No. 15-3569

_________________________________

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

_______________________________

LISA ALLEN and MISTY DALTON 

Plaintiffs-Appellants,

v.

GREATBANC TRUST COMPANY,

Defendant-Appellee.

________________________________

On Appeal from the United States District Court 

for the Northern District of Illinois 

________________________________

Brief of the Amicus Curiae, Thomas E. Perez, 

Secretary of Labor, United States Department of Labor, 

in Support of Appellants Requesting Reversal 

________________________________

M. PATRICIA SMITH ELIZABETH HOPKINS

Solicitor of Labor Counsel for Appellate and

 Special Litigation

G. WILLIAM SCOTT

Associate Solicitor for JEFFREY M. HAHN

Plan Benefits Security Division Trial Attorney

U.S. Department of Labor

200 Constitution Ave., N.W.

Room N-4611

Washington, D.C. 20210

 (202) 693-5695
TABLE OF CONTENTS

TABLE OF AUTHORITIES .................................................................................... ii

STATEMENT OF THE ISSUES............................................................................... 1 

THE SECRETARY'S INTEREST............................................................................. 2 

STATEMENT OF THE CASE.................................................................................. 2 

SUMMARY OF THE ARGUMENT ........................................................................ 8 

ARGUMENT...........................................................................................................10

I. THE DISTRICT COURT ERRED IN APPLYING 

DUDENHOEFFER'S "SPECIAL-CIRCUMSTANCES" 

REQUIREMENT TO CLAIMS INVOLVING THE PUCHASE 

OF NON-PUBLICLY TRADED STOCK..........................................10

II. THE DISTRICT COURT ERRED IN REQUIRING PLAINTIFFS 

TO PLEAD FACTS NEGATING AN EXEMPTION ON WHICH 

DEFENDANT HAS THE BURDEN OF PROOF IN ORDER TO 

SURVIVE A MOTION TO DISMISS ON THEIR PROHIBITED 

TRANSACTION CLAIM................................................................... 16 

CONCLUSION....................................................................................................... 25 

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE
ii

TABLE OF AUTHORITIES

Federal Cases:

Ashcroft v. Iqbal,

556 U.S. 662 (2009) ................................................................................. 6, 11, 12

Bell Atlantic Corp. v. Twombly,

550 U.S. 544 (2007) ................................................................................. 6, 11, 24

Braden v. Wal-Mart Stores, Inc.,

588 F.3d 585 (8th Cir. 2009).................................................................. 19, 21, 22

Crawford-El v. Britton,

523 U.S. 574 (1998) ............................................................................................24

Donovan v. Bierwirth,

680 F.2d 263 (2d Cir. 1982)................................................................................14

Donovan v. Cunningham,

716 F.2d 1455 (5th Cir. 1983)................................................................ 17, 18 n.3

Elmore v. Cone Mills Corp.,

23 F.3d 855 (4th Cir. 1994).......................................................................... 18 n.3

Eyler v. C.I.R.,

88 F.3d 445 (7th Cir. 1996).................................................................................17

Fifth Third Bancorp v. Dudenhoeffer,

134 S.Ct. 2459 (2014) .......................................................................... 1 & passim

Fish v. GreatBanc Trust Co.,

749 F.3d 671 (7th Cir. 2014).................................................................. 18, 22, 23

Halliburton Co. v. Erica P. John Fund, Inc. 

134 S.Ct. 2398 (2014) ............................................................................. 13, 13 n.2

Harris Trust & Sav. Bk. v. Salomon Smith Barney, Inc.,

530 U.S. 238 (2000) ............................................................................................16
iii

Federal Cases-(continued):

Heller Fin., Inc. v. Midwhey Powder Co.,

883 F.2d 1286 (7th Cir. 1989).............................................................................19

Howard v. Shay,

100 F.3d 1484 (9th Cir.1996), cert. denied.,

520 U.S. 1237 (1997) ............................................................................. 14, 18 n.3

In re Citigroup ERISA Litig.,

662 F.3d 128 (2d Cir. 2011) (all abrogated by Dudenhoeffer), 

134 S.Ct. 2459 .....................................................................................................10

Jones v. Bock,

549 U.S. 199 (2007) ..................................................................................... 20, 21

Keach v. U.S. Trust Co.,

419 F.3d 626 (7th Cir. 2005).................................................................. 14, 15, 18

Kirschbaum v. Reliant Energy, Inc.,

526 F.3d 243 (5th Cir. 2008)...............................................................................10

Kross v. W. Elec. Co.,

701 F.2d 1238 (7th Cir. 1983).............................................................................21

Kuper v. Iovenko,

66 F.3d 1447 (6th Cir.1995)................................................................................10

Lowen v. Tower Asset Mgmt., Inc.,

829 F.2d 1209 (2d Cir. 1987)....................................................................... 18 n.3

Matter of Excello Press, Inc.,

967 F.2d 1109 (7th Cir.1992)..............................................................................23

Moench v. Robertson,

62 F.3d 553 (3d Cir. 1995)..................................................................................10

Mosely v. Bd. of Educ. of the City of Chicago,

434 F.3d 527 (7th Cir. 2006)...............................................................................19
iv

Federal Cases-(continued):

Quan v. Computer Scis. Corp.,

623 F.3d 870 (9th Cir. 2010)...............................................................................10

Secretary of Labor v. Fitzsimmons, (en banc)

805 F.2d 682 (7th Cir. 1986).................................................................................2

Sec. & Exch. Comm'n v. Ralston Purina Co.,

346 U.S. 119 (1953) ............................................................................................22

Shaw v. Delta Air Lines, Inc.,

463 U.S. 85 (1983) ............................................................................................2, 3

Summers v. State St. Bank & Tr. Co.,

463 F.3d 404 (7th Cir. 2006)..............................................................................12

Tregenza v. Great Am. Commc'ns Co.,

12 F.3d 717 (7th Cir. 1993).......................................................................... 19, 20

Federal Statutes:

Employee Retirement Income Security Act of 1974,

as amended, 29 U.S.C. 1001 et seq:

Section 2, 29 U.S.C. § 1001..................................................................................1

Section 3(14)(A), 29 U.S.C. § 1002(14)(A).......................................................17

Section 3(14)(H), 29 U.S.C. § 1002(14)(H).......................................................17

Section 3(18), 29 U.S.C. § 1002(18) ....................................................... 3 n.1, 17

Section 3(18)(B), 29 U.S.C. § 1002(18)(B) .......................................................15

Section 404, 29 U.S.C. § 1104..........................................................................3, 9

Section 404(a), 29 U.S.C. § 1104(a)................................................ 16, 17, 18, 20

Section 404(a)(1), 29 U.S.C. § 1104(a)(1) ...........................................................4
v

Federal Statutes-(continued):

Section 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A)................................................3

Section 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B).................................................3

Section 404(a)(1)(C), 29 U.S.C. § 1104(a)(1)(C)...............................................11

Section 406, 29 U.S.C. § 1106............................................................. 2 & passim

Section 406(a), 29 U.S.C. § 1106(a).................................................... 1 & passim

Section 406(a)(1), 29 U.S.C. § 1106(a)(1) .................................................... 5, 19

Section 406(a)(1)(A), 29 U.S.C. § 1106(a)(1)(A)................................................3

Section 406(b)(2), 29 U.S.C. § 1106(b)(2)...........................................................5

Section 406(b)(3), 29 U.S.C. § 1106(b)(3).............................................. 5, 18 n.3

Section 406(a)(1)(C), 29 U.S.C. § 1106(a)(1)(C)...............................................19

Section 407(d)(6)(A), 29 U.S.C. § 1107(d)(6)(A)..............................................11

Section 408, 29 U.S.C. § 1108............................................................. 9 & passim

Section 408(b)(2), 29 U.S.C. § 1108(b)(2).........................................................19

Section 408(b)(19), 29 U.S.C. § 1108(b)(19).............................................. 22, 23

Section 408(b)(19)(D), 29 U.S.C. § 1108(b)(19)(D)..........................................23

Section 408(e), 29 U.S.C. § 1108(e).................................................... 2 & passim

Section 408(e)(1)(A), 29 U.S.C. § 1108(e)(1)(A)................................................7

Miscellaneous:

Fed. R. Civ. P. 7(a)...................................................................................................24
vi

Miscellaneous-(continued):

Fed. R. Civ. P. 8 .................................................................................................. 7, 21

Fed. R. Civ. P. 8(a).............................................................................................. 5, 19

Fed. R. Civ. P. 11.....................................................................................................23

Fed. R. Civ. P. 11(b) ................................................................................................23

Fed. R. Civ. P. 12(b)(6)............................................................................................11

Fed. R. Civ. P. 12(e).................................................................................................24

Burton G. Malkiel, "Reflections on the Efficient Market Hypothesis: 30 Years 

Later", 40 Fin. Rev. 1 (2005)..............................................................................12
STATEMENT OF THE ISSUES

This appeal stems from a suit brought by two participants in the PersonalTouch Employee Stock Ownership Plan (ESOP), a pension plan governed by the 

Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. 

Their complaint alleges that the plan trustee breached its duties and engaged in 

prohibited transactions under ERISA by allowing the ESOP to substantially 

overpay for stock in the sponsoring privately-held company. The district court 

dismissed the case on the pleadings. The Secretary's brief addresses the following 

issues on appeal: 

1. Whether, under the pleading standards for cases concerning plan 

investments in publicly-traded stock set out by the Supreme Court in Fifth Third 

Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), the participants were required to 

plead the existence of "special circumstances" that would have alerted their trustee, 

GreatBanc, to the fact that the price paid by the Personal-Touch Home Care, Inc. 

Employee Stock Ownership Plan for privately-held employer stock exceeded the 

stock's fair market value.

2. Whether, to survive a motion to dismiss on their prohibited-transaction 

claim under ERISA section 406(a), 29 U.S.C. § 1106(a), plaintiffs were required 

not only to allege a transaction proscribed by section 406(a), but also to allege facts 
2

showing that the transaction was not exempt under the "adequate consideration" 

exemption in ERISA section 408(e), 29 U.S.C. § 1108(e). 

THE SECRETARY'S INTEREST

The Secretary of Labor has primary regulatory and enforcement authority 

for Title I of ERISA. See Secretary of Labor v. Fitzsimmons, 805 F.2d 682, 692-

93 (7th Cir. 1986) (en banc). The Secretary has a substantial interest in ensuring 

that the "special circumstances" pleading standard recently set out by the Supreme 

Court in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), which is 

based on the assumption that publicly-traded stock generally is correctly priced so 

long as there is no fraud on the market, is not misapplied in the very different 

context of determining whether a fiduciary overpaid for privately-held stock. The 

Secretary also has a substantial interest in ensuring that plan fiduciaries do not 

cause plans to engage in transactions prohibited by ERISA section 406, and that 

participants and beneficiaries are not required to plead facts relevant to a 

fiduciary's affirmative defense to such a prohibited transaction, especially given 

that, in many cases, such facts may reasonably be ascertained only through 

discovery. 

STATEMENT OF THE CASE

1. ERISA is a comprehensive statute designed to promote the interests of 

employees and their beneficiaries in employee benefit plans. Shaw v. Delta Air 
3

Lines, Inc., 463 U.S. 85, 90 (1983). It does this primarily by imposing, in section 

404, a number of stringent duties on plan fiduciaries, including a duty of loyalty, a 

duty to act for the exclusive purpose of providing plan benefits and defraying

reasonable expenses, and a duty of prudence. 29 U.S.C. § 1104(a)(1)(A), (B). In 

addition, the statute, in section 406, supplements these general fiduciary duties by

flatly prohibiting fiduciaries from engaging in certain transactions that are likely to 

harm the plans they serve. 29 U.S.C. § 1106. As relevant here, ERISA prohibits 

any sale of property between a plan and a related party, known under ERISA as 

"party in interest," id. at § 1106(a)(1)(A), although it exempts the sale of employer 

stock in some situations, including where it is for "adequate consideration," id. § 

1108(e).1

2. Plaintiffs Lisa Allen and Misty Dalton are employees of PersonalTouch Home Care, Inc. ("Personal-Touch") and participants in their company's

ESOP. A11-A12, ¶¶ 2, 4. Personal-Touch is a privately-held company that 

provides home health care and related services. A12, ¶ 5. On January 1, 2010, 

Personal-Touch adopted the ESOP, and some time later that year appointed 

GreatBanc to represent the ESOP as its trustee in a stock purchase transaction. 

 

1 ERISA defines "adequate consideration" for stock and other assets for which 

there is not a "generally recognized market," such as the Personal-Touch stock at 

issue here, as "the fair market value of the asset as determined in good faith by the 

trustee." 29 U.S.C. § 1002(18).
4

A14-A15, ¶¶ 17-18. On December 9, 2010, GreatBanc caused the ESOP to 

purchase Personal-Touch stock from the company and its principal shareholders 

for $60 million (the "Transaction"). A15, ¶ 19. To finance the ESOP's purchase, 

GreatBanc authorized the ESOP to take out a $60 million loan from PersonalTouch at an interest rate of 6.25%. A12, ¶ 7; A15, ¶ 20. 

By December 31, 2010, just three weeks after the Transaction closed, the 

value of the ESOP's Personal-Touch stock had already declined by 22%, to 

approximately $47 million. A 15, ¶ 21. By the end of 2011, the stock's value had 

further declined to approximately $30 million, a nearly 50% reduction from the 

Transaction price. A16, ¶ 22. As of the end of 2013, the stock's value had 

declined even more, to less than $27 million. Id., ¶ 23. 

3. On April 7, 2015, plaintiffs filed a complaint in the United States 

District Court for the Northern District of Illinois asserting two claims for relief 

against GreatBanc for alleged ERISA violations. Because the ESOP was 

purchasing employer stock that was not publicly traded, the ESOP purchase 

required, as a first step, that the stock be valued. The first claim alleges that 

GreatBanc acted imprudently under ERISA section 404(a)(1), 29 U.S.C. § 

1104(a)(1), by, among other things, failing to determine that it received complete 

and accurate financial information from Personal-Touch relevant to the valuation, 

failing adequately to investigate the reasonableness of the financial projections
5

provided by Personal-Touch, relying upon a flawed valuation report, and 

ultimately causing the ESOP to pay more than fair market value for PersonalTouch stock. A16, ¶ 24; A17, ¶ 27; A19-A20, ¶ 38. As additional factual support 

for their imprudence claim, the complaint details, among other things, the decline 

in the stock's value in the months and years following the Transaction, and 

explains that "[g]iven the precipitous decline in the value of Personal-Touch stock, 

it is implausible that GreatBanc adequately and diligently reviewed or analyzed 

Personal-Touch's earning statements." A17, ¶ 30. 

The second claim alleges that GreatBanc violated ERISA's prohibited 

transactions provision, section 406, 29 U.S.C. § 1106, in three ways: (1) by causing 

the ESOP to purchase stock from "parties in interest" (the selling shareholders), in 

violation of ERISA section 406(a)(1), A21, ¶ 42; (2) by acting in the Transaction 

on behalf of parties who were adverse to the ESOP (the selling shareholders), as 

evidenced by the substantial overpayment it caused the sellers to receive, in 

violation of ERISA section 406(b)(2), A21-22, ¶ 46; and (3) by receiving 

compensation from the selling shareholders, in violation of ERISA section 

406(b)(3), A22,¶ 47.

4. On October 1, 2015, the district court dismissed the case in its 

entirety. A1-A8. The court held that neither of plaintiffs' claims satisfied the 

pleading standards of Federal Rule of Civil Procedure 8(a), as articulated by the 
6

Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and 

Ashcroft v. Iqbal, 556 U.S. 662 (2009). 

Turning first to plaintiffs' breach of fiduciary duty claim, the court focused 

its analysis "solely on Defendant's actions or inactions at the time of the ESOP 

formation and stock purchase." A4. According to the court, the complaint's 

allegations concerning GreatBanc's transgressions contemporaneous with the 

Transaction – including GreatBanc's failure to thoroughly investigate the value of 

Personal-Touch stock – were "conclusory" and, as a result, "need not be accepted 

as true." Id. 

As to the complaint's more specific allegations of the stock's postTransaction decline, the court reasoned that a post-purchase stock-price drop "is 

not necessarily indicative of the fair market value before the purchase" and "does 

not speak directly to Defendant's duty 'under the circumstances then prevailing' at 

the time of the purchase." Id. In further support of this conclusion, the court drew 

upon the Supreme Court's decision in Fifth Third Bancorp v. Dudenhoeffer, which 

held that a plaintiff must show "special circumstances" to properly plead a claim 

that a fiduciary should have known, based on publicly-available information alone, 

that a publicly-traded stock was overpriced at the time of purchase. 134 S. Ct. 

2459, 2471 (2014). While recognizing that the instant case involves stock that is 

not publicly traded, the district court nevertheless reasoned that Dudenhoeffer's 
7

"special circumstances" requirement "seems applicable in this case." A5. The 

court then concluded that, by failing to plead any special circumstances – such as a 

specific risk facing Personal-Touch that Greatbanc failed to properly assess –

plaintiffs did not meet the pleading standards of Rule 8 or Dudenhoeffer. Id.

The court dismissed plaintiffs' prohibited transaction claim for the same 

reasons. The court recognized that section 406 "categorically prohibits almost any 

transaction between an ESOP and a party in interest," but then noted that under 

ERISA section 408(e), "[a] purchase of shares by an ESOP from a party in interest 

is exempted from being a prohibited transaction if the shares are purchased for 

'adequate consideration.'" A6-A7 (quoting 29 U.S.C. § 1108(e)(1)(A)). While 

acknowledging that,"[a]t trial, the defendant would carry the burden of satisfying 

this [adequate-consideration] test," the court nevertheless held that this test 

supplied the "central question" on plaintiffs' prohibited transaction claim, which 

was the same question on which their fiduciary-breach claim turned: "did Plaintiffs 

successfully plead that the ESOP paid more than fair market value for the 

Personal-Touch shares?" A7. Because plaintiffs' fiduciary duty claim failed, the 

court reasoned, their prohibited transaction claim must fail along with it. Id. At 

plaintiffs' request, the court subsequently entered a final judgment. A9-A10.
8

SUMMARY OF ARGUMENT

The district court erroneously conflated the pleading standards for two 

distinct claims asserted in this case, and dismissed both for failing to satisfy a 

nebulous "special circumstances" test grafted from a Supreme Court decision 

(Dudenhoeffer) that was never meant to apply to a case like this one. 

1. The Supreme Court in Dudenhoeffer required plaintiffs to plead the 

existence of "special circumstances" in a very specific class of cases: those 

involving allegations that a fiduciary should have known from "publicly available 

information alone" that a "publicly traded stock" was overvalued. Dudenhoeffer, 

134 S. Ct. at 2471. And it imposed this requirement for a very specific reason: 

because fiduciaries may, as a general matter, assume that the market price of 

publicly-traded stock is an "unbiased assessment of the security's value," meaning 

that only in "special circumstances" would it be plausible to expect a fiduciary to 

realize that the presumptively efficient market, in fact, was wrong. Id. at 2472. In 

contrast, plaintiffs here allege that GreatBanc imprudently purchased stock in a 

privately-held company that does not trade on any stock market, and whose value 

can be ascertained only through the good-faith and painstaking due diligence of its 

purchaser. Plaintiffs do not need to plead additional "special circumstances" under 

Dudenhoeffer in order to state a claim that GreatBanc failed in this regard and thus 
9

breached its duty of procedural prudence under ERISA section 404, or that it 

engaged in a prohibited transaction under ERISA section 406.

2. Even if plaintiffs were required to plead "special circumstances" to 

sustain their fiduciary breach claim, they certainly were not required to do so for 

their prohibited-transaction claim. Section 406 of ERISA imposes per se 

prohibitions on certain transactions that Congress considered especially rife with 

the potential for abuse, like those between a plan and company insiders, who

ERISA refers to as "parties in interest." See 29 U.S.C. § 1106. Despite finding 

that the Transaction here was one between a plan and "parties in interest," the 

district court nevertheless faulted plaintiffs for failing to plead facts negating an 

exemption to the prohibited transaction rules set out in ERISA section 408, 29 

U.S.C. § 1108. This Court has made clear, however, that the section 408 

exemptions are affirmative defenses on which the defendant has the burden of 

proof. And this Court has been equally clear that plaintiffs need not allege facts 

negating a defendant's affirmative defense, whether grounded in ERISA or any 

other statute. Plaintiffs were required only to plead a transaction proscribed by 

ERISA section 406, which they indisputably did.
10

ARGUMENT

I. THE DISTRICT COURT ERRED IN APPLYING DUDENHOEFFER'S 

"SPECIAL-CIRCUMSTANCES" REQUIREMENT TO CLAIMS 

INVOLVING THE PURCHASE OF NON-PUBLICLY-TRADED STOCK

The district court erred in applying the Supreme Court's decision in 

Dudenhoeffer in analyzing the sufficiency of the plaintiffs' fiduciary-breach and 

prohibited-transaction claims. Invoking Dudenhoeffer, the court faulted plaintiffs 

for failing to plead "special circumstances" that should have alerted GreatBanc to 

the fact that it was paying too much for Personal-Touch stock. A5. As explained 

below, the letter and logic of Dudenhoeffer's "special-circumstances" requirement 

is confined to cases involving a fiduciary's purchase of publicly-traded stock, not 

the non-publicly traded stock at issue here. 

Prior to Dudenhoeffer, a number of lower courts had applied a "presumption 

of prudence" to an ESOP fiduciary's decision to invest in employer stock. See, 

e.g., Moench v. Robertson, 62 F.3d 553, 570 (3d Cir. 1995); Kuper v. Iovenko, 66 

F.3d 1447 (6th Cir.1995); Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254 

(5th Cir. 2008); Quan v. Computer Scis. Corp., 623 F.3d 870, 881 (9th Cir. 2010); 

In re Citigroup ERISA Litig., 662 F.3d 128, 139–140 (2d Cir. 2011) (all abrogated 

by Dudenhoeffer, 134 S. Ct. 2459). This presumption sought to reconcile two 

seemingly competing forces facing ESOP fiduciaries: ERISA's stringent duty of 

prudence on the one hand, and ERISA's requirement that ESOPs invest "primarily" 
11

in employer stock on the other. See 29 U.S.C. § 1107(d)(6)(A) (defining an ESOP 

as a stock bonus plan "which is designed to invest primarily in qualifying employer 

securities."). With ERISA encouraging ESOP fiduciaries to purchase employer 

stock, the theory went, these fiduciaries should be given some leeway for acting 

accordingly, which courts attempted to accomplish through a rebuttable 

presumption of prudence.

In Dudenhoeffer, the Supreme Court held that ESOP fiduciaries are not 

entitled to a special presumption of prudence when they purchase employer stock; 

as the Court reasoned, Congress already accommodated ESOP fiduciaries by 

specifically exempting them from ERISA's diversification requirement, 29 U.S.C. 

§ 1104(a)(1)(C). Dudenhoeffer, 134 S. Ct. at 2467. Rather, ESOP fiduciaries "are 

subject to the duty of prudence just as other ERISA fiduciaries are." Id. Although 

the Court's rejection of the presumption of prudence is Dudenhoeffer's core 

holding, the Court went on to address concerns that the presumption's demise 

would lead inevitably to meritless lawsuits against ESOP fiduciaries. One 

safeguard, the Court explained, is the pleading standard required to survive a 

motion to dismiss under Rule 12(b)(6), which the Court most recently expounded 

on in Twombly and Iqbal. 134 S. Ct. at 2471. As those cases instruct, "only a 

complaint that states a plausible claim for relief survives a motion to dismiss." 

Iqbal, 556 U.S. at 679 (emphasis added). Whether a claim is "plausible," the Court 
12

said in Iqbal, will be "context-specific," but in all cases the well-pleaded facts must 

"permit the court to infer more than the mere possibility of misconduct." Id. 

The Court in Dudenhoeffer then offered guidance for how Iqbal's 

plausibility standard would apply to the case before it, where the plaintiffs alleged 

that defendants "knew or should have known in light of publicly available 

information . . . that continuing to hold and purchase Fifth Third stock was 

imprudent." Dudenhoeffer, 134 S. Ct. at 2471. The Court explained that 

fiduciaries are not expected when purchasing or selling publicly-traded employer 

stock to outsmart the stock market and "may, as a general matter, prudently rely on 

the market price." Id. In support of that proposition, the Supreme Court cited

Summers v. State St. Bank & Tr. Co., where this Court similarly said that "[a]

trustee is not imprudent to assume that a major stock market . . . provides the best 

estimate of the value of the stocks traded on it that is available to him." 453 F.3d 

404, 408 (7th Cir. 2006) (citing Burton G. Malkiel, "Reflections on the Efficient 

Market Hypothesis: 30 Years Later," 40 Financial Rev. 1 (2005)). Indeed, this 

Court reasoned that, for a trustee to think that it could predict the future of a 

publicly-traded company more accurately than the market, "would be hubris." Id. 

Given the general reliability of publicly-traded stock prices, the Supreme Court 

concluded in Dudenhoeffer that "where a stock is publicly traded" – like that of 

Fifth Third Bank – "allegations that a fiduciary should have recognized from 
13

publicly-available information alone that the market was over- or undervaluing the 

stock are implausible as a general rule, at least in the absence of special

circumstances." Id. (emphasis added).2 

By its plain terms, then, Dudenhoeffer's "special-circumstances" pleading 

requirement is confined to cases "where a stock is publicly traded." Id. In 

contrast, plaintiffs here alleged that GreatBanc overpaid for stock in a private

company (Personal-Touch) that does not trade on a public stock exchange. 

Moreover, Dudenhoeffer was about fiduciary breaches under section 404 and 

nothing in the Supreme Court's decision indicates that it was speaking to prohibited 

transaction allegations under section 406, such as those alleged here and discussed 

further in Part II.

Nor does the logic for such a heightened pleading burden apply to a case 

involving a fiduciary's purchase of non-publicly-traded stock. The Supreme Court 

predicated its "special circumstances" requirement on the notion that, in general, 

public stock market prices represent "'an unbiased assessment of the security's 

value.'" Dudenhoeffer, 134 S. Ct. at 2472 (quoting Halliburton Co. v. Erica P. 

John Fund, Inc. 134 S. Ct. 2398, 2411 (2014)). Hence, allegations that a fiduciary 

 2 The Court did not elaborate on what would qualify as "special circumstances," 

other than to say that they would have to "affect[] the reliability of the market price 

as 'an unbiased assessment of the security's value in light of all public 

information.'" 134 S. Ct. at 2472 (quoting Halliburton Co. v. Erica P. John Fund, 

Inc., 134 S. Ct. 2398, 2411 (2014)).
14

should have understood from public information that the "unbiased" market price 

of a publicly-traded stock did not reflect its true value are implausible, absent 

"special circumstances." Dudenhoeffer, 134 S. Ct. at 2471. But for privatecompany stock, there is no stock market price that serves as a reliable proxy for the 

stock's value. Instead, a fiduciary must determine how much to pay through its 

own "good faith" investigation, a process that involves performing due diligence 

on the company and assigning it an enterprise value. See Keach v. U.S. Trust Co., 

419 F.3d 626, 636 (7th Cir. 2005). Even where fiduciaries enlist the help of expert

valuation advisors, their advice will not "operate as a complete whitewash which, 

without more, satisfies ERISA's prudence requirement." Donovan v. Bierwirth, 

680 F.2d 263, 272 (2d Cir. 1982). Rather, the fiduciary still must "'investigate the 

expert's qualifications,'" "'provide the expert with complete and accurate 

information,'" and "'make certain that reliance on the expert's advice is reasonably 

justified under the circumstances.'" Keach, 419 F.3d at 637 (quoting Howard v. 

Shay, 100 F.3d 1484, 1489 (9th Cir.1996)). 

Thus, unlike a stock market price, there is nothing inherently reliable about a 

fiduciary's investigation of a private company's value, and nothing in Dudenhoeffer

suggests that fiduciaries are entitled to a thumb on the scale in a case such as this,

where Plaintiffs allege that Greatbanc determined the value of the privately-held 
15

Personal-Touch stock based on "inflated financial projections and a flawed 

valuation report." A16, ¶ 24. 

If anyone should receive the benefit of the doubt as to the adequacy of a 

fiduciary's investigation of a private company's fair market value, ERISA makes 

clear that it is the participants and beneficiaries, particularly with regard to the 

claim that the trustee violated ERISA's prohibited transaction rules. As discussed 

in Section II, infra, it is the fiduciary's burden to prove that an ESOP's otherwise 

prohibited purchase of employer stock from company insiders (as happened here) 

is exempted under ERISA section 408(e), which entails proving that the fiduciary 

determined the stock's fair market value by way of a "good faith" investigation. 

See 29 U.S.C. § 1002(18)(B); Keach, 419 F.3d at 636. But by requiring plaintiffs 

to plead "special circumstances" relating to "the financial situation of PersonalTouch" to sustain their claim that GreatBanc caused the ESOP to engage in a 

prohibited transaction, A5 – rather than just the prohibited transaction itself – the 

district court effectively transferred the burden of proving the stock's fair market 

value from the fiduciary (GreatBanc) to the participants (plaintiffs). 

Thus, neither Dudenhoeffer nor ERISA required plaintiffs to plead "special 

circumstances" that should have alerted GreatBanc to the fact that it was paying 

too much for Personal-Touch stock. 
16

II. THE DISTRICT COURT ERRED IN REQUIRING PLAINTIFFS TO 

PLEAD FACTS NEGATING AN EXEMPTION ON WHICH 

DEFENDANT HAS THE BURDEN OF PROOF IN ORDER TO 

SURVIVE A MOTION TO DISMISS ON THEIR PROHIBITED 

TRANSACTION CLAIM

In dismissing plaintiffs' prohibited-transaction claim under ERISA section 

406(a), the district court acknowledged that the transaction at issue, as pled, was 

prohibited by section 406(a). But according to the court, that was not enough, as 

plaintiffs also had to plead that the transaction was not exempt under ERISA 

section 408(e)'s "adequate-consideration" exemption. And because the adequateconsideration analysis, the court said, shared the same central question with 

plaintiffs' deficient fiduciary breach claim, the court dismissed plaintiffs' section 

406(a) claim for the same reasons it dismissed their section 404(a) claim. A7. In 

so holding, the district court impermissibly imposed on plaintiffs the burden to 

plead facts disproving that the fiduciaries had met section 408(e)'s adequate 

consideration exemption, which is an affirmative defense on which the defendant 

has the burden of proof.

In section 406 of ERISA, Congress strengthened and supplemented ERISA's 

exacting fiduciary standards "by categorically barring certain transactions deemed 

'likely to injure the pension plan.'" Harris Trust & Sav. Bk. v. Salomon Smith 

Barney, Inc., 530 U.S. 238, 241-42 (2000) (citation omitted). Among these 

proscriptions is a transaction between a plan and a "party in interest," 29 U.S.C. § 
17

1106(a), a status that is defined to include company insiders, such as "any 

fiduciary," and "any officer, director, or 10% or more shareholder of an employer 

whose employees are covered by the plan." 29 U.S.C. § 1002(14)(A) and (H). 

"Doubtlessly recognizing that such absolute prohibitions would significantly 

hamper the implementation of ESOPs, particularly by small companies, Congress 

enacted in Section 408 a conditional exemption from the prohibited transaction 

rules for acquisition of employer securities by ESOPs and certain other plans." 

Donovan v. Cunningham, 716 F.2d 1455, 1465 (5th Cir. 1983). Specifically, 

section 408(e) of ERISA allows a plan to buy employer stock from a party in

interest if the plan pays no more than "adequate consideration." 29 U.S.C. § 

1108(e). ERISA, in turn, defines "adequate consideration" for assets other than 

publicly-traded stock as the "fair market value of the asset as determined in good 

faith by the trustee or named fiduciary." 29 U.S.C. § 1002(18). In light of the 

definition's "good faith" component, this Court has said "that the adequate 

consideration test focuses on the conduct of the fiduciaries in determining the 

price, not the price itself." Eyler v. C.I.R., 88 F.3d 445, 455 (7th Cir. 1996). 

Because section 404(a)'s prudence standard likewise focuses on a fiduciary's 

conduct, the question whether an ESOP fiduciary satisfied its section 404(a) 

fiduciary duties overlaps substantially with the question of whether it qualifies for 

section 408(e)'s adequate-consideration exemption. See Cunningham, 716 F.2d at 
18

1467-68 (satisfying the adequate-consideration exemption requires "a 

determination of fair market value by way of a prudent investigation in the 

circumstances then prevailing.") (emphasis added).

But there is one significant difference. Whereas plaintiffs have the burden of 

proving a fiduciary breach under section 404(a), this Court has correctly held that, 

for purposes of section 408(e), the "trustee or fiduciary has the burden to establish 

that the ESOP paid no more than fair market value for the asset, and that the fair 

market value was determined in good faith by the fiduciary." Keach v. U.S. Trust 

Co., 419 F.3d 626, 636 (7th Cir. 2005); accord Fish v. GreatBanc Trust Co., 749 

F.3d 671, 685 (7th Cir. 2014).

3 Because the burden of proof is on the fiduciary to 

show that section 408 exempts an otherwise prohibited transaction, the only 

obligation imposed on a plaintiff asserting a prohibited transaction claim is to 

plead and prove the existence of a transaction prohibited by section 406(a). 

 3 This Court is hardly alone in imposing on defendants the burden of proving 

section 408's prohibited-transaction exemptions. See, e.g., Lowen v. Tower Asset 

Mgmt., Inc., 829 F.2d 1209, 1215 (2d Cir. 1987) ("a fiduciary charged with a 

violation of Section [1106(b)(3)] . . . must prove by a preponderance of the 

evidence that the transaction in question fell within an exemption"); Elmore v. 

Cone Mills Corp., 23 F.3d 855, 864 (4th Cir. 1994) ("in order to avoid liability 

under [Section 1106, the defendant] bears the burden of proving the transaction 

was for adequate consideration in compliance with [Section 1108(e)]"); Donovan 

v. Cunningham, 716 F.2d 1455, 1467-1468 (5th Cir. 1983) (similar); Howard v. 

Shay, 100 F.3d 1484, 1488 (9th Cir. 1996), cert. denied, 520 U.S. 1237 (1997) 

(characterizing defendant's burden of proving adequate-consideration exemption as 

a "heavy one").
19

That is exactly what the Eighth Circuit concluded in Braden v. Wal-Mart 

Stores, Inc., 588 F.3d 585, 602 (8th Cir. 2009). In that case, the district court

dismissed plaintiffs' section 406(a)(1) claim because the complaint "failed to show 

that [the transactions] were not exempted by § 1108." Id. at 560. "This was 

wrong," the Eighth Circuit held, "because the statutory exemptions established by 

§ 1108 are defenses which must be proven by the defendant." Id. at 601. The 

court instead found that the plaintiff had properly stated a claim simply by alleging 

that the defendant caused the plan to enter a transaction proscribed by section 

406(a)(1)(C). Id. This was "sufficient to shift the burden to appellees to show that 

'no more than reasonable compensation [was] paid' for Merrill Lynch's services," 

which was the exemption defendant was claiming in that case. Id. (quoting 29 

U.S.C. § 1108(b)(2)). 

While this Court has not specifically considered whether plaintiffs asserting 

prohibited-transaction claims under ERISA section 406 must plead facts negating

the corresponding section 408 exemption (notwithstanding that defendants have 

the burden of proof on that score), it has held that, in general, "a plaintiff is not 

required to negate an affirmative defense in his complaint." Tregenza v. Great 

Am. Commc'ns Co., 12 F.3d 717 (7th Cir. 1993); Mosely v. Bd. of Educ. of the 

City of Chicago, 434 F.3d 527, 533 (7th Cir. 2006) (same). Rather, it is a 

defendant's obligation to plead the applicability of an affirmative defense, and to 
20

do so consistent with the requirements of Rule 8(a). Heller Fin., Inc. v. Midwhey 

Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989) ("Affirmative defenses are 

pleadings and, therefore, are subject to all pleading requirements of the Federal 

Rules of Civil Procedure."). To be sure, if a plaintiff's complaint, on its face, 

happens to establish an affirmative defense, then the complaint may be dismissed 

on that basis. Jones v. Bock, 549 U.S. 199, 214-15 (2007) ("Whether a particular 

ground for opposing a claim may be the basis for dismissal for failure to state a 

claim depends on whether the allegations in the complaint suffice to establish that

ground.") (emphasis added). "But it does not follow from the fact that a plaintiff 

can get into trouble by pleading more than he is required to plead that he is 

required to plead that more." Tregenza, 12 F.3d at 718.

Here, while correctly acknowledging that, "[a]t trial, the defendant would 

carry the burden of satisfying [the adequate consideration] test," the district court 

incorrectly placed the burden to plead it on plaintiffs. A7. Indeed, the court 

incorrectly concluded that "the central question" on plaintiffs' section 406(a) claim 

is "the same" question on which the viability of plaintiffs' section 404(a) claim 

turned: "did Plaintiffs successfully plead that the ESOP paid more than fair market 

value for the Personal–Touch shares?" Id. But it is not. Instead, on plaintiffs' 

section 406(a) claim, the question whether the plan paid fair market value is one 

that must be answered by Greatbanc, the trustee who engaged in the prohibited 
21

transaction. All that plaintiffs were required to plead was that GreatBanc caused 

the ESOP to purchase Personal-Touch stock from a "party in interest" and thereby 

violated section 406(a). As the district court correctly concluded, they did. See A6 

("Personal–Touch is a party in interest because it is an employer whose employees 

are covered by the ESOP."). Absent a finding that the complaint established on its 

face that the ESOP paid adequate consideration for the stock (a finding the district 

court did not and could not make), Jones, 549 U.S. at 214-15, that should have 

been enough for plaintiffs to survive GreatBanc's motion to dismiss on their

section 406 claim.

To be sure, GreatBanc will protest that if a plaintiff need only plead the bare 

existence of a prohibited transaction to survive a motion to dismiss, Rule 8 will be 

too easily met in cases involving ESOP transactions, which almost always are 

prohibited by section 406(a). But as the Eighth Circuit explained in Braden, such 

concerns ignore the severity of the conduct proscribed by section 406(a) – in short, 

insider transactions and self-dealing – and the fact that "in such situations the 

burden of proof is always on the party to the self-dealing transaction to justify its 

fairness." Braden, 588 F.3d at 602. They also ignore "the fact that ERISA is a 

remedial statute to be liberally construed in favor of employee benefit fund 

participants." Kross v. W. Elec. Co., 701 F.2d 1238, 1242 (7th Cir. 1983). As the 

Supreme Court has explained in construing an exemption to the similarly remedial 
22

Securities Act of 1933, "[k]eeping in mind the broadly remedial purposes of 

federal securities legislation, imposition of the burden of proof on an issuer who 

would plead the exemption seems to us fair and reasonable." Sec. & Exch. 

Comm'n v. Ralston Purina Co., 346 U.S. 119, 126 (1953). 

Further, requiring plaintiffs to negate in their complaints the applicable 

section 408 exemption would often unfairly impose on plaintiffs the burden of 

pleading facts "that remain in the sole control of the parties who stand accused of 

wrongdoing" – in this case, facts concerning GreatBanc's internal procedures to 

determine Personal-Touch's fair market value. Braden, 588 F.3d at 602; Fish, 749 

F.3d at 686 ("The burden of proof makes good sense as a policy matter because the 

fiduciary will ordinarily have the information needed to know whether an 

exception applies under § 1108."). And this concern would not be limited to 

section 408(e)'s adequate-consideration exemption if this Court were to hold that 

plaintiffs must plead facts that plausibly show that the defendants who have 

engaged in a prohibited transaction do not meet an exemption under section 408 of 

ERISA. For example, section 408(b)(19) exempts "cross trading" transactions, 

which involve "the purchase and sale of a security between a plan and any other 

account managed by the same investment manager," but only if each of seven

separate conditions are satisfied, many of which involve facts that an ordinary

participant could not reasonably be expected to ascertain. 29 U.S.C. § 
23

1108(b)(19). Indeed, only the fiduciary would know whether it "authorize[d] in 

advance of any cross-trades (in a document that is separate from any other written 

agreement of the parties) the investment manager to engage in cross trades at the 

investment manager's discretion, after such fiduciary has received disclosure 

regarding the conditions under which cross trades may take place (but only if such 

disclosure is separate from any other agreement or disclosure involving the asset 

management relationship), including the written policies and procedures of the 

investment manager described in subparagraph (H)." 29 U.S.C. § 1108(b)(19)(D). 

In any event, there are already a number of safeguards in place that lessen

the likelihood of plaintiffs filing suit over transactions that plainly are exempted by 

section 408. First, Rule 11 of the Federal Rules of Civil Procedure requires 

attorneys to certify, subject to court sanction, that their complaints are "not being 

presented for any improper purpose" and "are warranted by existing law." Fed. R. 

Civ. P. 11(b). This Court has said that "[i]n deciding whether sanctions should be 

imposed on plaintiffs who filed unfounded cases . . . plaintiffs and their attorneys 

'may have a responsibility to examine whether any obvious affirmative defenses 

bar the case.'" Fish, 749 F.3d at 687 (quoting Matter of Excello Press, Inc., 967 

F.2d 1109, 1113 (7th Cir.1992)). In the same vein, the Supreme Court has 

suggested that a complaint does not state a "plausible" claim for relief where there 

is "an obvious alternative explanation" for the alleged conduct that renders it 
24

permissible. Twombly, 550 U.S. at 567. District courts also have tools at their 

disposal prior to allowing discovery in meritless cases, including "order[ing] a 

reply to the defendant's or a third party's answer under Federal Rule of Civil 

Procedure 7(a), or grant[ing] the defendant's motion for a more definite statement 

under Rule 12(e)." Crawford-El v. Britton, 523 U.S. 574, 598 (1998). And, of 

course, "summary judgment serves as the ultimate screen to weed out truly 

insubstantial lawsuits prior to trial." Id. at 600. But none of these safeguards 

justifies the district court's dismissal of plaintiffs' section 406(a) claim in this case.
25

CONCLUSION

For these reasons, the Secretary requests that the district court's decision be 

reversed. 

Respectfully submitted,

PATRICIA M. SMITH

Solicitor of Labor 

G. WILLIAM SCOTT

Associate Solicitor

ELIZABETH HOPKINS

Counsel for Appellate and 

Special Litigation

/s/ Jeffrey Hahn

JEFFREY HAHN

Trial Attorney

United States Department of Labor

Plan Benefits Security Division

200 Constitution Ave. N.W. N-4611

Washington, DC 20210
CERTIFICATE OF COMPLIANCE

I certify that this amicus brief complies with the type-volume limitation of 

Fed. R. App. P. 32(a)(7)(B) because it contains 5,539 words, excluding the 

parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B).

I further certify that this amicus brief complies with the typeface 

requirements of Fed. R. App. P. 32(a)(5), and the type style requirements of 

Fed. R. App. P. 32(a)(6), because it has been prepared in a monospaced 

typeface using Microsoft Word version 2010 in 14-point Times New Roman 

font.

Dated: February 16, 2016

/s/ Jeffrey Hahn

JEFFREY HAHN

Trial Attorney

United States Department of Labor

Plan Benefits Security Division

200 Constitution Ave. N.W. N-4611

Washington, DC 20210
CERTIFICATE OF SERVICE

I hereby certify that on the 16th day of February, 2016, true and correct 

copies of the foregoing Brief of the Amicus Curiae Thomas E. Perez,

Secretary of the United States Department of Labor, in Support of 

Appellants Requesting Reversal, were served upon the following counsel of 

record and this Court by ECF.

Gregory Porter

Tillman Breckenridge

Ryan Jenny

BAILEY & GLASSER LLP

Suite 230

1054 31st Street NW

Washington, DC 20007

Attorneys for Plaintiffs-Appellants

Theodore Becker

Julie Gouvreau

DRINKER BIDDLE & REATH, LLP

Suite 3700

191 N. Wacker Drive

Chicago, IL 60606-1698

Joseph Faucher

DRINKER BIDDLE & REATH LLP

Suite 1400

1800 Century Park East

Los Angeles, CA 90067

Attorneys for Defendant-Appellee

/s/ Jeffrey Hahn

JEFFREY HAHN