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November 4, 2008 DOL Home > SOL |
WorldCom Amicus Brief
UNITED
STATES DISTRICT COURT
TABLE OF CONTENTS INTRODUCTION ARGUMENT CONCLUSION CERTIFICATE OF SERVICE BRIEF OF THE
SECRETARY OF LABOR AS AMICUS CURIAE The participants and beneficiaries of the WorldCom Salary
Savings 401(k) Plan (the "Plan") lost millions of dollars saved for their
retirement when the value of WorldCom, Inc. stock held in the Plan collapsed
following revelations of accounting irregularities at WorldCom. Plaintiffs, who are Plan participants, have
sought to hold the Plan's fiduciaries liable under the Employee Retirement
Income Security Act ("ERISA"), 29 U.S.C. § 1001, et seq.,
for failing to protect them and the Plan. The Defendants have filed numerous motions to dismiss in
these consolidated cases, some repeating arguments already rejected. To date, no named Defendant has admitted
that he or she was a fiduciary to the Plan.
Currently before the Court is the motion to dismiss filed by the
"Individual Defendants."[1] In opposition, the Secretary files this
amicus brief expressing her view that ERISA imposes upon fiduciaries who
appoint other fiduciaries a duty to monitor those whom they appoint, and there
is no cause to impose a heightened pleading standard on fiduciary breach claims
under ERISA.[2] I.
STANDARD
OF REVIEW A complaint should not be dismissed pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim
upon which relief can be granted "unless it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim which would entitle
him to relief." Conley v.
Gibson, 355 U.S. 41, 45-46 (1957); Phillip v. Univ. of Rochester,
316 F.3d 291, 293 (2d Cir. 2003); Cooper v. Parsky, 140 F.3d 433, 440
(2d Cir. 1998); Bridgeway Corp. v. Citibank, N.A., 132 F. Supp. 2d 297,
302-03 (S.D.N.Y. 2001). In deciding
whether a complaint states a claim, a court must accept the material facts
alleged in the complaint as true and construe all reasonable inferences in the
plaintiff's favor. EEOC v. Staten
Island Sav. Bank, 207 F.3d 144, 148 (2d Cir. 2000); Hernandez v.
Coughlin, 18 F.3d 133, 136 (2d Cir.), cert. denied, 513 U.S.
536 (1994). A court's task
"in ruling on a Rule 12(b)(6) motion 'is merely to assess the legal
feasibility of the complaint, not to assay the weight of the evidence which
might be offered in support thereof.'"
Cooper, 140 F.3d at 440 (quoting Ryder Energy Distribution
Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir.
1984)). Thus, the fundamental issue at
the dismissal stage "is not whether a plaintiff is likely to prevail
ultimately, but whether the claimant is entitled to offer evidence to support
the claims. Indeed it may appear on the
face of the pleading that a recovery is very remote and unlikely but that is
not the test." Chance v.
Armstrong, 143 F.3d 698, 701 (2d Cir. 1998) quoted in Phelps v.
Kapnolas, 308 F.3d 180, 184-85 (2d Cir. 2002). The notice pleading
principles embodied in Rules 8 and 12 of the Federal Rules of Civil Procedure
are intended to remove technical obstacles impeding access to the federal
courts. Anderson v. Coughlin, 700 F.2d 37, 43 (2d Cir. 1983); Boston
v. Stanton, 450 F. Supp. 1049, 1053 (W.D. Mo. 1978). A complaint need only "give the
defendant fair notice of what the plaintiff's claim is and the grounds upon
which it rests." Conley,
355 U.S. at 47; see Swierkiewicz
v. Sorema, N.A., 534 U.S. 506, 512 (2002).
Thus, the federal rules allow simple pleadings and "rel[y] on
liberal discovery rules and summary judgment motions to define disputed facts
and issues and to dispose of unmeritorious claims." Swierkiewicz, 534 U.S. at 512. II.
APPOINTING
FIDUCIARIES HAVE A DUTY TO MONITOR THEIR APPOINTEES The Second Claim for Relief of the Third Amended
Consolidated Master Class Action Complaint (the "Complaint") alleges
that specified Director Defendants expressly appointed and removed at least one
fiduciary to the Plan. Complaint at ¶¶
128-134. Plaintiffs also allege that
the Director Defendants appointed Merrill Lynch as trustee for the Plan. Id. at ¶ 34. The Complaint alleges that all Director
Defendants had a duty to monitor the performance of any fiduciaries so
appointed, and breached their fiduciary duties by failing to do so. Id. at ¶ 129. In their previous motions to dismiss, the
Defendants did not appear to dispute that there was a duty to monitor. Instead, they argued that the disclosures
Plaintiffs sought as a part of such monitoring would violate the securities
laws. See In re WorldCom Inc.
ERISA Litig., 263 F. Supp. 2d 745, 765 (S.D.N.Y. 2003) (the "June
Order"). In their current motion
to dismiss, the moving Defendants again argue that Merrill Lynch had virtually
no discretionary authority for them to monitor and that, in any event, acting
on any duty to monitor would violate the securities laws. Individual Defendants' Memorandum in Support
of Motion to Dismiss at 20-24. The
Court properly rejected both of these arguments in its June Order. 263 F. Supp. 2d at 762, 765. After the close of briefing on the current
Motion to Dismiss, Defendants submitted by letter a copy of an unpublished
October 24, 2003 decision denying a motion for reconsideration in In re
Williams Cos. ERISA Litig., No. 02CV153-H (M), 2003 WL 22794417 (N.D. Okla.
Oct. 27, 2003) and so suggested that there may not be a duty to monitor. The Williams decision misapprehended
the Secretary's position, however, and is contrary to the weight of
precedent. Thus, the Secretary believes
that the decision in Williams was simply wrong, and should be accorded
no weight by this Court. ERISA imposes strict duties of prudence and
loyalty on plan fiduciaries. See
Donovan v. Bierwirth, 680 F.2d 263, 272 n.2 (2d Cir.), cert. denied,
459 U.S. 1069 (1982). Under ERISA's
functional test of fiduciary status, a person is a plan fiduciary to the extent
that "he has any discretionary authority or discretionary
responsibility in the administration of such plan." 29 U.S.C. § 1002(21)(A)(iii) (emphasis
added). If, as alleged, the Board members
had and exercised discretionary authority to select other fiduciaries, they
engaged in plan administration and, to that extent, were fiduciaries. The prudent appointment, retention and, if
appropriate, removal, of plan fiduciaries and service providers is essential to
the proper operation of benefit plans, and is an aspect of plan
administration. Accordingly, the
plaintiffs have adequately alleged that the Board members were fiduciaries to
the extent they chose other plan fiduciaries.
29 C.F.R. § 2509.75-8 at D-4. Pursuant to her authority to interpret and
enforce the provisions of Title I of ERISA, the Secretary has explicitly
addressed the "ongoing responsibilities of a fiduciary who has appointed
trustees or other fiduciaries with respect to these appointments" and
concluded that: At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure. 29 C.F.R. § 2509.75-8 at FR-17. In this manner, the Secretary has
interpreted the duty of appointing fiduciaries (expressly including members of
a Board of Directors) to encompass a duty to periodically monitor the
performance of the appointees so as to ensure compliance with their fiduciary
duties under ERISA and the plan. Id. at DR-4. This interpretation, published more than twenty-five years ago,
is entitled to some deference. See
Black & Decker Disability Plan v. Nord, 123 S. Ct. 1965, 1972 (2003)
(giving deference to the Secretary's view of the ERISA claims processing system
as expressed in a Q&A on the Department of Labor website); see also
Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (referring to
informal agency guidance as a "body of experience and informed
judgment" to which courts are entitled to resort for guidance); Meyer
v. Holly, 123 S. Ct. 824, 830 (2003) (deferring to HUD regulation
specifying that ordinary vicarious liability rules apply in administration of
housing statute); Chevron U.S.A. Inc. v. Echazabal, 536 U.S. 73, 83
(2002) (giving deference to EEOC regulation interpreting Americans with
Disabilities Act). The monitoring duties of appointing fiduciaries are also
well established in the case law. The
courts have long recognized that "[t]he power to appoint and remove
trustees carries with it the concomitant duty to monitor those trustees'
performance." Liss v. Smith,
991 F. Supp. 278, 311 (S.D.N.Y. 1998); accord Leigh v. Engle, 727
F.2d 113, 135 (7th Cir. 1984), cert. denied, 489 U.S. 1078
(1989); Martin v. Feilen, 965 F.2d 660, 669-70 (8th Cir. 1992), cert.
denied, 506 U.S. 1054 (1993); Mehling v. New York Life Ins. Co.,
163 F. Supp. 2d 502, 510 (E.D. Pa. 2001); Atwood v. Burlington Indus.
Equity, Inc., No. 2:92CV00716, 1994 WL 698314, at *6 (M.D.N.C. Aug. 3,
1994); Henry v. Frontier Indus., Inc., Nos. 87-3879 and 87-3898, 1988 WL
132577, at *3 (9th Cir. Dec. 1, 1988) (unpublished); Sandoval v. Simmons,
622 F. Supp. 1174, 1211 (C.D. Ill. 1985); Restatement (Second) of Trusts
§§ 184, 224. "[I]mplicit in [the
appointing fiduciary's] power to select the Plans' named fiduciaries is the
duty to monitor the fiduciaries' actions, including their investment of Plan
assets." Mehling, 163 F.
Supp. 2d at 510, citing Leigh, 727 F.2d at 134-35. Most recently, Judge Harmon affirmed the
Secretary's position with respect to the duty to monitor fiduciaries after they
are appointed in the Enron litigation.
In re Enron Corp. Sec., Derivative & ERISA Litig., 284 F.
Supp. 2d 511, 552-53 (S.D. Tex. 2003). In disregarding this established body of law, the Williams
court apparently misunderstood the Secretary's position. In a footnote quoted by Defendants in their
November 20, 2003 letter submission, Judge Holmes said "[T]he position
argued by DOL would effectively expand the responsibility of any appointing
authority … to be a guarantor for any and all actions by [the appointed]
fiduciaries." Williams,
2003 WL 22794417, at n.1. The Secretary has never suggested, however, that the duty
to monitor requires the appointing fiduciary to second-guess every decision of
its appointee, or to guarantee the wisdom of the appointee's decisions. As fiduciaries, the appointing fiduciaries must
make decisions on appointment and removal with prudence and loyalty, 29 U.S.C.
§ 1104(a), refrain from engaging in prohibited transactions, 29 U.S.C. § 1106,
and avoid participating in or contributing to other fiduciaries' breaches of
responsibility, 29 U.S.C. § 1105. They
are not, however, generally obligated to assume direct responsibility for
duties properly allocated to other fiduciaries or to vouchsafe every decision
they make. Accordingly, appointing
fiduciaries are not charged with directly overseeing the investments and thus
duplicating the responsibilities of the investment fiduciaries whom they
appoint. At a minimum, however, the
duty of prudence requires that they have procedures in place so that on an
ongoing basis they may review and evaluate whether investment fiduciaries are
doing an adequate job (for example, by
requiring periodic reports on their work and the plan's performance, and by
ensuring that they have a prudent process for obtaining the information and
resources they need). See Leigh,
727 F.2d at 135 (appointing fiduciary did not have to examine every action
taken by the plan administrators, but he was obligated to act with appropriate
prudence and reasonableness in monitoring the administrators' management of the
plan). In the absence of a sensible process for monitoring their appointees, the appointing
fiduciaries would have no basis for prudently concluding that their appointees
were faithfully and effectively performing their obligations to plan
participants or for deciding whether to retain or remove them. The Secretary does not suggest that the
appointing fiduciaries must follow one prescribed set of procedures for
monitoring the investment fiduciaries, but that they apply procedures that
allow them to assure themselves that those they have entrusted with discretionary
authority to invest the plan's assets are properly discharging their
responsibilities. The Secretary's view
is consistent with this Court's June Order, which dismissed a duty to monitor
claim that was based on a far different factual premise. 263 F. Supp. 2d at 760-61. In the original Complaint, the duty to
monitor was not based on any allegation that the Director Defendants had
specifically retained or exercised authority under the Plan to appoint its fiduciaries,
but was instead based on the Board's general authority to oversee the
corporation and conduct its affairs under corporate law. In the Plaintiffs' view, it was sufficient
that the Plan had named WorldCom as the appointing fiduciary and that the Board
had supervisory authority over WorldCom.
This Court properly rejected the Plaintiffs' invitation to transform the
Board's corporate-law obligation to supervise the company into a fiduciary
obligation under ERISA to oversee the Plan, absent any allegation that the
Board had specifically retained or assumed any such fiduciary responsibilities
to the Plan. Id. at 761. The Court declined to find that an
apparently unexercised authority under state corporate law made the directors
fiduciaries. Id.; see also
Enron, 284 F. Supp. 2d at 553 n.59. The allegations of
the Third Amended Complaint are significantly different from those the Court
previously considered. Plaintiffs now
allege that specific Director Defendants affirmatively appointed Merrill Lynch
and affirmatively appointed and removed at least one investment fiduciary for
the Plan. Complaint at ¶¶ 34,
128-34. Unlike the previous general
allegations based on state corporate law, the Amended Complaint specifically
alleges that the Defendants exercised and retained a duty to appoint and remove
fiduciaries that they failed to monitor and, therefore, states a claim. The Individual
Defendants argue that the Third Claim for Relief, alleging that the fiduciary
defendants breached their duties under ERISA by making material
misrepresentations to the Plan's participants and beneficiaries,
"allege[s] intentional misconduct, sound[s] in fraud, and must be pled
with particularity pursuant to Rule 9(b)." See Individual Defendants' Memorandum in Support of Motion
to Dismiss at 28-30. They also claim
that Rule 9(b) applies to claims for co-fiduciary liability under ERISA section
405. Id. at n.22. Rule 9(b) requires that "[i]n all
averments of fraud or mistake, the circumstances constituting fraud or mistake
shall be stated with particularity."
Fed. R. Civ. P. 9(b).[3] An ERISA fiduciary duty claim based on misrepresentations or
a failure to provide truthful information does not sound in fraud, however. See, e.g., Crowley v.
Corning, Inc., 234 F. Supp. 2d 222, 230-31 (W.D.N.Y. 2002)(allegations that
plan fiduciary breached its duty by failing to provide truthful information to
participants is fiduciary claim, not fraud claim, and not subject to Rule
9(b)'s requirements). Instead, any such
claim is grounded, not in generalized principles of detrimental reliance, but
on the specific duties of prudence and loyalty that an ERISA fiduciary owes
plan participants and beneficiaries under Section 404 of ERISA. 29 U.S.C. §§ 1104(a)(1)(A) and (B); Varity
Corp.v. Howe, 516 U.S 489, 506 (1996).
Thus,
ERISA breach of duty claims for misrepresentations to participants and
beneficiaries are not based, like fraud, on the general duty to refrain from
harming others, but rather in the affirmative duty to protect and serve plan
participants with prudence and loyalty as set forth in the text of ERISA. ERISA does not require that Plaintiffs prove
the specific elements of a common-law claim for fraud as a predicate for
asserting a breach of fiduciary duty. To the extent that courts have treated
fiduciary claims based on misrepresentations as fraud claims, they have been in
error. Crowley, 234 F. Supp. 2d
at 230-31; cf. Concha v. London, 62 F.3d 1493, 1502-03 (9th Cir.
1995) (distinguishing between breach of fiduciary duty and fraud claims). Because the Plaintiffs' claims are not
grounded in fraud in the relevant sense, they are not subject to the
requirements of Rule 9, as the Northern District of California held in its
decision in this case before it was transferred to this court. Vivien v. WorldCom, No. C 02-01329
WHA, 2002 WL 31640557, at *6-7 (N.D. Cal. July 26, 2002); accord Rankin
v. Rots, 278 F. Supp. 2d 853, 866 (E.D. Mich. 2003) ("The heightened
pleading requirement under Rule 9(b) will not be imposed where the claim is for
a breach of fiduciary duty under ERISA."); Stein v. Smith, 270 F.
Supp. 2d 157, 167 (D. Mass. 2003)(relying on Vivien to hold that Rule
8(a)'s lenient pleading standard and not Rule 9(b)'s standard applies to claim
that defendant had fiduciary duty to monitor and evaluate performance of
company stock). CONCLUSIONFor all the reasons
stated above, the Secretary urges this court to hold that the Plaintiffs have
stated a claim against the Individual Defendants. Respectfully submitted, HOWARD M. RADZELY TIMOTHY D.
HAUSER ELIZABETH
HOPKINS ____________________________ SUSAN J.
LUKEN U.S.
Department of Labor
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CERTIFICATE OF SERVICE
I hereby certify that on this ____ day of January, 2004, a copy of the foregoing was served by overnight delivery upon the following. ______________________________ ERISA Steering Committee:
Securities Co-Lead Counsel:
Footnotes: [1] The moving Defendants are (a) current or former WorldCom directors
Alexander, Allen, Areen, Aycock, Bobbitt, Galesi, Kellett, Macklin, Porter,
Roberts, Sidgemore (now deceased), and Tucker (the "Director
Defendants"); and (b) former WorldCom officers or employees Faircloth
(Senior Manager 401(k) Operations and Compliance), Helms (Senior Manager of
Benefits Finance and Pension Administration), Miller (Employee Benefits
Director), Scott (Vice President for Financial Accounting), and Titus (Senior
Manager for Strategic Benefits) (collectively with the Moving Director
Defendants, the "Individual Defendants"). Defendants Bernard J. Ebbers and Merrill Lynch do not join the motion
to dismiss. [2] The Secretary does not address all of the arguments raised by the
motion to dismiss. The decision to
address some, but not all arguments, should not be construed as reflecting on
the merits of the arguments that are not addressed. [3] The moving Defendants also argue that the Supreme Court's
decision in Pegram v. Herdrich, 530 U.S. 211 (2000), imposed a
heightened pleading standard for claims of breach of fiduciary duty. Pegram, however, simply did not
address the standard of pleading in an ERISA fiduciary breach claim. Rule 8(a) of the Federal Rules of Civil
Procedure controls the adequacy of pleadings.
Under the notice-pleading standard set forth in the Rule, the Plaintiffs
have adequately alleged that the Defendants were fiduciaries, that they
breached their specific responsibilities as fiduciaries, and that those
breaches caused the Plan to imprudently hold WorldCom stock. |
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