Opinion ID: 615595
Heading Depth: 1
Heading Rank: 4

Heading: Applying the Moench Presumption

Text: We turn now to whether plaintiffs have pled facts sufficient to overcome the presumption of prudence and successfully alleged that the Investment and Administration Committees abused their discretion by allowing participants to continue to invest in Citigroup stock. The Moench court, relying on trust law, explained that fiduciaries should override Plan terms requiring or strongly favoring investment in employer stock only when owing to circumstances not known to the [plan] settlor and not anticipated by him, maintaining the investment in company stock would defeat or substantially impair the accomplishment of the purposes of the [Plan]. 62 F.3d at 571 (quoting Restatement (Second) of Trusts § 227 cmt. g). We agree with this formulation and cannot imagine that an ESOP or EIAP settlor, mindful of the long-term horizon of retirement savings, would intend that fiduciaries divest from employer stock at the sign of any impending price decline. Rather, we believe that only circumstances placing the employer in a dire situation that was objectively unforeseeable by the settlor could require fiduciaries to override plan terms. Edgar, 503 F.3d at 348. The presumption is to serve as a substantial shield, Kirschbaum, 526 F.3d at 256, that should protect fiduciaries from liability where there is room for reasonable fiduciaries to disagree as to whether they are bound to divest from company stock, Quan, 623 F.3d at 882. The test of prudence is, as the dissent points out, one of conduct rather than results, and the abuse of discretion standard ensures that a fiduciary's conduct cannot be second-guessed so long as it is reasonable. Although proof of the employer's impending collapse may not be required to establish liability, [m]ere stock fluctuations, even those that trend downhill significantly, are insufficient to establish the requisite imprudence to rebut the Moench presumption. Wright v. Or. Metallurgical Corp., 360 F.3d 1090, 1099 (9th Cir. 2004). We judge a fiduciary's actions based upon information available to the fiduciary at the time of each investment decision and not from the vantage point of hindsight. 29 U.S.C. § 1104(a)(1)(B) (establishing that the prudence of an ERISA fiduciary is to be measured in light of the circumstances then prevailing); Chao v. Merino, 452 F.3d 174, 182 (2d Cir.2006) (quoting Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir.1984)). We cannot rely, after the fact, on the magnitude of the decrease in the employer's stock price; rather, we must consider the extent to which plan fiduciaries at a given point in time reasonably could have predicted the outcome that followed. Here, plaintiffs allege that Citigroup made ill-advised investments in the subprime-mortgage market while hiding the extent of those investments from Plan participants and the public. They also allege that, just prior to the start of the Class Period, Citigroup became aware of the impending collapse of the subprime market and that, ultimately, Citigroup reported losses of about $30 billion due to its subprime exposure. As a result, plaintiffs argue, Citigroup's stock price was inflated during the Class Period because the price did not reflect the company's true underlying value. Of course, as plaintiffs acknowledge, these facts alone cannot sufficiently plead a fiduciary breach: that Citigroup made bad business decisions is insufficient to show that the company was in a dire situation, much less that the Investment Committee or the Administration Committee knew or should have known that the situation was dire. Like the Fifth Circuit in Kirschbaum, we cannot say that whenever plan fiduciaries are aware of circumstances that may impair the value of company stock, they have a fiduciary duty to depart from ESOP or EIAP plan provisions. See Kirschbaum, 526 F.3d at 256. In an attempt to suggest the Investment and Administration Committees' knowledge of Citigroup's situation, plaintiffs allege in conclusory fashion that the Committee knew or should have known about Citigroup's massive subprime exposure as a result of their responsibilities as fiduciaries of the Plans. Compl. ¶ 188. Plaintiffs add that, even if defendants were unaware of Citigroup's subprime exposure, they only lacked such knowledge because they failed to conduct an appropriate investigation into whether Citigroup stock was a prudent investment for the Plans. Compl. ¶ 189. Plaintiffs' allegations are insufficient to state a claim against the Investment and Administration Committees for breach of the duty of prudence. As an initial matter, plaintiffs' bald assertion, without any supporting allegations, that the Investment and Administration Committees knew about Citigroup's subprime activities cannot support their claims. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ([A] plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions....). Moreover, that the fiduciaries allegedly failed to investigate the continued prudence of investing in Citigroup stock cannot alone rescue plaintiffs' claim; plaintiffs have not pled facts that, if proved, would show that such an investigation during the Class Period would have led defendants to conclude that Citigroup was no longer a prudent investment. As we noted above, plaintiffs must allege facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident. Kuper, 66 F.3d at 1460. This they have not done. Additionally, even if we assume that an investigation would have revealed all of the facts that plaintiffs have alleged, the Investment and Administration Committees would not have been compelled to conclude that Citigroup was in a dire situation. While the Committee may have been able to uncover Citigroup's subprime investments, the facts alleged by plaintiffs, if proved, are not sufficient to support a conclusion that the Investment and Administration Committees could have foreseen that Citigroup would eventually lose tens of billions of dollars. And even if the Committee could have done so, it would not have been compelled to find that Citigroup, with a market capitalization of almost $200 billion, was in a dire situation. While fiduciaries' decisions are not to be judged in hindsight, we note for the record that during the Class Period, Citigroup's share price fell from $55.70 to $28.74, a drop of just over 50%. Other courts have found plaintiffs unable to overcome the Moench presumption in the face of similar stock declines. See Kirschbaum, 526 F.3d at 247 (40% drop); Edgar, 503 F.3d at 344 (25% drop); Kuper, 66 F.3d at 1451 (80% drop). To summarize: plaintiffs fail to allege facts sufficient to show that defendants either knew or should have known that Citigroup was in the sort of dire situation that required them to override Plan terms in order to limit participants' investments in Citigroup stock. Plaintiffs are therefore unable to state a claim for breach of ERISA's duty of prudence based on the inclusion of the Common Stock Fund in the Plans.
Plaintiffs allege in Count II of their complaint that the Communications Defendants (Citigroup, the Administration Committee, and Prince) breached their fiduciary duty of loyalty by (1) failing to provide complete and accurate information regarding ... Citigroup and (2) conveying through statements and omissions inaccurate material information regarding the soundness of Citigroup stock. Compl. ¶ 237. We reject the first theory of liability because fiduciaries have no duty to provide Plan participants with non-public information that could pertain to the expected performance of Plan investment options. And we reject the second theory because there are no facts alleged that would, if proved, support a conclusion that defendants made statements, while acting in a fiduciary capacity, that they knew to be false.
ERISA contains a comprehensive set of `reporting and disclosure' requirements. Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 83, 115 S.Ct. 1223, 131 L.Ed.2d 94 (1995) (citing 29 U.S.C. §§ 1021-1031). The statute, for example, requires plan administrators to describ[e] the importance of diversifying the investment of retirement account assets, 29 U.S.C. § 1021(m)(2), and to inform participants of the risk that holding more than 20 percent of a portfolio in the security of one entity ( such as employer securities ) may not be adequately diversified, id. § 1025(a)(2)(B)(ii)(II) (emphasis added). Additionally, regulations in place during the Class Period required plan administrators, in certain circumstances, to provide plan participants with a description of the investment alternatives available under the plan and, with respect to each designated investment alternative, a general description of the investment objectives and risk and return characteristics of each such alternative. 29 C.F.R. § 2550.404c-1(b)(2)(B)(1)(ii) (2009). Plaintiffs do not allege any violations of these requirements. Nor could they support such a claim; the Plan documents informed plaintiffs that the Stock Fund invested only in Citigroup stock, which would be retained in this fund regardless of market fluctuations, and that the Fund may undergo large price declines in adverse markets, the risk of which may be offset by owning other investments that follow different investment strategies. Plaintiffs instead argue that defendants violated ERISA's more general duty of loyalty, 29 U.S.C. § 1104(a)(1), by failing to provide participants with information regarding the expected future performance of Citigroup stock. They rely on cases stating, in broad terms, that fiduciaries must disclose to participants information related to the participants' benefits. See, e.g., Dobson v. Hartford Fin. Servs. Grp., Inc., 389 F.3d 386, 401 (2d Cir.2004) (A number of authorities assert a plan fiduciary's obligation to disclose information that is material to beneficiaries' rights under a plan....). The cases cited by plaintiffs are inapposite for two reasons. First, in many of them, the court imposed a duty to inform at least in part because further information was necessary to correct a previous misstatement or to avoid misleading participants. See, e.g., Estate of Becker v. Eastman Kodak Co., 120 F.3d 5, 10 (2d Cir. 1997) (relying in part on the materially misleading information provided by a benefits counselor to conclude that Kodak breached its fiduciary duty to provide Becker with complete and accurate information about her retirement options). Second, all of the cases cited by plaintiffs relate to administrative, not investment, matters such as participants' eligibility for defined benefits or the calculation of such benefits; none require plan fiduciaries to disclose nonpublic information regarding the expected performance of a plan investment option. See, e.g., Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 88-89 (2d Cir.2001) (holding that an employer may be liable for misstatements or omissions about the availability of lifetime life insurance benefits); Estate of Becker, 120 F.3d at 9-10 (imposing liability based on an employer's providing misleading information about participants' eligibility for lump-sum retirement benefits). We decline to broaden the application of these cases to create a duty to provide participants with nonpublic information pertaining to specific investment options. [4] ESOP fiduciaries do not have a duty to give investment advice or to opine on the stock's condition. Edgar, 503 F.3d at 350 (internal quotation marks omitted). We agree with the district court that such a requirement would improperly transform fiduciaries into investment advisors. In re Citigroup ERISA Litig., 2009 WL 2762708, at . Here, the Administration Committee provided adequate warning that the Stock Fund was an undiversified investment subject to volatility and that Plan participants would be well advised to diversify their retirement savings. Even assuming that they had the ability to do so, defendants had no duty to communicate a forecast as to when this volatility would manifest itself in a sharp decline in stock price.
Plaintiffs next argue that, even if defendants had no affirmative duty to provide information regarding Plan investments, they nevertheless breached their duty of loyalty by making misrepresentations as to the expected performance of Citigroup stock. ERISA requires a fiduciary to discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries. Varity Corp. v. Howe, 516 U.S. 489, 506, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996) (quoting 29 U.S.C. § 1104(a)(1)). Because lying is inconsistent with the duty of loyalty, ERISA fiduciaries violate this duty when they participate knowingly and significantly in deceiving a plan's beneficiaries. Id. ; see also Bouboulis v. Transp. Workers Union of Am., 442 F.3d 55, 66 (2d Cir.2006). Plaintiffs assert misrepresentation claims against Citigroup, Prince, and the Administration Committee. We hold that Citigroup and Prince were not acting in a fiduciary capacity when making the statements alleged in the complaint, and that the complaint does not adequately allege that the Administration Committee knew that it was making false or misleading statements.
Plaintiffs allege that Citigroup and Prince regularly communicated with Plan participants about Citigroup's expected performance. They argue that Citigroup and Prince may be held liable, under ERISA, for these communications because they intentionally connected their statements to Plan benefits. This argument fails because neither Citigroup nor Prince was a Plan administrator responsible for communicating with Plan participants. Therefore, neither acted as a Plan fiduciary when making the statements at issue. Plaintiffs rely on the Supreme Court's decision in Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), in which the Court found an employer liable for misstatements made to plan participants in part because the employer intentionally connected its statements to the future of [plan] benefits. Id. at 505, 116 S.Ct. 1065. Plaintiffs, however, overlook that the employer in Varity was also the plan administrator, id. at 491, 116 S.Ct. 1065, and that only the plan administrator is responsible for meeting ERISA's disclosure requirements and therefore for communicating with Plan participants. 29 U.S.C. § 1132(c). That the employer in Varity intentionally connected its statements to plan benefits highlighted that it acted as a plan administrator and fiduciaryand not merely an employerwhen making the statements in question. Cf. Amato v. W. Union Int'l, 773 F.2d 1402, 1416-17 (2d Cir.1985) (stating that an employer is only liable under ERISA for actions it takes while acting as an ERISA fiduciary), abrogated on other grounds by Mead Corp. v. Tilley, 490 U.S. 714, 721, 109 S.Ct. 2156, 104 L.Ed.2d 796 (1989). Here, Citigroup and Prince were not Plan administrators and were not responsible for communicating with Plan participants. [5] Citigroup and Prince therefore spoke to Plan participants as employers and not as Plan fiduciaries. They cannot be held liable, at least under ERISA, for any alleged misstatements made to Citigroup employees.
Plaintiffs also do not state a claim for relief based on alleged misstatements made by the Administration Committee because they have not adequately alleged that defendants made statements they knew to be false. Plaintiffs allege that both Plans' Summary Plan Descriptions (SPDs), distributed by the Administration Committee, directed the Plans' participants to rely on Citigroup's filings with the SEC ..., many of which ... were materially false and misleading. Compl. ¶ 197. Plaintiffs state that the SEC filings all failed to adequately inform participants of the true magnitude of the Company's involvement in subprime lending and other improper business practices ..., and the risks these presented to the Company. Compl. ¶ 237. A fiduciary, however, may only be held liable for misstatements when the fiduciary knows those statements are false or lack a reasonable basis in fact. See Flanigan v. Gen. Elec. Co., 242 F.3d 78, 84 (2d Cir.2001). Here, while plaintiffs conclude that the Committee members knew or should have known about Citigroup's massive subprime exposure as a result of their responsibilities as fiduciaries of the Plans, Compl. ¶ 188, they have provided no specific allegations beyond this naked assertion, Twombly, 550 U.S. at 557, 127 S.Ct. 1955. Plaintiffs are also unable to support their argument that the Administration Committee members should have known of the misstatements because they should have performed an independent investigation of the accuracy of Citigroup's SEC filings. While we cannot rule out that such an investigation may be warranted in some cases, plaintiffs have not alleged facts that, without the benefit of hindsight, show that it was warranted here. Plaintiffs have not alleged that there were any warning flags, specific to Citigroup, that triggered the need for an investigation. Rather, plaintiffs provide a list of publicly available articles and news reports that signaled potential trouble in the subprime market as a whole. We are also mindful that requiring Plan fiduciaries to perform an independent investigation of SEC filings would increase the already-substantial burden borne by ERISA fiduciaries and would arguably contravene Congress's intent to create a system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the first place. Conkright v. Frommert, ___ U.S. ___, 130 S.Ct. 1640, 1649, 176 L.Ed.2d 469 (2010) (quoting Varity, 516 U.S. at 497, 116 S.Ct. 1065 (alterations in original)). Furthermore, we are hesitant to run the risk of disturbing the carefully delineated corporate disclosure laws. Baker v. Kingsley, 387 F.3d 649, 662 (7th Cir.2004). While we have the authority to create a common law of rights and obligations under ERISA, the scope of permissible judicial innovation is narrower in areas where other federal actors are engaged. Black & Decker Disability Plan v. Nord, 538 U.S. 822, 831-32, 123 S.Ct. 1965, 155 L.Ed.2d 1034 (2003) (internal quotation marks and citation omitted). Accordingly, while we intimate no view as to the possible investigatory responsibilities of other fiduciaries who are privy to additional warning signs or who are operating under substantially different circumstances, in the situation presented here we decline to hold that the Plan fiduciaries were required to perform an independent investigation of SEC filings before incorporating them into the SPDs.
Plaintiffs also assert claims that (1) Citigroup and the Director Defendants failed to properly monitor their fiduciary co-defendants (Count III); (2) the same defendants failed to share information with their co-fiduciaries (Count IV); (3) all defendants breached their duty to avoid conflicts of interest (Count V); and (4) Citigroup, Citibank, and the Director Defendants are liable as co-fiduciaries (Count VI). Plaintiffs do not contest that Counts III, IV, and VI cannot stand if plaintiffs fail to state a claim for relief on Counts I or II. Accordingly, we affirm the district court's dismissal of these counts. Count V appears to be based entirely on the fact that the compensation of some of the fiduciaries was tied to the performance of Citigroup stock and that Prince and Robert Rubin, another Director Defendant, sold some of their Citigroup stock during the Class Period. Plaintiffs do not allege any specific facts suggesting that defendants' investments in Citigroup stock prompted them to act against the interests of Plan participants. Under plaintiffs' reasoning, almost no corporate manager could ever serve as a fiduciary of his company's Plan. There simply is no evidence that Congress intended such a severe interpretation of the duty of loyalty. We agree with the many courts that have refused to hold that a conflict of interest claim can be based solely on the fact that an ERISA fiduciary's compensation was linked to the company's stock. See, e.g., In re Polaroid ERISA Litig., 362 F.Supp.2d 461, 477 (S.D.N.Y.2005); In re WorldCom, Inc. ERISA Litig., 263 F.Supp.2d 745, 768 (S.D.N.Y.2003). Accordingly, we affirm the judgment of the district court insofar as it held that plaintiffs failed to state a claim for relief on Count V.