based not on indefensible policy concerns, Dissent at 15 [16], but on a recognition of the competing obligations imposed 16 on ERISA fiduciaries. Our endorsement of Moench is 17 The district court also ruled that defendants were insulated 18 from liability because they had no discretion to divest the Plans 19 of employer stock. 20 2762708, at *13. 21 rule would leave employees retirement savings that are invested 22 in ESOPs or EIAPs without any protection at all a result that 23 Congress sought to avoid in enacting ERISA. 24 at 1457 ( [T]he purpose of ESOPs cannot override ERISA s goal of In re Citigroup ERISA Litig., 2009 WL We take issue with this holding because such a 21 See Kuper, 66 F.3d 1 ensuring the proper management and soundness of employee benefit 2 plans. ). 3 fiduciaries follow plan terms only to the extent that they are 4 consistent with ERISA, 29 U.S.C. § 1104(a)(1)(D), we decline to 5 hold that defendants decision to continue to offer the Stock 6 Fund is beyond our power to review. 7 Especially in light of ERISA s requirement that Finally, we reject plaintiffs argument that the Moench 8 presumption should not apply at the pleading stage. The 9 presumption is not an evidentiary presumption; it is a standard 10 of review applied to a decision made by an ERISA fiduciary. 11 Where plaintiffs do not allege facts sufficient to establish that 12 a plan fiduciary has abused his discretion, there is no reason 13 not to grant a motion to dismiss. 14 (applying Moench to grant a motion to dismiss because there was 15 no reason to allow [the] case to proceed to discovery when, even 16 if the allegations [were] proven true, [the plaintiff could not] 17 establish that defendants abused their discretion ); Gearren v. 18 The McGraw-Hill Cos., Inc., 690 F. Supp. 2d 254, 269 (S.D.N.Y. 19 2010). 20 21 B. See Edgar, 503 F.3d at 349 Applying the Moench Presumption We turn now to whether plaintiffs have pled facts sufficient 22 to overcome the presumption of prudence and successfully alleged 23 that the Investment and Administration Committees abused their 24 discretion by allowing participants to continue to invest in 22 1 Citigroup stock. The Moench court, relying on trust law, 2 explained that fiduciaries should override Plan terms requiring or 3 strongly favoring investment in employer stock only when owing to 4 circumstances not known to the [plan] settlor and not anticipated 5 by him, maintaining the investment in company stock would defeat 6 or substantially impair the accomplishment of the purposes of the 7 [Plan]. 8 227 cmt. g). 9 that an ESOP or EIAP settlor, mindful of the long-term horizon of 62 F.3d at 571 (quoting Restatement (Second) of Trusts § We agree with this formulation and cannot imagine 10 retirement savings, would intend that fiduciaries divest from 11 employer stock at the sign of any impending price decline. 12 Rather, we believe that only circumstances placing the employer in 13 a dire situation that was objectively unforeseeable by the 14 settlor could require fiduciaries to override plan terms. 15 503 F.3d at 348. 16 shield, Kirschbaum, 526 F.3d at 256, that should protect 17 fiduciaries from liability where there is room for reasonable 18 fiduciaries to disagree as to whether they are bound to divest 19 from company stock, 20 is, as the dissent points out, one of conduct rather than results, 21 and the abuse of discretion standard ensures that a fiduciary s 22 conduct cannot be second-guessed so long as it is reasonable. 23 24 Edgar, The presumption is to serve as a substantial Quan, 623 F.3d at 882. The test of prudence Although proof of the employer s impending collapse may not be required to establish liability, [m]ere stock fluctuations, 23 1 even those that trend downhill significantly, are insufficient to 2 establish the requisite imprudence to rebut the Moench 3 presumption. 4 1099 (9th Cir. 2004). 5 information available to the fiduciary at the time of each 6 investment decision and not from the vantage point of hindsight. 7 29 U.S.C. § 1104(a)(1)(B) (establishing that the prudence of an 8 ERISA fiduciary is to be measured in light of the circumstances 9 then prevailing ); Chao v. Merino, 452 F.3d 174, 182 (2d Cir. Wright v. Or. Metallurgical Corp., 360 F.3d 1090, We judge a fiduciary s actions based upon 10 2006) (quoting Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir. 11 1984)). 12 decrease in the employer s stock price; rather, we must consider 13 the extent to which plan fiduciaries at a given point in time 14 reasonably could have predicted the outcome that followed. We cannot rely, after the fact, on the magnitude of the 15 Here, plaintiffs allege that Citigroup made ill-advised 16 investments in the subprime-mortgage market while hiding the 17 extent of those investments from Plan participants and the public. 18 They also allege that, just prior to the start of the Class 19 Period, Citigroup became aware of the impending collapse of the 20 subprime market and that, ultimately, Citigroup reported losses of 21 about $30 billion due to its subprime exposure. 22 plaintiffs argue, Citigroup s stock price was inflated during 23 the Class Period because the price did not reflect the company s 24 true underlying value. As a result, Of course, as plaintiffs acknowledge, 24 1 these facts alone cannot sufficiently plead a fiduciary breach: 2 that Citigroup made bad business decisions is insufficient to show 3 that the company was in a dire situation, much less that the 4 Investment Committee or the Administration Committee knew or 5 should have known that the situation was dire. 6 Circuit in Kirschbaum, we cannot say that whenever plan 7 fiduciaries are aware of circumstances that may impair the value 8 of company stock, they have a fiduciary duty to depart from ESOP 9 or EIAP plan provisions. 10 Like the Fifth See Kirschbaum, 526 F.3d at 256. In an attempt to suggest the Investment and Administration 11 Committees knowledge of Citigroup s situation, plaintiffs allege 12 in conclusory fashion that the Committee knew or should have 13 known about Citigroup s massive subprime exposure as a result of 14 their responsibilities as fiduciaries of the Plans. 15 188. 16 Citigroup s subprime exposure, they only lacked such knowledge 17 because they failed to conduct an appropriate investigation into 18 whether Citigroup stock was a prudent investment for the Plans. 19 Compl. ¶ 189. Compl. ¶ Plaintiffs add that, even if defendants were unaware of 20 Plaintiffs allegations are insufficient to state a claim 21 against the Investment and Administration Committees for breach of 22 the duty of prudence. 23 assertion, without any supporting allegations, that the Investment 24 and Administration Committees knew about Citigroup s subprime As an initial matter, plaintiffs bald 25 1 activities cannot support their claims. 2 Twombly, 550 U.S. 544, 555 (2007) ( [A] plaintiff s obligation to 3 provide the grounds of his entitlement to relief requires more 4 than labels and conclusions . . . . ). 5 fiduciaries allegedly failed to investigate the continued prudence 6 of investing in Citigroup stock cannot alone rescue plaintiffs 7 claim; plaintiffs have not pled facts that, if proved, would show 8 that such an investigation during the Class Period would have led 9 defendants to conclude that Citigroup was no longer a prudent Bell Atl. Corp. v. Moreover, that the 10 investment. As we noted above, plaintiffs must allege facts that, 11 if proved, would show that an adequate investigation would have 12 revealed to a reasonable fiduciary that the investment at issue 13 was improvident. 14 done. Kuper, 66 F.3d at 1460. This they have not 15 Additionally, even if we assume that an investigation would 16 have revealed all of the facts that plaintiffs have alleged, the 17 Investment and Administration Committees would not have been 18 compelled to conclude that Citigroup was in a dire situation. 19 While the Committee may have been able to uncover Citigroup s 20 subprime investments, the facts alleged by plaintiffs, if proved, 21 are not sufficient to support a conclusion that the Investment and 22 Administration Committees could have foreseen that Citigroup would 23 eventually lose tens of billions of dollars. 24 Committee could have done so, it would not have been compelled to 26 And even if the 1 find that Citigroup, with a market capitalization of almost $200 2 billion, was in a dire situation. 3 are not to be judged in hindsight, we note for the record that 4 during the Class Period, Citigroup s share price fell from $55.70 5 to $28.74, a drop of just over 50%. 6 plaintiffs unable to overcome the Moench presumption in the face 7 of similar stock declines. 8 drop); Edgar, 503 F.3d at 344 (25% drop); Kuper, 66 F.3d at 1451 9 (80% drop). 10 While fiduciaries decisions Other courts have found See Kirschbaum, 526 F.3d at 247 (40% To summarize: plaintiffs fail to allege facts sufficient to 11 show that defendants either knew or should have known that 12 Citigroup was in the sort of dire situation that required them to 13 override Plan terms in order to limit participants investments in 14 Citigroup stock. 15 for breach of ERISA s duty of prudence based on the inclusion of 16 the Common Stock Fund in the Plans. 17 II. 18 Plaintiffs are therefore unable to state a claim Communications Claim Plaintiffs allege in Count II of their complaint that the 19 Communications Defendants (Citigroup, the Administration 20 Committee, and Prince) breached their fiduciary duty of loyalty by 21 (1) failing to provide complete and accurate information 22 regarding . . . Citigroup and (2) conveying through statements 23 and omissions inaccurate material information regarding the 24 soundness of Citigroup stock. Compl. ¶ 237. 27 We reject the first 1 theory of liability because fiduciaries have no duty to provide 2 Plan participants with non-public information that could pertain 3 to the expected performance of Plan investment options. 4 reject the second theory because there are no facts alleged that 5 would, if proved, support a conclusion that defendants made 6 statements, while acting in a fiduciary capacity, that they knew 7 to be false. 8 A. 9 ERISA contains a comprehensive set of reporting and And we Duty to Provide Information 10 disclosure requirements. 11 514 U.S. 73, 83 (1995) (citing 29 U.S.C. §§ 1021-1031). 12 statute, for example, requires plan administrators to describ[e] 13 the importance of diversifying the investment of retirement 14 account assets, 29 U.S.C. § 1021(m)(2), and to inform 15 participants of the risk that holding more than 20 percent of a 16 portfolio in the security of one entity (such as employer 17 securities) may not be adequately diversified, id. § 18 1025(a)(2)(B)(ii)(II) (emphasis added). 19 in place during the Class Period required plan administrators, in 20 certain circumstances, to provide plan participants with a 21 description of the investment alternatives available under the 22 plan and, with respect to each designated investment alternative, 23 a general description of the investment objectives and risk and 24 return characteristics of each such alternative. Curtiss-Wright Corp. v. Schoonejongen, 28 The Additionally, regulations 29 C.F.R. § 1 2 2550.404c-1(b)(2)(B)(1)(ii) (2009). Plaintiffs do not allege any violations of these 3 requirements. 4 documents informed plaintiffs that the Stock Fund invested only in 5 Citigroup stock, which would be retained in this fund regardless 6 of market fluctuations, and that the Fund may undergo large 7 price declines in adverse markets, the risk of which may be 8 offset by owning other investments that follow different 9 investment strategies. 10 Nor could they support such a claim; the Plan Plaintiffs instead argue that defendants violated ERISA s 11 more general duty of loyalty, 29 U.S.C. § 1104(a)(1), by failing 12 to provide participants with information regarding the expected 13 future performance of Citigroup stock. 14 stating, in broad terms, that fiduciaries must disclose to 15 participants information related to the participants benefits. 16 See, e.g., Dobson v. Hartford Fin. Servs. Grp., Inc., 389 F.3d 17 386, 401 (2d Cir. 2004) ( A number of authorities assert a plan 18 fiduciary s obligation to disclose information that is material to 19 beneficiaries rights under a plan . . . . ). 20 They rely on cases The cases cited by plaintiffs are inapposite for two reasons. 21 First, in many of them, the court imposed a duty to inform at 22 least in part because further information was necessary to correct 23 a previous misstatement or to avoid misleading participants. 24 e.g., Estate of Becker v. Eastman Kodak Co., 120 F.3d 5, 10 (2d 29 See, 1 Cir. 1997) (relying in part on the materially misleading 2 information provided by a benefits counselor to conclude that 3 Kodak breached its fiduciary duty to provide Becker with complete 4 and accurate information about her retirement options ). 5 all of the cases cited by plaintiffs relate to administrative, not 6 investment, matters such as participants eligibility for defined 7 benefits or the calculation of such benefits; none require plan 8 fiduciaries to disclose nonpublic information regarding the 9 expected performance of a plan investment option. Second, See, e.g., 10 Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 88-89 (2d 11 Cir. 2001) (holding that an employer may be liable for 12 misstatements or omissions about the availability of lifetime life 13 insurance benefits); Estate of Becker, 120 F.3d at 9-10 (imposing 14 liability based on an employer s providing misleading information 15 about participants eligibility for lump-sum retirement benefits). 16 We decline to broaden the application of these cases to 17 create a duty to provide participants with nonpublic information 18 pertaining to specific investment options.4 19 not have a duty to give investment advice or to opine on the 20 stock s condition. 21 marks omitted). 1 2 3 4 ESOP fiduciaries do Edgar, 503 F.3d at 350 (internal quotation We agree with the district court that such a 4 Although the dissent would hold that ERISA fiduciaries have an affirmative duty to disclose material information to plan participants, Judge Straub acknowledges that ERISA does not explicitly impose such a duty. 30 1 requirement would improperly transform fiduciaries into 2 investment advisors. 3 2762708, at *22. 4 adequate warning that the Stock Fund was an undiversified 5 investment subject to volatility and that Plan participants would 6 be well advised to diversify their retirement savings. 7 assuming that they had the ability to do so, defendants had no 8 duty to communicate a forecast as to when this volatility would 9 manifest itself in a sharp decline in stock price. In re Citigroup ERISA Litig., 2009 WL Here, the Administration Committee provided Even 10 B. Misrepresentations 11 Plaintiffs next argue that, even if defendants had no 12 affirmative duty to provide information regarding Plan 13 investments, they nevertheless breached their duty of loyalty by 14 making misrepresentations as to the expected performance of 15 Citigroup stock. 16 duties with respect to a plan solely in the interest of the 17 participants and beneficiaries. 18 489, 506 (1996) (quoting 29 U.S.C. § 1104(a)(1)). 19 is inconsistent with the duty of loyalty, ERISA fiduciaries 20 violate this duty when they participate knowingly and 21 significantly in deceiving a plan s beneficiaries. 22 Bouboulis v. Transp. Workers Union of Am., 442 F.3d 55, 66 (2d 23 Cir. 2006). 24 ERISA requires a fiduciary to discharge his Varity Corp. v. Howe, 516 U.S. Because lying Id.; see also Plaintiffs assert misrepresentation claims against Citigroup, 31 1 Prince, and the Administration Committee. 2 and Prince were not acting in a fiduciary capacity when making the 3 statements alleged in the complaint, and that the complaint does 4 not adequately allege that the Administration Committee knew that 5 it was making false or misleading statements. 6 1. We hold that Citigroup Citigroup and Prince 7 Plaintiffs allege that Citigroup and Prince regularly 8 communicated with Plan participants about Citigroup s expected 9 performance. They argue that Citigroup and Prince may be held 10 liable, under ERISA, for these communications because they 11 intentionally connected their statements to Plan benefits. 12 argument fails because neither Citigroup nor Prince was a Plan 13 administrator responsible for communicating with Plan 14 participants. 15 making the statements at issue. 16 This Therefore, neither acted as a Plan fiduciary when Plaintiffs rely on the Supreme Court s decision in Varity 17 Corp. v. Howe, 516 U.S. 489 (1996), in which the Court found an 18 employer liable for misstatements made to plan participants in 19 part because the employer intentionally connected its statements 20 to the future of [plan] benefits. 21 however, overlook that the employer in Varity was also the plan 22 administrator, id. at 491, and that only the plan administrator is 23 responsible for meeting ERISA s disclosure requirements and 24 therefore for communicating with Plan participants. 32 Id. at 505. Plaintiffs, 29 U.S.C. 1 § 1132(c). That the employer in Varity intentionally connected 2 its statements to plan benefits highlighted that it acted as a 3 plan administrator and fiduciary and not merely an employer 4 when making the statements in question. 5 Int l, 773 F.2d 1402, 1416-17 (2d Cir. 1985) (stating that an 6 employer is only liable under ERISA for actions it takes while 7 acting as an ERISA fiduciary), abrogated on other grounds by Mead 8 Corp. v. Tilley, 490 U.S. 714, 721 (1989). 9 Prince were not Plan administrators and were not responsible for Cf. Amato v. W. Union Here, Citigroup and 10 communicating with Plan participants.5 11 therefore spoke to Plan participants as employers and not as Plan 12 fiduciaries. 13 for any alleged misstatements made to Citigroup employees. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Citigroup and Prince They cannot be held liable, at least under ERISA, 5 The dissent contends that Citigroup and Prince acted as fiduciaries because they intentionally connected their statements about Citigroup s financial health and stock performance to the likely future of Plan benefits. Dissent at [32] (quoting Varity, 516 U.S. at 505). We disagree with the dissent s characterization of the facts alleged here. The employer in Varity transferred all of its money-losing divisions into a newly created subsidiary that was destined to fail, and induced its employees to switch employers to the subsidiary by falsely assuring them that their benefits would remain secure. 516 U.S. at 492-94. The parent corporation therefore intentionally connected its statements about [the subsidiary s] financial health to statements it made about the future of benefits, which in that context [was] an act of plan administration. Id. at 505 (emphasis in original). Plaintiffs, by contrast, allege only that Citigroup generally encouraged its employees and thus Plan participants to invest in Citigroup stock. Compl. ¶ 198. These allegations do not suggest the kind of intentional connection the Supreme Court relied on to find a fiduciary relationship in Varity. 33 1 2. Administration Committee 2 Plaintiffs also do not state a claim for relief based on 3 alleged misstatements made by the Administration Committee because 4 they have not adequately alleged that defendants made statements 5 they knew to be false. 6 Plan Descriptions (SPDs), distributed by the Administration 7 Committee, directed the Plans participants to rely on 8 Citigroup s filings with the SEC . . . , many of which . . . were 9 materially false and misleading. Plaintiffs allege that both Plans Summary Compl. ¶ 197. Plaintiffs state 10 that the SEC filings all failed to adequately inform participants 11 of the true magnitude of the Company s involvement in subprime 12 lending and other improper business practices . . . , and the 13 risks these presented to the Company. 14 Compl. ¶ 237. A fiduciary, however, may only be held liable for 15 misstatements when the fiduciary knows those statements are false 16 or lack a reasonable basis in fact. See Flanigan v. Gen. Elec. 17 Co., 242 F.3d 78, 84 (2d Cir. 2001). Here, while plaintiffs 18 conclude that the Committee members knew or should have known 19 about Citigroup s massive subprime exposure as a result of their 20 responsibilities as fiduciaries of the Plans, 21 have provided no specific allegations beyond this naked 22 assertion, 23 24 Compl. ¶ 188, they Twombly, 550 U.S. at 557. Plaintiffs are also unable to support their argument that the Administration Committee members should have known of the 34 1 misstatements because they should have performed an independent 2 investigation of the accuracy of Citigroup s SEC filings. 3 we cannot rule out that such an investigation may be warranted in 4 some cases, plaintiffs have not alleged facts that, without the 5 benefit of hindsight, show that it was warranted here. 6 have not alleged that there were any warning flags, specific to 7 Citigroup, that triggered the need for an investigation. 8 plaintiffs provide a list of publicly available articles and news 9 reports that signaled potential trouble in the subprime market as 10 11 While Plaintiffs Rather, a whole. We are also mindful that requiring Plan fiduciaries to 12 perform an independent investigation of SEC filings would increase 13 the already-substantial burden borne by ERISA fiduciaries and 14 would arguably contravene Congress s intent to create a system 15 that is [not] so complex that administrative costs, or litigation 16 expenses, unduly discourage employers from offering [ERISA] plans 17 in the first place. 18 (2010) (quoting Varity, 516 U.S. at 497 (alterations in 19 original)). 20 disturbing the carefully delineated corporate disclosure laws. 21 Baker v. Kingsley, 387 F.3d 649, 662 (7th Cir. 2004). 22 have the authority to create a common law of rights and 23 obligations under ERISA, the scope of permissible judicial 24 innovation is narrower in areas where other federal actors are Conkright v. Frommert, 130 S. Ct. 1640, 1649 Furthermore, we are hesitant to run the risk of 35 While we 1 engaged. 2 831-32 (2003) (internal quotation marks and citation omitted). 3 Accordingly, while we intimate no view as to the possible 4 investigatory responsibilities of other fiduciaries who are privy 5 to additional warning signs or who are operating under 6 substantially different circumstances, in the situation presented 7 here we decline to hold that the Plan fiduciaries were required to 8 perform an independent investigation of SEC filings before 9 incorporating them into the SPDs. 10 III. Black & Decker Disability Plan v. Nord, 538 U.S. 822, Plaintiffs Remaining Claims 11 Plaintiffs also assert claims that (1) Citigroup and the 12 Director Defendants failed to properly monitor their fiduciary co- 13 defendants (Count III); (2) the same defendants failed to share 14 information with their co-fiduciaries (Count IV); (3) all 15 defendants breached their duty to avoid conflicts of interest 16 (Count V); and (4) Citigroup, Citibank, and the Director 17 Defendants are liable as co-fiduciaries (Count VI). 18 not contest that Counts III, IV, and VI cannot stand if plaintiffs 19 fail to state a claim for relief on Counts I or II. 20 we affirm the district court s dismissal of these counts. 21 Plaintiffs do Accordingly, Count V appears to be based entirely on the fact that the 22 compensation of some of the fiduciaries was tied to the 23 performance of Citigroup stock and that Prince and Robert Rubin, 24 another Director Defendant, sold some of their Citigroup stock 36 1 during the Class Period. Plaintiffs do not allege any specific 2 facts suggesting that defendants investments in Citigroup stock 3 prompted them to act against the interests of Plan participants. 4 Under plaintiffs reasoning, almost no corporate manager could 5 ever serve as a fiduciary of his company s Plan. 6 no evidence that Congress intended such a severe interpretation of 7 the duty of loyalty. 8 refused to hold that a conflict of interest claim can be based 9 solely on the fact that an ERISA fiduciary s compensation was There simply is We agree with the many courts that have 10 linked to the company s stock. See, e.g., In re Polaroid ERISA 11 Litig., 362 F. Supp. 2d 461, 477 (S.D.N.Y. 2005); In re Worldcom, 12 Inc. ERISA Litig., 263 F. Supp. 2d 745, 768 (S.D.N.Y. 2003). 13 Accordingly, we affirm the judgment of the district court insofar 14 as it held that plaintiffs failed to state a claim for relief on 15 Count V. 16 17 CONCLUSION 18 For the foregoing reasons, we AFFIRM the district court s 19 dismissal of plaintiffs complaint. 37 1 STRAUB, Circuit Judge, concurring in part and dissenting in part: The August 2007 collapse of the $2 trillion subprime1 mortgage market unleashed a 2 3 global contagion, 2 the virulence of which is well demonstrated by plaintiffs allegations in this 4 case. 5 Plaintiffs are current and former employees of Citigroup who invested years of savings in 6 their employer s retirement Plans. They did so at the cajoling of Citigroup and the other named 7 defendants, who, according to plaintiffs, repeatedly and materially misrepresented Citigroup s 8 dismal financial outlook and its massive subprime exposure. Defendants allegedly knew or 9 should have known that Citigroup stock was an imprudent investment, but nonetheless permitted 10 and encouraged the Plans to hold and to acquire billions of dollars in Citigroup stock. As 11 Citigroup s dire financial condition was revealed, its price per share declined by over 74% in a 12 little over one year a loss in market value of over $200 billion. Compl. ¶ 175. According to 13 plaintiffs, their retirement Plans suffered enormous losses during the relevant time period. 1 To oversimplify, the subprime crisis may be summarized as follows. Beginning in approximately 2001, many mortgage lenders approved loans for borrowers who did not qualify for prime interest rates; many of these loans were hybrid adjustable rate mortgages, which provided a fixed rate of interest for an introductory period, after which the rate would balloon. Financial institutions packaged these mortgages into mortgage-backed securities, which were then sold to investors. By 2006, home prices began to drop while interest rates rose. As a result, many borrowers could neither pay their existing mortgages nor refinance at favorable rates. Delinquencies and foreclosures thus increased, and the value of mortgage-backed securities dropped precipitously. Banks and other investors that were overly exposed to such investments faced the threat of collapse. See generally Compl. ¶¶ 108-34, 189; MAJORITY STAFF OF THE JOINT ECONOMIC COMM. OF THE U.S. CONG., THE SUBPRIME LENDING CRISIS (2007), available at http://jec.senate.gov/archive/Documents/Reports/10.25.07OctoberSubprimeReport.pdf. See also Litwin v. Blackstone Group, L.P., 634 F.3d 706, 710 (2d Cir. 2011). 2 ANDREW ROSS SORKIN, TOO BIG TO FAIL 5 (2010). -1- 1 Today s majority opinion ensures that such losses will go remediless. It thus represents 2 both an alarming dilution of the Employee Retirement Income Security Act ( ERISA ), 29 3 U.S.C. § 1001 et seq., and a windfall for fiduciaries, who may now avail themselves of the 4 corporate benefits of employee stock ownership plans ( ESOPs ) without being burdened by the 5 costs of complying with the statutorily mandated obligation of prudence. 6 In affirming the District Court s dismissal of plaintiffs Prudence Claim, the majority 7 holds that defendants decisions to invest in employer stock are entitled to a presumption of 8 prudence. According to the majority, plaintiffs can overcome the presumption only through 9 allegations, accepted as true, that would establish that the employer was in a dire situation. 10 Maj. Op. at [23] (internal quotations omitted). Such arbitrary line-drawing leaves employees 11 wholly unprotected from fiduciaries careless decisions to invest in employer securities so long 12 as the employer s situation is just shy of dire a standard that the majority neglects to define 13 in any meaningful way. But the duty of prudence does not wax and wane depending on 14 circumstance; ERISA fiduciaries must act prudently at all times, and those who are derelict must 15 be subject to accountability. Because I find no justification for cloaking fiduciaries investment 16 decisions in a mantle of presumptive prudence, I must respectfully dissent. 17 The majority next affirms the District Court s dismissal of plaintiffs Communication 18 Claim. Because I find the Communication Claim to be adequately stated, I dissent from this 19 holding as well. 20 The majority also affirms the dismissal of Counts III (failure to monitor), IV (failure to 21 disclose information to co-fiduciaries), and VI (co-fiduciary liability) for the same reasons it 22 affirmed the dismissal of the Prudence and Communication Claims. Because I conclude that -2- 1 dismissal of the Prudence and Communication Claims was improper, I also dissent with respect 2 to Counts III, IV, and VI. 3 Finally, the majority affirms the dismissal of Count V, in which plaintiffs allege that all 4 defendants breached their duty to avoid conflicts of interest by receiving compensation tied to 5 the performance of Citigroup stock. I agree that this claim was properly dismissed. I thus join 6 the majority for this part of the opinion only. 7 I. 8 9 Prudence Claim The majority affirms the District Court s dismissal of plaintiffs Prudence Claim, in which plaintiffs allege (a) that the Investment Committee, the Administration Committee, 10 Citigroup, and Citibank knew or should have known that Citigroup stock was an imprudent 11 investment; and (b) that the foregoing defendants thus breached their fiduciary duties by, among 12 other things, continuing to offer as an investment option the Citigroup Common Stock Fund (the 13 Fund ), which consisted mostly of Citigroup common stock. 14 15 I conclude that plaintiffs allegations are sufficient to state a claim against the Investment and Administration Committees for breach of the duty of prudence. I thus respectfully dissent. 16 A. Moench-Type Deference Should Not Apply 17 The District Court concluded that defendants, in offering the Fund to Plan participants as 18 an investment option, were entitled to a presumption that they did so prudently. In re Citigroup 19 ERISA Litig., No. 07 Civ. 9790, 2009 WL 2762708, at *1, 15-19 (S.D.N.Y. Aug. 31, 2009). By 20 upholding this ruling, the majority aligns our Court with those that have embraced the doctrine 21 articulated in Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995), cert. denied, 516 U.S. 1115 22 (1996). See, e.g., Quan v. Computer Scis. Corp., 623 F.3d 870, 881 (9th Cir. 2010); Kirschbaum -3- 1 v. Reliant Energy, Inc., 526 F.3d 243, 254 (5th Cir. 2008); Kuper v. Iovenko, 66 F.3d 1447, 1459 2 (6th Cir. 1995). 3 Because I find the underpinnings of the Moench presumption to be fundamentally 4 unsound, I decline the invitation to adopt it as a rule of law in our Circuit. As a practical matter, 5 Moench-type deference to the investment decisions of an ESOP fiduciary renders moot ERISA s 6 prudent man standard of conduct, 29 U.S.C. § 1104(a)(1). Of course, policy concerns 7 sometimes justify divergence between standards of conduct in other words, how actors should 8 conduct themselves and standards of review in other words, the manner in which courts 9 evaluate whether challenged conduct gives rise to liability. But in my view, the policy concerns 10 underlying the Moench decision warrant no such divergence. I would preserve the statutorily 11 mandated standard of prudence by calling for plenary, rather than deferential, review of an ESOP 12 fiduciary s investment decisions. 13 1. 14 ERISA s Prudent Man Standard of Conduct ERISA was designed to ensure the continued well-being and security of millions of 15 employees and their dependents through the regulation of employee benefit plans. See 29 16 U.S.C. § 1001(a). See also Varity Corp. v. Howe, 516 U.S. 489, 496 (1996). The statute thus 17 imposes stringent standards of conduct upon fiduciaries who oversee such plans. See 29 U.S.C. 18 § 1001(b). Indeed, we have said that ERISA s fiduciary standards of conduct are the highest 19 known to the law. LaScala v. Scrufari, 479 F.3d 213, 219 (2d Cir. 2007) (quoting Donovan v. 20 Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir.), cert. denied, 459 U.S. 1069 (1982)). Of particular 21 relevance here is the ERISA fiduciary s duty to act in accordance with the prudent man 22 standard of conduct that is, with the care, skill, prudence, and diligence under the -4- 1 circumstances then prevailing that a prudent man acting in a like capacity and familiar with such 2 matters would use in the conduct of an enterprise of a like character and with like aims. 29 3 U.S.C. § 1104(a)(1)(B). Although this standard is rooted in the common law of trusts, ERISA s 4 standard is more exacting. Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir. 1983). 5 ERISA allows for the creation of ESOPs, which are designed to invest primarily in 6 qualifying employer securities. 29 U.S.C. § 1107(d)(6)(A). To fulfill this purpose, ESOP 7 fiduciaries are exempt from certain standards of conduct that apply to other kinds of ERISA 8 plans. For example, although fiduciaries of pension benefit plans generally must diversify 9 investments so as to minimize risk, see id. § 1104(a)(1)(C), ESOP fiduciaries need not do so. 10 Specifically, section 404(a)(2) of ERISA provides that the diversification requirement . . . and 11 the prudence requirement (only to the extent that it requires diversification) . . . is not violated by 12 acquisition or holding of . . . qualifying employer securities. Id. § 1104(a)(2). ESOP fiduciaries 13 are also exempted from ERISA s prohibition against dealing with a party in interest. Id. § 14 1106(b)(1). But they are not otherwise excused from the stringent prudent man standard that 15 governs fiduciary conduct under typical ERISA plans. See, e.g., Quan, 623 F.3d at 878; 16 Moench, 62 F.3d at 569; Fink v. Nat l Sav. & Trust Co., 772 F.2d 951, 955 (D.C. Cir. 1985). 17 2. Policy Justifications for Deferential Standards of Review 18 Whether a standard of conduct such as ERISA s prudent man standard is judicially 19 enforced turns on the standard of review used to test the legality of the conduct at issue. In many 20 contexts, the two standards are aligned. For instance, the standard of conduct that governs 21 automobile drivers is that they should drive carefully, and the standard of review in a liability 22 claim against a driver is whether he drove carefully. Melvin Aron Eisenberg, The Divergence -5- 1 of Standards of Conduct and Standards of Review in Corporate Law, 62 FORDHAM L. REV. 437, 2 437 (1993) (internal footnote omitted). In such instances, the governing standard of conduct 3 retains its bite. 4 In other areas of the law, however, prudential judgment counsels in favor of adopting a 5 standard of review that is more lenient than the applicable standard of conduct. See id. 6 Corporate law provides a useful example. As a normative matter, directors of a corporation are 7 generally expected to perform their functions in good faith, and with the degree of care that an 8 ordinarily prudent person in a like position would use under similar circumstances. See, e.g., 9 N.Y. BUS. CORP. LAW § 717(a). This standard of conduct is fairly demanding, but the standard 10 of review used to test whether directors are liable for violating the duty of due care is less 11 stringent. See Eisenberg, supra, at 441. Under the business judgment rule, directors are entitled 12 to a presumption that, in making a business decision, they acted on an informed basis, in good 13 faith, and in the honest belief that the action taken was in the best interests of the company. See, 14 e.g., Dist. Lodge 26, Int l Ass n of Machinists & Aerospace Workers, AFL-CIO v. United Techs. 15 Corp., 610 F.3d 44, 52 (2d Cir. 2010). 16 Considerations of fairness and policy led to the adoption of this deferential standard. 17 Eisenberg, supra, at 443. Business judgments are often made on the basis of incomplete 18 information and in the face of obvious risks. Id. at 444. A reasonableness standard of review 19 could thus discourage directors from making bold but desirable decisions, and might even 20 deter directors from serving at all. Id. In addition, courts are ill-equipped to determine after the 21 fact whether a particular business decision was reasonable under the circumstances. William T. 22 Allen, Jack B. Jacobs & Leo E. Strine, Jr., Realigning the Standard of Review of Director Due -6- 1 Care with Delaware Public Policy: A Critique of Van Gorkom and its Progeny as a Standard of 2 Review Problem, 96 NW. U. L. REV. 449, 452 (2002). Examining directors decisions under a 3 standard of review that is more lenient than the relevant standard of conduct thus furthers 4 important public policy values. Id. at 449. 5 6 7 8 9 10 3. Policy Considerations Do Not Warrant Deferential Review of ESOP Fiduciaries Investment Decisions I am not persuaded that considerations of public policy require Moench-type deference to the investment decisions of ESOP fiduciaries, which results in an emasculation of ERISA s prudent man standard of conduct. 11 a. 12 The Moench Court s Policy Considerations The named plaintiff in Moench alleged that the fiduciaries of his ESOP breached ERISA 13 standards of conduct by continuing to invest in employer stock despite the deterioration of the 14 employer s financial condition. See Moench, 62 F.3d at 558-59. For our purposes, the issue in 15 Moench was what standard of review is appropriate to test the fiduciaries liability for their 16 investment decisions. See id. at 568. See also Edgar v. Avaya, Inc., 503 F.3d 340, 346 (3d Cir. 17 2007). 18 To answer this question, the Moench court first considered the special status of ESOPs 19 under ERISA. Moench, 62 F.3d at 568. Specifically, the court noted that ESOP fiduciaries are 20 exempt from ERISA s duty to diversify, and from the statute s prohibition against dealing with a 21 party in interest. Id. (discussing the exemptions under 29 U.S.C. §§ 1104(a)(2) and 1108(b)(1).) 22 The court explained that these exemptions arise[ ] out of the nature and purpose of ESOPs 23 themselves, id., which is to invest primarily in qualifying employer securities, Edgar, 503 24 F.3d at 346 (quoting 29 U.S.C. § 1107(d)(6)(A)). That ESOPs are undiversified means that they -7- 1 place participants retirement assets at much greater risk than other ERISA plans. Moench, 62 2 F.3d at 568 (internal quotations omitted). But Congress did not intend ESOPs to guarantee 3 retirement benefits. Id. Rather, Congress intended that ESOPs would function as both employee 4 retirement benefit plans and as a technique of corporate finance that would encourage employee 5 ownership. Id. at 569 (internal quotations omitted). Notwithstanding ESOPs unique status, 6 the Moench court emphasized that ESOP fiduciaries are still required to act in accordance with 7 ERISA s standards of prudence and loyalty. See Moench v. Robertson, 62 F.3d 553, 569 (3d Cir. 8 1995); see also Edgar, 503 F.3d at 346. 9 According to the Moench court, the appropriate standard of review was thus one that 10 would preserve a balance between, on the one hand, the goals of ESOPs, and on the other, 11 ERISA s stringent fiduciary duties. In short, the appropriate standard of review would ensure 12 that competent fiduciaries would not be deterred from service, and unscrupulous ones would 13 not be given license to steal. Moench, 62 F.3d at 569 (internal quotations omitted). 14 The court rejected plenary review as destructive of such balancing. See id. at 570. The 15 court reasoned that strict judicial scrutiny of fiduciaries investment decisions would render 16 meaningless the ERISA provision excepting ESOPs from the duty to diversify. Id. In addition, 17 the court feared that plenary review would risk transforming ESOPs into ordinary pension 18 benefit plans, which would frustrate Congress s desire to facilitate employee ownership. Id. 19 After all, the court asked, why would an employer establish an ESOP if its compliance with 20 the purpose and terms of the plan could subject it to strict judicial second-guessing? Id. 21 Finally, the court looked to the common law of trusts, which requires that interpretation of trust 22 terms be controlled by the settlor s intent. Id. That principle is not well served in the long run -8- 1 by ignoring the general intent behind such plans in favor of giving beneficiaries the maximum 2 opportunities to recover their losses. Id. 3 To fashion the appropriate standard of review, the court again found guidance in the 4 common law of trusts. See id. at 571. According to Moench, where a trust instrument requires 5 the trustee to invest in a particular stock, the trustee is generally immune from judicial inquiry, 6 id., see also Edgar, 503 F.3d at 346, but where the instrument merely permits a particular 7 investment, trust law calls for plenary review of the investment decision, id. The fiduciaries in 8 Moench were not required to invest in employer securities, but they were more than simply 9 permitted to make such investments. Moench, 62 F.3d at 571. The court therefore determined 10 that an intermediate abuse of discretion standard would strike the appropriate balance between 11 immunity from judicial review, at one extreme, and de novo review, at the other. Edgar, 503 12 F.3d at 347; see also Moench, 62 F.3d at 571 ( [T]he most logical result is that the fiduciary s 13 decision to continue investing in employer securities should be reviewed for an abuse of 14 discretion. ). 15 Pursuant to this deferential review, an ESOP fiduciary who invests plan assets in 16 employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of 17 that decision. However, the plaintiff may overcome that presumption by establishing that the 18 fiduciary abused its discretion by investing in employer securities. Moench, 62 F.3d at 571. To 19 do so, plaintiffs must show that the fiduciaries could not have believed reasonably that 20 continued adherence to the ESOP s direction was in keeping with the settlor s expectations of 21 how a prudent trustee would operate. Id. Thus, plaintiffs may introduce evidence to the effect 22 that, owing to circumstances not known to the settlor and not anticipated by him, investing in -9- 1 employer securities would defeat or substantially impair the accomplishment of the purposes of 2 the trust. 3 Id. (internal quotations omitted). 3 4 5 6 b. The Moench Court s Policy Considerations Are Insufficient to Justify Adopting Deferential Review The question remains whether the policy concerns articulated in Moench and reiterated 7 by the majority here warrant our adoption of a standard of review that is more lenient than 8 ERISA s prudent man standard of conduct. I answer that question in the negative. 9 10 11 12 i. Moench Deference Does Not Appropriately Balance ERISA s Competing Values In my view, the Moench presumption strikes no acceptable accommodation, (Maj. Op. 13 at [19]), between the competing ERISA values of protecting employees retirement assets and 14 encouraging investment in employer stock. The majority favorably cites to decisions that note 15 that the Moench presumption would be difficult to rebut, 4 and that refer to the presumption as 16 a substantial shield 5 to fiduciary liability. As these authorities implicitly acknowledge, the 17 Moench presumption precludes, in the ordinary course, judicial enforcement of the prudent man 18 standard of conduct. In a case that was argued in tandem with the instant matter,6 the Secretary 19 of Labor noted that the Moench presumption relegates the duty of prudence to protecting 20 employees only from the complete loss of their assets in the wake of a company s collapse, 3 The majority here states that only circumstances placing the employer in a dire situation that was objectively unforeseeable by the settlor could require fiduciaries to override plan terms. Maj. Op. at [23] (quoting Edgar, 503 F.3d at 348). 4 Quan v. Computer Scis. Corp., 623 F.3d 870, 883 (9th Cir. 2010). 5 Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 256 (5th Cir. 2008). 6 The Court decided the Gearren matter in a separate, per curiam opinion filed today. See Gearren v. McGraw-Hill Cos., No. 10-792-cv (2d Cir. [DATE]) (per curiam). -10- 1 thereby leaving them otherwise unprotected from the careless management of plan assets. 2 Brief for the Secretary of Labor as Amicus Curiae Supporting Plaintiffs-Appellants, Gearren v. 3 McGraw-Hill Cos., (2d Cir. June 4, 2010) (No. 10-792-cv), 2010 WL 2601687, at *20. This 4 cannot be what Congress envisioned when it enacted ERISA. Cf. ILGWU Nat l Ret. Fund v. 5 Levy Bros. Frocks, Inc., 846 F.2d 879, 885 (2d Cir. 1988) (citing IUE AFL-CIO Pension Fund v. 6 Barker & Williamson, Inc., 788 F.2d 118, 127 (3d Cir. 1986) for the proposition that ERISA, as a 7 remedial statute, should be liberally construed in favor of protecting the participants in 8 employee benefits plans (internal quotations omitted)). ERISA is paternalistic, Van Boxel v. 9 Journal Co. Emps. Pension Trust, 836 F.2d 1048, 1052 (7th Cir. 1987), and it is thus 10 incongruous to deny participants meaningful judicial review on the theory that investment in 11 employer stock should be encouraged. 12 The statutory structure further demonstrates the impropriety of Moench s 13 accommodation. ESOPs are merely one type of benefit plan under the broader ERISA 14 framework. That they are exempt from certain of ERISA s standards of conduct does not mean 15 that the policies favoring ESOPs should override the policies of ERISA. Indeed, when a general 16 statutory policy is qualified by an exception, courts generally read the exception narrowly in 17 order to preserve the primary operation of the [policy]. John Hancock Mut. Life Ins. Co. v. 18 Harris Trust & Sav. Bank, 510 U.S. 86, 97 (1993) (parenthetically quoting Comm r of Internal 19 Revenue v. Clark, 489 U.S. 726, 739-40 (1989)). Accordingly, the investment decisions of 20 ESOP fiduciaries must be subject to the closest scrutiny under the prudent person rule, in spite 21 of the strong policy and preference in favor of investment in employer stock. Fink v. Nat l Sav. 22 & Trust Co., 772 F.2d 951, 955-56 (D.C. Cir. 1985) (internal quotations omitted); see also Eaves -11- 1 v. Penn, 587 F.2d 453, 460 (10th Cir. 1978) ( ESOP fiduciaries are subject to the same fiduciary 2 standards as any other fiduciary except to the extent that the standards require diversification of 3 investments. ). 4 Had Congress intended to accommodate ERISA s competing values by requiring 5 deferential review of ESOP fiduciaries decisions, it could have provided for that result. See, 6 e.g., 5 U.S.C. § 706(2)(A) (Administrative Procedure Act) (establishing a deferential standard of 7 review over agency determinations). 8 9 10 ii. Plenary Review Would Not Deter ESOP Formation I further reject the Moench court s assertion, echoed by the majority here, that plenary 11 review of a fiduciary s investment decisions would spell doomsday for the ESOP institution. See 12 Moench, 62 F.3d at 570; Maj. Op. at [20]. ESOPs (under ERISA) had been in existence for more 13 than twenty years before the Court of Appeals for the Third Circuit issued its decision in 14 Moench. I have seen no evidence that plenary review during that time or thereafter7 resulted in 15 ESOP termination, or deterred ESOP formation. ESOP growth apparently slowed in the early 16 1990s. But commentators (including the ESOP Association, an amicus here) attribute the 17 subsidence to legislative and market factors not to fiduciaries fears of being subjected to a 18 particular brand of judicial review.8 7 See, e.g., Howard v. Shay, 100 F.3d 1484, 1488-89 (9th Cir. 1996) (undertaking plenary review of ESOP fiduciary s conduct); Eyler v. Comm r of Internal Revenue, 88 F.3d 445, 454-56 (7th Cir. 1996) (same); Donovan v. Cunningham, 716 F.2d 1455, 1473-74 (5th Cir. 1983) (same); Burud v. Acme Elec. Co., Inc., 591 F. Supp. 238, 248 (D. Alaska 1984) ( There are no statutory or federal common law presumptions cloaking the fiduciary s act in prudence. To the contrary, ERISA invites the closest scrutiny of a trustee s action. ). 8 See, e.g., ESOP Statistics, ESOP ASSOCIATION, http://www.esopassociation.org/media/media_statistics.asp (last visited Aug. 11, 2011) (noting -12- 1 The Moench court questioned why an employer would establish an ESOP if its 2 compliance with the purpose and terms of the plan could subject it to strict judicial second- 3 guessing[.] Moench v. Robertson, 62 F.3d 553, 570 (3d Cir. 1995). But the incentives for 4 ESOP creation are well documented. First, corporations often establish ESOPs to help raise 5 funds, which can then be used, for example, to provide working capital or to buy out large 6 shareholders. See Michael E. Murphy, The ESOP at Thirty: A Democratic Perspective, 41 7 WILLAMETTE L. REV. 655, 664 (2005). Second, ESOPs confer significant tax advantages on 8 employers.9 Third, employers use ESOPs to accomplish various business objectives, including 9 management entrenchment (by placing large amounts of stock in friendly hands), and avoiding 10 hostile takeovers (by purchasing publicly held shares of employer stock as a defensive measure). 11 See Aditi Bagchi, Varieties of Employee Ownership: Some Unintended Consequences of 12 Corporate Law and Labor Law, 10 U. PA. J. BUS. & EMP. L. 305, 317 (2008). 13 In light of these, and other incentives, some commentators note that ESOPs have been 14 used more to the advantage of the firm than its employees. Id. at 316 (internal quotations 15 omitted). I thus find implausible the suggestion that plenary review of fiduciaries investment 16 decisions would suddenly deter ESOP formation or lead to widespread plan termination. that the rapid increase in new ESOPs in the late 1980s subsided after Congress removed certain tax incentives in 1989 ); see also Michael E. Murphy, The ESOP at Thirty: A Democratic Perspective, 41 WILLAMETTE L. REV. 655, 661 n.42 (2005). 9 As the ESOP Association notes, [t]he amounts which may be contributed to an ESOP on a tax-deductible basis are higher than the amounts which may be contributed to other kinds of defined contribution plans. Brief for the ESOP Association as Amicus Curiae Supporting Defendants-Appellees, at 8-9 n.5 (citing I.R.C. § 404(a)(9)). In addition, corporations that use ESOPs to obtain loans may take tax deductions with respect to both the interest and the principal payments on the loan. Id. (citing I.R.C. § 404(a)(3), (9)). Employers may also deduct certain dividends paid on ESOP stock. See I.R.C. § 404(k). -13- 1 2 3 4 iii. Plenary Review Would Not Render ESOP Fiduciaries Guarantors I also disagree with the contention that plenary review of the prudence of fiduciaries 5 investment decisions would transform fiduciaries into virtual guarantors of the financial success 6 of the [ESOP], Moench, 62 F.3d at 570 (alteration in original) (internal quotations omitted); see 7 also Maj. Op. at [20] (stating that absent deferential review, fiduciaries would be equally 8 vulnerable to suit either for not selling if they adhered to the plan s terms and the company stock 9 decreased in value, or for deviating from the plan by selling if the stock later increased in 10 11 value ). The foregoing arguments misperceive the nature of the prudence inquiry, and the effect 12 of plenary review. The test of prudence is one of conduct, not results. See Bunch v. W.R. Grace 13 & Co., 555 F.3d 1, 7-8 (1st Cir. 2009). Accordingly, whether a fiduciary acted prudently at the 14 time he engaged in a challenged transaction turns on whether he employed the appropriate 15 methods to investigate the merits of the investment. Flanigan v. Gen. Elec. Co., 242 F.3d 78, 16 86 (2d Cir. 2001) (internal quotations omitted). A fiduciary who discharges his duty of prudence 17 will not be liable merely because the investment ultimately fails, see DiFelice v. U.S. Airways 18 Inc., 497 F.3d 410, 424 (4th Cir. 2007), just as a surgeon who abides by the applicable standard 19 of care will not be liable in negligence merely because his patient expires on the operating table. 20 In short, the duty of prudence which is concerned with conduct does not require a fiduciary 21 to become a guarantor who is concerned with results. See DeBruyne v. Equitable Life 22 Assurance Soc y of the U.S., 920 F.2d 457, 465 (7th Cir. 1990). Plenary review could not 23 possibly alter that dichotomy, because the basis for liability is a breach of the duty of prudence, 24 which is not a guarantee but a standard of conduct that Congress imposed and that the fiduciary -14- 1 can satisfy by acting reasonably. Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 920 (8th 2 Cir. 1994). 3 4 5 6 iv. Plenary Review Would Not Render Meaningless ESOPs Exemption From The Duty To Diversify I further disagree with the contention that plenary review of fiduciaries investment 7 decisions would read the diversification exemption out of ERISA. See Moench, 62 F.3d at 570. 8 As previously noted, ERISA provides that the diversification requirement . . . and the prudence 9 requirement (only to the extent that it requires diversification) . . . is not violated by acquisition 10 or holding of . . . qualifying employer securities. 29 U.S.C. § 1104(a)(2) (emphasis added). 11 The exemption thus allows ESOP fiduciaries to be released from certain per se violations on 12 investments in employer securities. Eaves, 587 F.2d at 459. 13 Of course, the absence of a general diversification duty from the ESOP setting does not 14 eliminate fiduciaries duty of prudence. See 29 U.S.C. § 1104(a)(2); Armstrong v. LaSalle Bank 15 Nat. Ass n, 446 F.3d 728, 732 (7th Cir. 2006). An ESOP fiduciary may invest plan assets in 16 employer securities so long as it remains prudent to do so. See id. And plenary review of that 17 question i.e., of the prudence of a fiduciary s investment decisions simply has no impact on 18 the continued viability of ESOPs statutory exemption from per se liability for the failure to 19 diversify. The Secretary of Labor, in her amicus brief, explains the distinction well: 20 21 22 23 24 25 26 The plaintiffs here . . . do not base their claims on the failure to diversify holdings of an otherwise prudent investment. Instead, they assert that the market was being misled to overvalue the stock, and that the plan s fiduciaries continued to purchase and hold the stock anyway. Diversification is not the issue; it was imprudent for the fiduciaries to knowingly buy even a single share at an inflated price. -15- 1 Brief for the Secretary of Labor as Amicus Curiae Supporting Plaintiffs-Appellants, In re 2 Citigroup ERISA Litig., (2d Cir. Dec. 28, 2009) (No. 09-3804-cv), 2009 WL 7768350, at *15 3 n.2. 4 In other words, although in the ESOP context there is no duty to diversify as such, there 5 is still a duty of prudence. And in particular cases, the duty of prudence might . . . become a 6 duty to diversify, even though failure to diversify an ESOP s assets is not imprudence per se. 7 Steinman v. Hicks, 352 F.3d 1101, 1106 (7th Cir. 2003) (emphasis added). Accordingly, whether 8 courts evaluate the prudence of fiduciaries conduct under plenary review does not endanger 9 ESOPs statutory exemption from per se liability for the failure to diversify. 10 11 4. Summary In sum, I cannot join in the majority s adoption of the Moench presumption, which is 12 premised on indefensible policy concerns, and which, contrary to the congressionally enacted 13 purposes of the Employee Retirement Income Security Act, greatly imperils the security of 14 employees retirement incomes. 15 Because I decline to adopt the presumption, I need not opine on its application to this 16 case. Instead, I would hold that the sufficiency of plaintiffs Prudence Claim must be evaluated 17 under plenary review. I now undertake that evaluation. 18 19 20 B. The District Court Erred In Dismissing Plaintiffs Prudence Claim 21 To state a claim for breach of fiduciary duty under ERISA, plaintiffs must adequately 1. Applicable Law 22 allege that defendants were plan fiduciaries who, while acting in that capacity, engaged in 23 conduct constituting a breach of fiduciary duty under ERISA. See 29 U.S.C. § 1109; Pegram v. -16- 1 Herdrich, 530 U.S. 211, 222-24 (2000). I agree with the majority that plaintiffs sufficiently 2 alleged that the Investment Committee and the Administration Committee were ERISA 3 fiduciaries with respect to plaintiffs ability to invest through the Plans in Citigroup stock. 4 Accordingly, I turn now to whether plaintiffs allegations, accepted as true, would render it 5 plausible that these defendants, acting in their fiduciary capacities, breached any ERISA- 6 imposed responsibilities, obligations or duties. 7 As previously noted, an ERISA fiduciary must discharge his duties with the care, skill, 8 prudence, and diligence under the circumstances then prevailing that a prudent man acting in a 9 like capacity and familiar with such matters would use in the conduct of an enterprise of a like 10 11 character and with like aims. 29 U.S.C. § 1104(a)(1)(B). The court s task in evaluating fiduciary compliance with the prudent man standard is to 12 inquire whether the individual [fiduciary], at the time [he] engaged in the challenged 13 transactions, employed the appropriate methods to investigate the merits of the investment and to 14 structure the investment. Flanigan, 242 F.3d at 86 (internal quotations omitted). The question 15 is thus whether the fiduciary acted reasonably in light of the facts of which he knew or should 16 have known at the time he engaged in the challenged transaction. See Roth, 16 F.3d at 920. A 17 [fiduciary] who simply ignores changed circumstances that have increased the risk of loss to the 18 trust s beneficiaries is imprudent. Armstrong, 446 F.3d at 734. 19 20 21 2. Application of Law to Facts I would hold that plaintiffs have stated a claim against the Investment and Administration Committees for breach of the duty of prudence. -17- 1 Plaintiffs allegations, if true, render it plausible that the Investment and Administration 2 Committees knew about Citigroup s massive subprime exposure. To see why this is so, we must 3 briefly examine (a) plaintiffs allegations regarding the responsibilities (and membership) of the 4 Investment and Administration Committees, and (b) the broader context of the subprime crisis, 5 as well as Citigroup s prominent role in it. 6 Pursuant to Plan documents, the Administration Committee was charged with managing 7 the operation and administration of the Plans. The Plans also delegated to the Administration 8 Committee the authority to impose certain restrictions on participants investment selections. 9 Meanwhile, the Plan documents charged the Investment Committee with, among other things, 10 selecting and monitoring investment options for the Plans; it had the discretion and authority to 11 suspend, eliminate, or reduce any Plan investment, including investments in Citigroup stock. 12 Compl. ¶ 69. Plaintiffs explicitly allege that the Investment Committee regularly exercised its 13 authority to suspend, eliminate, reduce, or restructure Plan investments. Id. Given plaintiffs 14 allegation that, as of 2008, Citigroup was the largest bank in the world in terms of revenue, we 15 may reasonably infer (a) that Citigroup appointed relatively sophisticated businesspersons to 16 staff the Investment Committee (as well as the Administration Committee); and (b) that such 17 relatively sophisticated Investment Committee members would have had at least a basic 18 knowledge of current events and market trends, especially insofar as they related to the selection 19 and monitoring of Plan investments. 20 Plaintiffs Complaint contains detailed allegations regarding the growth of subprime 21 lending and Citigroup s ill-fated entry into the subprime marketplace. By 2006 and 2007, reports 22 of an incipient subprime meltdown began to appear in the Wall Street Journal, the New York -18- 1 Times, the Financial Times, Bloomberg News, and Reuters. Id. ¶ 189(a)-(y). Plaintiffs allege 2 that the crisis was foreseeable by at least the end of 2006, given the steady decline in the 3 housing market, . . . the plethora of published reports by governmental agencies, real estate and 4 mortgage industries, [and] the media at large. Id. ¶ 136. 5 Citigroup allegedly increased its activity in the subprime and securitization market in 6 early 2005. By November 2007, its subprime exposure amounted to a staggering $55 billion in 7 at least one of its banking units almost 30% of what the entire Company was worth at the 8 time. Id. ¶ 134. According to plaintiffs, Citigroup reported subprime-related losses of $18.1 9 billion for the fourth quarter of 2007, and $7.5 billion for the first quarter of 2008. Plaintiffs 10 allege that, as a result of Citigroup s dire financial condition, its share price declined by over 11 74% between June 2007 and July 2008 a loss of over $200 billion in market value in a little 12 over one year. Id. ¶ 175. The losses sustained during the Class Period of January 1, 2007 13 through January 15, 2008 allegedly had an enormous impact on the value of participants 14 retirement assets, id. ¶ 238. 15 Such allegations support a reasonable inference that the relatively sophisticated members 16 of the Investment Committee by virtue of their responsibilities as fiduciaries of the Plans 17 would have had at least some awareness of both Citigroup s massive subprime exposure, and the 18 growing potential for a market-wide crisis. That is, members of the Investment Committee were 19 charged with selecting and monitoring Plan investment options, including Citigroup stock, which 20 was the Plans single largest asset.10 It is thus reasonable to infer that in discharging their 10 As of December 31, 2007 the day before the commencement of the Class Period the Citigroup Plan held Citigroup common stock with a fair market value of approximately $2.14 billion; this represented approximately 19% of the total invested assets of the Citigroup Plan for -19- 1 investment-related duties, Investment Committee members would have informed themselves of 2 material information concerning Citigroup s business and operations that was relevant to the 3 appropriateness of investing Plan assets in Citigroup stock. See In re Coca-Cola Enters. Inc., 4 ERISA Litig., No. 06 Civ. 0953, 2007 WL 1810211, at *14 (N.D. Ga. June 20, 2007) (ruling that 5 complaint withstood dismissal where plaintiffs alleged that defendants were senior employees 6 who knew or should have known all material public and nonpublic information concerning [the 7 employer s] business and operations that were relevant to the appropriateness of [the employer s] 8 common stock as a Plan investment (internal quotations omitted)); In re Westar Energy, Inc., 9 ERISA Litig., No. 03-4032, 2005 WL 2403832, at *25 (D. Kan. Sept. 29, 2005) (ruling that 10 complaint withstood dismissal where plaintiffs alleged that at least some of the Committee 11 members knew or should have known [of alleged misrepresentations] based on their status as 12 officers in the Company, and based on their own conduct (emphasis added)). 13 The Complaint s well-pleaded allegations also support a reasonable inference that the 14 Administration Committee knew of Citigroup s dire financial condition, Compl. ¶ 175. At 15 least one individual, Richard Tazik, apparently served on both the Investment Committee and the 16 Administration Committee during the relevant time period. On the above analysis, it is at least 17 plausible that Mr. Tazik, by virtue of his service on the Investment Committee, knew about 18 Citigroup s subprime exposure. And because Mr. Tazik also allegedly served on the 19 Administration Committee, it is plausible that at least one member of that Committee knew 20 about it as well. Plan year 2007. As of the same date, the Citibuilder Plan held Citigroup common stock with a fair market value of approximately $4.3 million; this represented approximately 32% of the total invested assets of the Citibuilder Plan for Plan year 2007. -20- 1 If, in light of this knowledge, reasonably prudent fiduciaries would have taken 2 meaningful steps to protect the Plans participants from the inevitable losses . . . [that] would 3 ensue as [Citigroup s] non-disclosed material problems . . . became public, id. ¶ 228, then 4 defendants may have acted imprudently.11 That, however, is a fact-intensive inquiry ill-suited 5 for resolution at the pleading stage. I would thus vacate the District Court s dismissal and 6 remand for further proceedings. 7 II. 8 9 Communications Claim The majority also affirms the dismissal of plaintiffs Communications Claim, in which plaintiffs allege that Citigroup, Prince and the Administration Committee breached their 10 fiduciary duty of loyalty (a) by failing to provide complete and accurate information to Plan 11 participants regarding Citigroup s financial condition, and (b) by conveying inaccurate, material 12 information to Plan participants regarding the soundness of Citigroup stock. 13 14 For the reasons stated below, I conclude that the District Court should not have dismissed plaintiffs Communications Claim. I thus respectfully dissent. 15 A. Duty to Disclose 16 In affirming the dismissal of plaintiffs Communication Claim, the majority holds that 17 ERISA fiduciaries have no duty to provide Plan participants with material information regarding 18 the expected performance of Plan investment options. I find this conclusion to be contrary to the 19 dictates of ERISA. 11 See 29 C.F.R. § 2550.404a-1(b)(1) (noting that the duty of prudence is satisfied if the fiduciary (i) [h]as given appropriate consideration to those facts and circumstances that, given the scope of such fiduciary s investment duties, the fiduciary knows or should know are relevant to the particular investment . . . and (ii) [h]as acted accordingly. ). -21- 1 It is true that ERISA does not explicitly command fiduciaries to disclose such 2 information, and the Supreme Court has not yet opined on whether the statute contemplates a 3 duty to do so, see Varity Corp. v. Howe, 516 U.S. 489, 506 (1996) (declining to reach the 4 question). But in enacting ERISA, Congress did not attempt to explicitly enumerat[e] all of 5 the powers and duties of [ERISA] fiduciaries. Id. at 496 (parenthetically quoting Cent. States, 6 Se. & Sw. Areas Pension Fund v. Cent. Transp., Inc., 472 U.S. 559, 570 (1985)). Rather, 7 Congress invoked the common law of trusts to define the general scope of [fiduciaries ] 8 authority and responsibility. Id. Trust law is thus the starting point for our effort to 9 interpret ERISA s fiduciary duties, after which we must go on to ask whether . . . the language 10 of the statute, its structure, or its purposes require departing from common-law trust 11 requirements. Varity Corp., 516 U.S. at 497. 12 Pursuant to this approach, I conclude that ERISA fiduciaries have an affirmative duty to 13 disclose material information that plan participants need to know to adequately protect their 14 interests, Brief for the Secretary of Labor as Amicus Curiae Supporting Plaintiffs-Appellants, In 15 re Citigroup ERISA Litig., (2d Cir. Dec. 28, 2009) (No. 09-3804-cv), 2009 WL 7768350, at *24. 16 Such a duty is firmly rooted in the common law of trusts. See Glaziers & Glassworkers 17 Union Local No. 252 Annuity Fund v. Newbridge Sec., Inc., 93 F.3d 1171, 1180 (3d Cir. 1996). 18 Indeed, the duty to disclose material information is the core of a fiduciary s responsibility, 19 animating the common law of trusts long before the enactment of ERISA. Eddy v. Colonial 20 Life Ins. Co. of Am., 919 F.2d 747, 750 (D.C. Cir. 1990). According to the Restatement of 21 Trusts, the trustee is under a duty to communicate to the beneficiary material facts affecting the 22 interest of the beneficiary which he knows the beneficiary does not know and which the -22- 1 beneficiary needs to know for his protection in dealing with a third person. 12 REST. (SECOND) 2 OF TRUSTS 3 483, 489 (1918) (Cardozo, J.) ( A beneficiary, about to plunge into a ruinous course of dealing, 4 may be betrayed by silence as well as by the spoken word. . . . [A trustee] cannot rid himself of 5 the duty to warn and to denounce, if there is improvidence or oppression, either apparent on the 6 surface, or lurking beneath the surface, but visible to his practised eye . . . . ). The duty to 7 disclose thus entails an affirmative duty to inform when the [fiduciary] knows that silence might 8 be harmful. Bixler v. Cent. Pa. Teamsters Health-Welfare Fund, 12 F.3d 1292, 1300 (3d Cir. 9 1993). It compensates for the disparity of training and knowledge that potentially exists 10 § 173, cmt. d. See also, e.g., Globe Woolen Co. v. Utica Gas & Elec. Co., 224 N.Y. between a lay beneficiary and a trained fiduciary. See id. 11 Nothing in ERISA warrants a dilution of the common law requirements. In order to 12 comport with the statutory duty of loyalty, an ERISA fiduciary must discharge his duties with 13 respect to a plan solely in the interest of the participants and beneficiaries, 29 U.S.C. § 14 1104(a)(1), and for the exclusive purpose of providing benefits to participants and their 15 beneficiaries, id. § 1104(a)(1)(A). These provisions incorporate the fiduciary standards of the 16 common law of trusts. See, e.g., Pegram v. Herdrich, 530 U.S. 211, 224 (2000); Bixler, 12 F.3d 17 at 1300 (citing Eddy, 919 F.2d at 750). Yet, ERISA makes the common law requirements even 18 more exacting. Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir. 1983); see also Varity 19 Corp., 516 U.S. at 497 ( ERISA s standards and procedural protections partly reflect a 20 congressional determination that the common law of trusts did not offer completely satisfactory 12 And if a fiduciary is required to arm beneficiaries with sufficient information to deal with a third person, the fiduciary is plainly required to provide sufficient information to allow the beneficiary to deal with the fiduciary himself. See Glaziers & Glassworkers, 93 F.3d at 1181 n.6. -23- 1 protection. ). Indeed, ERISA s legislative history indicates that Congress recognized the 2 importance of disclosure, which it viewed as a device to impart to employees sufficient 3 information and data to enable them to know whether the plan was financially sound and being 4 administered as intended. It was expected that the information disclosed would enable 5 employees to police their plans. S. Rep. No. 93-127, at 27 (1974), reprinted in 1974 6 U.S.C.C.A.N. 4838, 4863. I thus find no basis in ERISA for adopting a disclosure rule that 7 affords beneficiaries less protection than they enjoyed at common law. See Firestone Tire & 8 Rubber Co. v. Bruch, 489 U.S. 101, 113-14 (1989). 9 In light of the stringent statutory duty of loyalty, our sister courts of appeals have 10 recognized a duty to advise participants of circumstances that severely threaten plan assets, when 11 fiduciaries have reason to know that their silence may be harmful. In McDonald v. Provident 12 Indemnity Life Insurance Co., for example, the Fifth Circuit held that the duty to disclose 13 material information under such circumstances is an obvious component of ERISA s fiduciary 14 duty provision. 60 F.3d 234, 237 (5th Cir. 1995). There, a trustee of a group health insurance 15 plan failed to inform the plan sponsor a small business owner of a replacement insurer s new 16 rate schedule, which set prohibitive premiums following the occurrence of a single 17 catastrophic claim. Id. at 237. When the business owner s dependent suffered a near-fatal 18 accident, the insurer, over the course of one year, increased the company s premiums from 19 $2000 per month to over $15,000 per month. Id. Unable to afford continued coverage, the 20 company was forced to let the policy lapse. Id. The McDonald court concluded that information 21 regarding the rate schedule was material due to the impact the schedule would have had on any 22 small employer. Id. The trustee thus had a duty to disclose. Id. According to a subsequent -24- 1 panel of the Court of Appeals for the Fifth Circuit, McDonald adopted a case by case approach 2 in which the duty to disclose is triggered under special circumstance[s], such as when 3 concealed information could cause an extreme impact to plan participants and beneficiaries. 4 Ehlmann v. Kaiser Found. Health Plan of Tex., 198 F.3d 552, 556 (5th Cir. 2000). 5 Other courts have recognized that a disclosure duty may arise under similar 6 circumstances.13 See, e.g., Watson v. Deaconess Waltham Hosp., 298 F.3d 102, 114-15 (1st Cir. 7 2002) (explaining that an affirmative duty to inform beneficiaries of material facts about the plan 8 arises where there was some particular reason that the fiduciary should have known that his 9 failure to convey the information would be harmful (citing Griggs v. E.I. DuPont de Nemours & 10 Co., 237 F.3d 371, 381-82 (4th Cir. 2001); Barker v. Am. Mobil Power Corp., 64 F.3d 1397, 11 1403 (9th Cir. 1995); Eddy, 919 F.2d at 749)). See also Pegram, 530 U.S. at 227 n.8 (noting, in 12 dictum, that it could be argued that [an HMO] is a fiduciary insofar as it has discretionary 13 authority to administer the plan, and so it is obligated to disclose characteristics of the plan and 14 of those who provide services to the plan, if that information affects beneficiaries material 15 interests (emphasis added)); Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639, 644 16 (8th Cir. 2007); Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 87 (2d Cir. 2001); 13 According to the majority, certain of these authorities are inapposite because they relate to administrative, not investment, matters such as participants eligibility for defined benefits or the calculation of such benefits. Maj. Op. at [30]. I am not persuaded. The benefit in a defined contribution plan is just whatever is in the retirement account when the employee retires. Harzewski v. Guidant Corp., 489 F.3d 799, 804-05 (7th Cir. 2007). The precise benefit at issue here may differ from those at issue in the above-mentioned authorities, but it is a benefit nonetheless. That is why a breach of fiduciary duty that diminishes the value of the retirement account gives rise to a claim for benefits measured by the difference between what the retirement account was worth when the employee retired and cashed it out and what it would have been worth then had it not been for the breach of fiduciary duty. Id. at 807 (emphasis added). -25- 1 Bixler, 12 F.3d at 1300 (ruling that an affirmative disclosure duty arises where the trustee 2 knows that silence might be harmful ); Glaziers & Glassworkers, 93 F.3d at 1182 ( [A] 3 fiduciary has a legal duty to disclose to the beneficiary only those material facts, known to the 4 fiduciary but unknown to the beneficiary, which the beneficiary must know for its own 5 protection. . . . The well established obligations endemic in the law of trusts requires nothing 6 less. ); Acosta v. Pac. Enters., 950 F.2d 611, 618-19 (9th Cir. 1991) ( [A]n ERISA fiduciary has 7 an affirmative duty to inform beneficiaries of circumstances that threaten the funding of 8 benefits. ). 9 These authorities lead me to conclude that ERISA fiduciaries must disclose material 10 information that plan participants reasonably need to know in order to adequately protect their 11 retirement interests. I thus agree with those district courts that have found in ERISA s fiduciary 12 provisions a duty to disclose material, adverse information regarding an employer s financial 13 condition or its stock, where such information could materially and negatively affect the 14 expected performance of plan investment options. See, e.g., In re Polaroid ERISA Litig., 362 F. 15 Supp. 2d 461, 478-79 (S.D.N.Y. 2005) (holding that plaintiffs stated a claim based on 16 defendants alleged failure to keep Plan participants informed of material adverse 17 developments regarding the employer s deteriorating financial situation); In re Enron Corp. 18 Sec., Derivative & ERISA Litig., 284 F. Supp. 2d 511, 562 (S.D. Tex. 2003) (holding that 19 plaintiffs stated a claim based on defendants alleged failure to disclose information about 20 Enron s dangerous financial condition of which the defendants knew or should have known); 21 In re Dynegy, Inc. ERISA Litig., 309 F. Supp. 2d 861, 888 (S.D. Tex. 2004) ( [W]hen the . . . 22 defendants distributed [materials] that encouraged plan participants to carefully review Dynegy s -26- 1 SEC filings, they also triggered an affirmative duty to disclose material adverse information that 2 the . . . defendants knew or should have known regarding the risks and appropriateness of 3 investing in company stock. (citing McDonald, 60 F.3d at 237)). 4 The majority believes that such a duty would improperly transform fiduciaries into 5 investment advisors by forcing them to give investment advice or to opine on the stock s 6 condition. Maj. Op. at [31] (quotations omitted). I disagree. Plaintiffs do not seek, and the 7 duty to disclose would not compel, the provision of investment advice or opinions regarding 8 corporate stock. Rather, the duty to disclose would merely ensure that, where retirement plan 9 assets are severely threatened, employees receive complete, factual information such that they 10 can make their own investment decisions on an informed basis. See, e.g., In re CMS Energy 11 ERISA Litig., 312 F. Supp. 2d 898, 916 (E.D. Mich. 2004) (finding that plaintiffs had not 12 alleged that defendants had any duty to provide the participants with investment advice ; rather, 13 plaintiffs allegations concern[ed] the fiduciary duties surrounding disclosure found in ERISA; 14 i.e. that [defendants] could not mislead or fail to disclose information that they knew or should 15 have known would be needed by participants to prevent losses ). 16 I also take issue with the majority s conclusion that the Administration Committee 17 provided adequate warning that the Stock Fund was an undiversified investment subject to 18 volatility and that Plan participants would be well advised to diversify their retirement savings, 19 Maj. Op. at [31]. As a preliminary matter, whether information provided to participants was 20 adequate to inform them of the risks of investing in employer stock is generally a fact-intensive 21 inquiry that must await a full factual record. In re Morgan Stanley ERISA Litig., 696 F. Supp. 22 2d 345, 363 (S.D.N.Y. 2009) (quotations omitted). In any event, I fail to see how generalized -27- 1 warnings concerning the inherent risks of undiversified investments could, as a matter of law, 2 place lay beneficiaries on notice of the specific fiduciary misconduct alleged here. See, e.g., In 3 re SunTrust Banks, Inc. ERISA Litig., 749 F. Supp. 2d 1365, 1377 (N.D. Ga. 2010) (ruling that 4 boilerplate warning cannot satisfy Defendants duty to disclose material negative information to 5 Plan Participants, particularly when, as Plaintiffs allege, Defendants were aware of the 6 deteriorating nature of the Company and its Stock ); Brieger v. Tellabs, Inc., 629 F. Supp. 2d 7 848, 865 (N.D. Ill. 2009) (explaining that fiduciaries do not discharge their duty by merely 8 warning that a particular investment was the riskiest option; the important question is whether 9 [the fiduciaries] . . . withheld material information that plaintiffs needed to make an informed 10 11 decision about their investment selections ). Where, as here, diversification is not in the picture to buffer the risk to the beneficiaries 12 should the company encounter adversity, fiduciaries must be especially careful to do nothing 13 to increase the risk faced by the participants still further. See Armstrong v. LaSalle Bank Nat. 14 Ass n, 446 F.3d 728, 732 (7th Cir. 2006). 15 B. Misrepresentations 16 The majority also concludes that plaintiffs failed to state a claim for breach of the 17 statutory duty of loyalty based on certain alleged misrepresentations made by Citigroup, Prince, 18 and the Administration Committee. Specifically, the majority holds (1) that neither Citigroup 19 nor Prince acted as a Plan fiduciary when making the statements at issue, Maj. Op. at [32]; and 20 (2) that plaintiffs alleged insufficient facts to demonstrate that the Administration Committee 21 knew or should have known that its statements were false, Maj. Op. at [34]. I disagree with both 22 holdings. -28- 1 2 3 4 1. Plaintiffs Sufficiently Alleged that Citigroup and Prince Acted as ERISA Fiduciaries In every case charging breach of ERISA fiduciary duty, the threshold question is 5 whether the defendant was acting as a fiduciary (that is, was performing a fiduciary function) 6 when taking the action subject to complaint. Pegram v. Herdrich, 530 U.S. 211, 226 (2000); 7 see also Bell v. Pfizer, Inc., 626 F.3d 66, 73 (2d Cir. 2010) (citing Pegram). In pertinent part, 8 section 3(21)(A) of ERISA states that a defendant is a fiduciary with respect to a plan to the 9 extent . . . he has any discretionary authority or discretionary responsibility in the administration 10 of such plan. 29 U.S.C. § 1002(21)(A). This test is a functional one14 that expands the 11 universe of persons subject to fiduciary duties. See Mertens v. Hewitt Assocs., 508 U.S. 248, 12 262 (1993). As we have emphasized, Congress intended that ERISA s definition of fiduciary 13 be broadly construed. Frommert v. Conkright, 433 F.3d 254, 271 (2d Cir. 2006) (citing 14 LoPresti v. Terwilliger, 126 F.3d 34, 40 (2d Cir. 1997)). 15 In accordance with the foregoing, the Supreme Court has held that a person may acquire 16 status as an ERISA fiduciary by communicating to beneficiaries about the likely future of their 17 plan benefits. See Varity Corp. v. Howe, 516 U.S. 489, 502 (1996). The employer/plan 18 administrator in Varity misrepresented the security of plaintiffs non-pension benefits to induce 19 them to transfer to a new subsidiary, which the employer had created for the purpose of placing 20 its money-losing eggs in one financially rickety basket. Id. at 493-94. The plaintiffs lost their 21 benefits when the subsidiary went into receivership. Id. at 494. Their suit alleged that the 22 employer s deception violated ERISA-imposed fiduciary obligations. See id. at 504. 14 See 29 C.F.R. § 2509.75-8 (FR-16) ( The personal liability of a fiduciary who is not a named fiduciary is generally limited to the fiduciary functions, which he or she performs with respect to the plan. ). -29- 1 For our purposes, the issue in Varity was whether the employer was acting in its 2 capacity as an ERISA fiduciary when it significantly and deliberately misled the [plaintiffs]. 3 Id. at 491. The Court answered that question in the affirmative. Drawing on the common law of 4 trusts, the Court concluded that [c]onveying information about the likely future of plan benefits, 5 thereby permitting beneficiaries to make an informed choice about continued participation, 6 constitutes a discretionary act of plan administration within the meaning of section 3(21)(A). 7 Id. at 502-03. The employer thus was acting as a fiduciary (that is, was performing a fiduciary 8 function), Pegram, 530 U.S. at 226, when it misled the plaintiffs. The Court did not base its 9 holding on the mere fact that the employer made statements about the subsidiary s expected 10 financial condition, or on the mere fact that the employer s business decision turned out to have 11 an adverse impact on the plan. Varity, 516 U.S. at 505. Rather, the determinative factor was that 12 the employer intentionally connected its statements about [the subsidiary s] financial health to 13 statements it made about the future of benefits, so that its intended communication about the 14 security of benefits was rendered materially misleading. Id. The Court emphasized that 15 making intentional representations about the future of plan benefits in that context is an act of 16 plan administration under section 3(21)(A). Id. (emphasis added). 17 In light of Varity, I conclude that plaintiffs have sufficiently alleged that Citigroup and 18 Prince were acting as fiduciaries within the meaning of section 3(21)(A) when they made the 19 misrepresentations here at issue. Plaintiffs allege that Citigroup and Prince were fiduciaries to 20 the extent they exercised authority or responsibility over the administration of the Plans. 21 Compl. ¶¶ 52, 61. This conclusion is supported with factual allegations which, if true, would -30- 1 establish that Citigroup and Prince conveyed information albeit misleading information about 2 the likely future of Plan benefits. See Varity, 516 U.S. at 504. 3 Specifically, plaintiffs allege that Citigroup and Prince regularly communicated with . . . 4 the Plans participants[ ] about Citigroup s performance, future financial and business prospects, 5 and Citigroup stock, the single largest asset of [the] Plans. Compl. ¶ 197 (emphasis added); 6 see also id. ¶¶ 30, 48. These communications, which were directed to Plan participants in 7 various writings and at mandatory town hall meetings, allegedly encouraged employees to invest 8 in Citigroup stock through the Plans. According to plaintiffs, the communications fostered an 9 inaccurately rosy picture of the soundness of Citigroup stock as a Plan investment by, among 10 other things, failing to disclose the significance and the risks posed by the Company s subprime 11 exposure. Id. ¶¶ 199-200; see also id. ¶¶ 60 ( Prince made numerous statements, many of 12 which were incomplete and inaccurate, to employees, and thus Plan participants, regarding the 13 Company, and the future prospects of the Company specifically with regard to the risk, or 14 purported lack thereof, faced by the Company as a result of its subprime exposure. ), 133, 136, 15 191, 237. As a result, Citigroup and Prince allegedly prevented the Plans participants from 16 appreciating the true risks presented by invest[ing] in Citigroup stock, and thus deprived 17 participants of the opportunity to make informed investment decisions. Id. ¶ 199. 18 Accepting these allegations as true, and drawing all reasonable inferences in the 19 plaintiffs favor, I would hold that plaintiffs sufficiently alleged that Citigroup and Prince acted 20 as fiduciaries within the meaning of section 3(21)(A) of ERISA. This is because plaintiffs 21 allegations, if true, would demonstrate that Citigroup and Prince intentionally connected their 22 statements about the financial health of Citigroup and the performance of its stock to the likely -31- 1 future of Plan benefits, such that their intended communication about the security of benefits 2 was materially misleading, Varity, 516 U.S. at 505. That is, plaintiffs sufficiently allege that 3 Citigroup and Prince acted as fiduciaries because, under the circumstances, the making of 4 intentional representations about the future of plan benefits is an act of plan administration 5 within the meaning of ERISA. See id. 6 In holding that neither Citigroup nor Prince acted as a Plan fiduciary, the majority finds 7 inapplicable the rule articulated in Varity. The majority observes that the employer in Varity 8 unlike Citigroup and Prince also served as the designated plan administrator. According to the 9 majority, then, Varity stands for the proposition that an employer may qualify as a fiduciary 10 11 under the circumstances alleged here only if it is also the designated plan administrator. I do not understand Varity or ERISA to impose such a formalistic limitation. As the 12 Supreme Court has emphasized, ERISA provides that a person is a fiduciary not only if he is 13 so named by a benefit plan, but also if he exercises discretionary authority over the plan s 14 administration. See Mertens, 508 U.S. at 251 (citing 29 U.S.C. §§ 1102(a), 1002(21)(A)). In 15 other words, ERISA defines fiduciary not in terms of formal trusteeship, but in functional 16 terms of . . . authority over the plan. Id. at 262. As a result, persons other than designated plan 17 administrators may, by performing an administrator-type function, acquire fiduciary status. The 18 majority may be correct that Citigroup and Prince were not the official Plan administrators, and 19 thus were not [officially] responsible for communicating with Plan participants, Maj. Op. at 20 [33] (emphasis added). But actors cannot take refuge from fiduciary status in official titles or 21 responsibilities where their ultra vires conduct is fiduciary in nature. A rule to the contrary 22 would create perverse incentives anathema to ERISA. -32- 1 As I see it, the point in Varity is not that the designation of plan administrator is a 2 prerequisite to fiduciary status. Instead, I view Varity as standing for the proposition that a 3 person may act as a fiduciary regardless of his official title when he makes intentional 4 representations about the future of plan benefits, because such conduct amounts to an act of plan 5 administration within the meaning of section 3(21)(A). See Varity, 516 U.S. at 502-05. In 6 short, the alleged misrepresentations at issue in Varity were actionable because they constituted 7 fiduciary acts under ERISA s functional definition of fiduciary ; whether the employer was 8 also the designated plan administrator simply was not dispositive. 9 I am not alone in this view. See, e.g., Marks v. Newcourt Credit Group, Inc., 342 F.3d 10 444, 454 n.2 (6th Cir. 2003) (citing Varity, and noting that we have only recognized [fiduciary 11 duty] claims when a plan administrator, or an employer exercising discretionary authority in 12 connection with the plan s management or administration misrepresents a material fact 13 (internal quotations omitted) (emphasis added)); Luckasevic v. World Kitchen, Inc., No. 06 Civ. 14 1629, 2007 WL 2683995, at *4 (W.D. Pa. Sept. 7, 2007) (rejecting defendants claim that Varity 15 is inapposite based on the plan administrator distinction, and noting that the employer need 16 not be the administrator to be deemed a fiduciary ); Adamczyk v. Lever Bros. Co., Div. of 17 Conopco, 991 F. Supp. 931, 937-938, 938 (N.D. Ill. 1997) ( To the extent to which 18 [communications] are related to plan administration, [they] trigger fiduciary duties on the part of 19 the communicator, regardless of his or her identity. Even where an independent plan 20 administrator has been appointed, it is entirely possible that it will be the employer that engages 21 in such communications with the employees. Neither the statute nor the Supreme Court s -33- 1 holding in Varity precludes the possibility that the employer acts as a fiduciary in such a case. 2 (emphasis added)). 3 4 5 6 2. Plaintiffs Sufficiently Alleged That The Administration Committee Knowingly Made False Statements The majority also concludes that plaintiffs failed to adequately allege that the 7 Administration Committee made statements it knew to be false. According to the majority, the 8 Complaint contains only one, conclusory allegation on this front: that the Administration 9 Committee members knew or should have known about Citigroup s massive subprime 10 exposure as a result of their responsibilities as fiduciaries of the Plans, Maj. Op. at [35] 11 (quoting Compl. ¶ 188). The majority holds that this naked assertion does not satisfy the 12 plausibility standard mandated by Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), Maj. Op. 13 at [35] (quoting Twombly, 550 U.S. at 557). 14 I disagree. I find in the Complaint numerous and specific factual allegations which, if 15 true, would support a reasonable inference that the Administration Committee knowingly made 16 false statements to Plan participants. 17 Plaintiffs allege that the Administration Committee regularly provided materially false 18 and misleading information to Plan participants about Citigroup s performance, future financial 19 and business prospects, and its stock. Compl. ¶ 197. The Administration Committee allegedly 20 conveyed such false information through newsletters, memos, Plan documents, and other related 21 materials, as well as through the Plans Summary Plan Descriptions, which incorporated by 22 reference Citigroup s misleading filings with the Securities and Exchange Commission. Id. ¶¶ 23 67, 143 ( Citigroup did not disclose any subprime-related problems or the amount of its 24 subprime-related loan loss exposure in its 2006 Form 10-K. ), 197. According to plaintiffs, -34- 1 these communications fostered an inaccurately rosy picture of the soundness of Citigroup stock 2 as a Plan investment, id. ¶ 199, because they failed to disclose the magnitude of Citigroup s 3 involvement in subprime lending and other improper business practices, id. ¶ 237. 4 As I discussed in the context of the Prudence Claim, plaintiffs factual allegations support 5 a reasonable inference that the members of the Investment Committee, by virtue of their 6 fiduciary responsibilities, would have had at least some awareness of both Citigroup s massive 7 subprime exposure, and the growing potential for a market-wide crisis. I also noted that, because 8 one individual Mr. Tazik allegedly served on both the Investment and Administration 9 Committees, it was plausible that at least one member of the Administration Committee was also 10 aware of Citigroup s precarious financial position. 11 In the context of the instant claim, plaintiffs allegations support a similar inference. 12 Because, on the above analysis, it is plausible that at least some members of the Investment 13 Committee knew of Citigroup s subprime exposure, we may reasonably infer that they would 14 have known the falsity of SEC filings which misrepresented the extent of that exposure. And 15 because Mr. Tazik allegedly served on both the Investment and the Administration Committees, 16 it is reasonable to infer that he would thus have known of the falsity of the Summary Plan 17 Descriptions, which incorporated Citigroup s misleading SEC filings. See, e.g., In re Dynegy, 18 Inc. ERISA Litig., 309 F. Supp. 2d 861, 880-82 (S.D. Tex. 2004) (ruling that complaint withstood 19 dismissal where defendants allegedly knew or should have known by virtue of their positions in 20 the [c]ompany and access to contradictory information . . . that the [Summary Plan Documents] 21 contained affirmative, material misrepresentations (internal quotations omitted)). -35- 1 In light of the foregoing, I would hold that plaintiffs plausibly alleged that the 2 misstatements here at issue were knowingly made by at least one member of the Administration 3 Committee. Of course, the extent of that member s knowledge, or any other member s 4 knowledge, is an evidentiary matter that cannot be resolved here. Accordingly, I would vacate 5 the District Court s decision and remand for further proceedings. 6 C. Summary 7 For the reasons stated above, I would vacate the District Court s dismissal with respect to 8 both components of the Communication Claim, and remand for further proceedings. 9 III. 10 Remaining Claims The majority affirms the dismissal of Counts III (failure to monitor), IV (failure to 11 disclose information to co-fiduciaries), and VI (co-fiduciary liability) for the same reasons it 12 affirmed the dismissal of Counts I and II. Because I conclude that dismissal of Counts I and II 13 was improper, I would also vacate the dismissal of Counts II, IV and VI, and remand for further 14 proceedings. 15 Finally, the majority affirms the dismissal of Count V, in which plaintiffs allege that all 16 defendants breached their duty to avoid conflicts of interest by receiving stock-based 17 compensation. I agree that this claim was properly dismissed. I thus join the majority for this 18 part of the opinion only. 19 20 * * * Conclusion 21 In sum, I would not adopt the Moench presumption of prudence, but would instead 22 evaluate the prudence of ESOP fiduciaries investment decisions under plenary review. Pursuant -36- 1 to such a review, I would hold that plaintiffs Prudence Claim withstands scrutiny under Rule 2 12(b)(6) of the Federal Rules of Civil Procedure. I would also hold that the District Court erred 3 in dismissing plaintiffs Communication Claim. Accordingly, I would vacate the District Court s 4 dismissal of the foregoing claims, as well as its dismissal of the secondary claims (Counts II, IV, 5 and VI), and would remand for further proceedings. 6 7 Because I conclude that the majority properly affirmed the dismissal of Count V of plaintiffs Complaint, I join that part of the majority s opinion. -37-
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