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On
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PAMELA TITTLE, on behalf of herself and a
class of persons similarly situated, et al., Plaintiffs
v.
ENRON CORP., Oregon Corporation, et al., Defendants |
Civil Action No. H-01-3913 and Consolidated
Cases |
Amended
Brief of the Secretary of Labor as Amicus Curiae Opposing the Motions to
Dismiss
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EUGENE SCALIA Solicitor of
Labor
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TIMOTHY D. HAUSER Associate Solicitor
Plan Benefits Security Division |
KAREN L. HANDORF Deputy Associate
Solicitor Plan Benefits Security Division |
ELIZABETH HOPKINS Counsel for Appellate and
Special Litigation Plan Benefits Security Division |
ROBIN SPRINGBERG PARRY Trial
Attorney |
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G. WILLIAM SCOTT Senior Trial
Attorney |
MARK FLYNN Senior Appellate Attorney
Special Appellate and Supreme Court Litigation Division |
U.S. Department of Labor Office of the
Solicitor Plan Benefits Security Division PO Box 1914 Washington,
DC 20013 Tel 202.693.5614 Fax 202.693.5610 |
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TABLE OF
CONTENTS
INTRODUCTION
ARGUMENT I. STANDARD OF
REVIEW
II. THE COMPLAINT ADEQUATELY ALLEGES THAT THE
ADMINISTRATIVE COMMITTEE MEMBERS WERE FIDUCIARIES RESPONSIBLE FOR MANAGING PLAN
ASSETS AND THAT ENRON, THE COMPENSATION COMMITTEE, AND LAY WERE FIDUCIARIES
RESPONSIBLE FOR MONITORING THE ADMINISTRATIVE COMMITTEE
- A. ERISA Defines Fiduciaries in Functional Terms
- B. The Plaintiffs Have Properly Alleged that the Members of
the Administrative Committee, the Compensation Committee, Ken Lay and Enron
were Fiduciaries Without Regard to Their Corporate Status
III. PLAINTIFFS ADEQUATELY ALLEGE THAT ENRON, LAY AND
THE COMPENSATION COMMITTEE BREACHED THEIR FIDUCIARY DUTIES BY FAILING TO
MONITOR THE ADMINISTRATIVE COMMITTEE
- A. The Plaintiffs have Sufficiently Alleged Fiduciary
Liability
- B. Plaintiff have Sufficiently Alleged Co-Fiduciary
Liability for the Failure to Monitor
IV. PLAINTIFFS SUFFICIENTLY ALLEGE THAT THE
ADMINISTRATIVE COMMITTEE MEMBERS, AS WELL AS ENRON, LAY AND THE COMPENSATION
COMMITTEE, BREACHED THEIR FIDUCIARY DUTIES TO PROTECT THE PLANS FROM THE LOSSES
CAUSED BY ENRONS PERILOUS FINANCIAL CONDITION AND FROM INACCURATE AND
MISLEADING INFORMATION ABOUT ENRONS FINANCIAL PERFORMANCE
- A. Plan Fiduciaries Have a Duty Not to Mislead Plan
Participants and to Correct Misleading Information from others
- B. Under Fifth Circuit Precedent, the Fiduciaries had a Duty
to Disclose Information if Necessary for Participants to Protect Their
Retirement Benefits
- C. The Administrative Committee Members Could Have Taken a
Number of Steps, Consistent With Their Duties Under Federal Securities Laws,
That May Have Protected Participants In Accordance With the Fiduciary
Provisions of ERISA
V. PLAINTIFFS CLAIMS THAT DEFENDANTS IMPRUDENTLY
ACQUIRED AND RETAINED ENRON STOCK FOR THE PLANS ARE NOT DEFEATED BY PLAN TERMS
THAT PROVIDE FOR INVESTMENT IN ENRON STOCK
- A. Defendants May Be Held Liable for Imprudently and Disloyally
Acquiring and Retaining Enron Stock for the ESOP
- B. Defendants May Be Held Liable for Acquiring and
Retaining Enron Stock in the Savings Plan
- 1. The Savings Plan Fiduciaries Were Not Required Either by
the Terms of the Savings Plan or Under ERISA to Make Enron Stock an Investment
Alternative for Employee Contributions
- 2. ERISA § 404(c) Does Not Relieve the
Fiduciaries of Responsibility for the Investment in Enron Stock
VI. UNDER FIFTH CIRCUIT PRECEDENT, PLAINTIFFS ARE NOT
REQUIRED TO PROVE THAT DEFENDANTS' FIDUCIARY BREACHES CAUSSED THE PLANS'
LOSSES; DEFENDANTS HAVE THE BURDEN OF PROOF ON CAUSATION
VII. THE COMPLAINT STATES A CLAIM THAT ADMINISTRATIVE
COMMITTEE MEMBERS, LAY, AND NORTHERN TRUST BREACHED THEIR FIDUCIARY DUTIES TO
THE ENRON SAVINGS PLAN WITH REGARD TO THE LOCKDOWN PERIOD
- A. Plaintiffs Have Alleged Sufficient Facts for Purposes of
Establishing Article III Standing to Challenge the Defendants' Conduct in
Relation to the Lockdown Period
- B. The Complaint Sufficiently Alleges that Northern Trust
was a Fiduciary and that it had Discretionary Control With Respect to the
Lockdown
- C. Even if Northern Trust was Given Written Instructions
Concerning the Lockdown, the Complaint States a Claim for Relief
VIII. PLAINTIFFS' OFFSET CLAIM IS A CLAIM FOR EQUITABLE
RELIEF UNDER § 502(a)(3)
- A. Monetary Relief is Available Against the Administrative
Committee Members Under § 502(a)(3)
- B. There is no Bar to Bringing Both § 502(a)(3) and
§ 502(a)(1)(B) Claims in the Same Action when § 502(a)(1)(B) Cannot
Provide Complete Relief
IX. PLAINTIFFS SUFFICIENTLY ALLEGED A CLAIM AGAINST
ANDERSEN FOR KNOWING PARTICIPATION IN A FIDUCIARY BREACH
CONCLUSION |
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Allison v.
Bank One-Denver, 289 F.3d 1223 (10th Cir. 2002)
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American Federal of Union
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Anweiler v.
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Clinton v.
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Confer v.
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Dixon v.
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Donovan v.
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Eaves v.
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Ehlmann v.
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Ershick v.
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Faircloth v.
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Financial Insts. Ret.
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Fink v.
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FirstTier v.
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-
Fischer v.
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-
Fotta v.
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Franklin v.
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Freund v.
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Fujikawa v.
Kim, 871 F. 2d 1427 (D.N.J. 1992)
-
Glaziers and Glassworkers
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93 F.3d 1171 (3rd Cir. 1996)
-
Globe Woolen Co.
v. Utica Gas & Electric Co., 224 N.Y. 483 (N.Y.
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Gollust v.
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Great-West Life &
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Griggs v. E.I.
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Harley v.
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Harris Trust and Savings
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-
Harte v.
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Henry v.
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-
Herman v.
NationsBank Trust Company (Georgia), 126 F.3d 1354 (11th Cir.
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Howe v. Varity
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-
Hudson v.
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-
In re Cady, Roberts &
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-
In re Ikon Office Solutions,
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-
In re Unisys Corp. Retiree
Medical Ben. ERISA Litigation, 57 F.3d 1235 (3rd Cir. 1995)
-
In re Unisys Sav. Plan
Litigation, 74 F.3d 420 (3rd Cir. 1996)
-
Jackson v.
Truck Drivers Union Local 42 Health and Welfare Fund, 33 F. Supp.
1143 (D. Mass. 1996)
-
Jefferson National Bank
v. Central National Bank of Chicago, 700 F.2d 1143 (7th Cir.
1983)
-
Jones v.
Greninger, 188 F.3d 322 (5th Cir. 1999)
-
Jordan v.
Federal Exp. Corp., 116 F.3d 1005 (3rd Cir. 1997)
-
Kayes v.
Pacific Lumber, 51 F.3d 1449 (9th Cir. 1995)
-
Koch v.
Dwyer, No. 98 Civ. 5519 RPF, 1999 WL 528181 (S.D.N.Y
1999)
-
Kramer v.
Smith Barney, 80 F.3d 1080 (5th Cir. 1996)
-
Kuper v.
Iovenko, 66 F.3d 1447 (6th Cir. 1995)
-
Laborer's National Pension
Fund v. NT Quantitative Advisors, Inc., 173 F.3d 313 (5th
Cir. 1999)
-
Landry v. Air
Line Pilots Ass'n Intern. AFL-CIO, 901 F.2d 404 (5th Cir.
1990)
-
Leigh v.
Engle, 727 F.2d 113 (7th Cir. 1984)
-
Liss v.
Smith, 991 F. Supp. 278 (S.D.N.Y. 1998)
-
Lujan v.
Defenders of Wildlife, 504 U.S. 555 (1992)
-
Maniace v.
Commerce Bank of Kansas City, N.A., 40 F.3d 264 (8th Cir. 1994),
cert. denied, 514 U.S. 111 (1995)
-
Martin v.
Feilen, 965 F.2d 660 (8th Cir. 1992)
-
Martin v.
Harline, 15 E.B.C.1138 (D. Utah 1992)
-
Martin v.
Schwab, 15 E.B.C. 2135, 1992 WL 296531, 4 (W.D. Mo.
1992)
-
McCall v.
Burlington Northern/Santa Fe Co., 237 F.3d 506 (5th Cir. 2000),
cert. denied, 122 S. Ct. 57 (2001)
-
McDonald v.
Provident Indemnity Life Ins. Co., 60 F.3d 234 (5th Cir. 1995),
cert. denied, 516 U.S. 1174 (1996)
-
McDonnell Douglas Corp.
v. Green, 411 U.S. 792 (1973)
-
McGarry v.
Eastern Air. Lines, Inc., No. 86-2467-CV-RYSKAMP, 1987 WL 13900 (S.D. Fla.
1987)
-
McNeese v.
Health Plan Marketing, Inc., 647 F. Supp. 981 (N.D. Ala.
1986)
-
Mehling v. New
York Life Ins. Co., 163 F. Supp. 2d 502 (E.D. Pa. 2001)
-
Mertens v.
Hewitt Associates, 508 U.S. 248 (1993)
-
Miniat v.
Globe Life Ins. Group, Inc., 805 F.2d 732 (7th Cir.
1987)
-
Moench v.
Robertson, 62 F.3d 553 (3rd Cir. 1995), cert. denied, 516
U.S. 1115 (1996)
-
Mullins v.
Pfizer, Inc., 899 F. Supp. 69 (D. Conn. 1995)
-
Musmeci v.
Schegmann Gaint Super Markets, 159 F. Supp. 2d 329 (E.D. La.
2001)
-
National Org. for Women,
Inc. v. Scheidler, 510 U.S. 249 (1994)
-
Nobile v.
Pension Committee of Pension Plan for Employees of New Rochelle Hosp.,
611 F. Supp. 725 (S.D.N.Y. 1985)
-
O'Rourke v.
Pitney Bowes, 1996 WL 539848, 2 (S.D.N.Y. 1996)
-
Ostler v.
OCE-USA, 2001 WL 119183 (N.D. Ill. Nov. 4, 2001)
-
Ream v.
Frey, 107 F.3d 147 (3rd Cir. 1997)
-
Reich v.
Lancaster, 55 F.3d 1034 (5th Cir. 1995)
-
Rhorer v.
Raytheon Engineers, 181 F.3d 639 (5th Cir. 1999)
-
Sandoval v.
Simons, 622 F. Supp. 1174 (C.D. Ill. 1985)
-
Secretary v.
Gilley, 209 F.2d 877 (6th Cir. 2002)
-
Scheuer v.
Rhodes, 416 U.S. 232 (1974)
-
Silverman v.
Mutual Benefit Life Ins. Co., 138 F.3d 98 (2nd Cir. 1998), cert.
denied, 525 U.S. 876 (1998)
-
Simeon v.
Mount Sinai Medical Center, 150 F. Supp. 2d 598 (S.D.N.Y.
2001)
-
Sommers Drug Stores Co.
Employee Profit Sharing Trust v. Corrigan Enterprises, Inc.,
793 F.2d 1456 (5th Cir. 1986)
-
Sosa v.
Coleman, 646 F.2d 991 (5th Cir.1981)
-
Swierkiewicz v.
Sorema N.A., 122 S. Ct. 992 (2002)
-
Tolson v.
Avondale, 141 F.3d 601 (5th Cir. 1998)
-
United States v.
Uvalde Consolidated Independent School District, 625 F.2d 547 (5th Cir.
1980), cert. denied, 451 U.S. 1002 (1981)
-
Varity v.
Howe, 516 U.S. 489 (1996)
-
Vartanian v.
Monsanto Co., 880 F. Supp. 63 (D. Mass. 1995)
-
Watson v.
Deaconess Waltham Hosp., 2002 WL 1789765 (1st Cir. 2002)
-
Whitfield v.
Cohen, 682 F. Supp. 188
-
Whitfield v.
Lindemann, 853 F.2d 1298 (5th Cir. 1988)
-
Whitfield v.
Tomasso, 682 F. Supp. 1287 (E.D.N.Y. 1988)
-
Yeseta v.
Baima, 837 F.2d 380 (9th Cir. 1988)
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-
15 U.S.C. 78j(b)
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15 U.S.C. 77q(a), § 10(b)
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29 C.F.R. § 2550404c-1(b)(2)(B)(1)
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29 C.F.R. § 2550404c-1(d)(2)(E)
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29 U.S.C. § 1002
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29 U.S.C. § 1103(a)
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29 U.S.C. § 1104(a)(1)(A) and
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29 U.S.C. § 1104(a)(1)
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29 U.S.C. § 1104
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29 U.S.C. § 1132(a)(1)
-
29 U.S.C. §§ 1132(a)(1)(B) and 1132(a)
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29 U.S.C. § 1002(21)
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29 U.S.C. § 1103
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29 U.S.C. § 1104(a)
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29 U.S.C. 1104(a)(1)
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29 U.S.C. § 1105(a)
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29 U.S.C. § 1106
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29 U.S.C. 1001-1169
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17 C.F.R. 24010b5-1
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17 C.F.R. 24010b-5
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17 C.F.R. 24010b5-1(a)
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29 C.F.R. § 250975-8 at D-4
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29 C.F.R. § 2550404c-1
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-
Fed.Reg.
46,922
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Fed. R.
Civ. P. 8(a)
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Fed. R.
Civ. P. 12(b)(6)
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Fed. R.
Civ. P. 56(e)
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H.R.
Rep., No. 93-533, p
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S. Rep.
No. 93-127, p
-
1 D.
Dobbs, Law of Remedies § 4.3(2), at 590-591 (2nd ed.
1993)
-
IIA
Scott on Trusts § 185, at pp
-
Restatement (Second) of Trusts § 173, cmt. c
(1959),
-
Restatement (Second) of Trusts § 198(1) (1959)
-
Restatement (Second) of Trusts, § 205, at 458 cmt.
a
-
Restatement (Second) of Trusts § 227 comment g
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76 Am.
Jur. 2d Trusts § 667 (2002)
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AC Mot.
to Dismiss at 3, 21-23, 29
-
AC Mot.
to Dismiss at pp. 25-29
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AC Reply
to Pls. Opp. to Mot. to Dismiss 20 n.21
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Am. Fed.
of Unions Local 102 Health ¶ Welfare
-
Olson
Mot. to Dismiss at 12
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U.S. Code
Cong. and Admin. News 1974, 4639, 4865
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Trust
Agreement Art. 1.1
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S.E.C.
Rule 10b
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This case was brought by Enron workers who allege
that their retirement accounts lost millions of dollars when Enron collapsed in
a wave of accounting scandals. The Enron workers were participants in three
employee benefit plans sponsored by Enron: (1) the Enron Corp. Savings Plan;
(2) the Enron Corp. Employee Stock Ownership Plan (ESOP); and the Cash Balance
Plan. They allege that the Defendants were fiduciaries of these employee
benefit plans and that, rather than acting prudently and solely in the interest
of the plans' participants and beneficiaries, the fiduciaries did nothing to
protect the plans from suffering huge losseseven though they knew or
should have known that the plans were paying too much for Enron stock and that
financial misstatements gravely threatened the integrity of Enron's retirement
promises. |
The Defendants have moved to dismiss the
Complaint, arguing that there is no set of facts that the Plaintiffs have
alleged that would make them liable for the losses suffered by the plans and
the retirement accounts of these workers. Essentially, they argue that the
Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §
1001-1169, a statute designed to protect the financial stability of employee
benefit plans and the retirement benefits of American workers, imposed no
obligation on them as fiduciaries to do anything even if they knew or should
have known that it was not in the best interest of the plans or their
participants to continue to buy and hold Enron stock. |
The Secretary files this amicus brief expressing
her view that, based on the allegations in the Complaint, ERISA required the
fiduciaries to take action to protect the interests of the plans, their
participants and beneficiaries, and that ERISA provides remedies for the
failure to have done so. The allegations of the Complaint are sufficient to
withstand motions to dismiss, and the Plaintiffs should be allowed to conduct
discovery to prove those allegations.(1) ERISA's fiduciary obligations are among
the "highest known to the law." Bussian v. RJR Nabisco,
223 F.3d 235, 294 (5th Cir. 2000). They do not permit fiduciaries to ignore
grave risks to plan assets, stand idly by while participants' retirement
security is destroyed, and then blithely assert that they had no responsibility
for the resulting harm. |
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I. Standard of
Review |
A motion to dismiss under Rule 12(b)(6) of the
Federal Rules of Civil Procedure is "viewed with disfavor, and is rarely
granted" because of the liberal pleading standard prescribed by Fed. R. Civ. P.
8(a). Sosa v. Coleman, 646 F.2d 991, 993 (5th Cir. 1981).
Rule 8(a)'s simplified pleading standard "relies on liberal discovery rules and
summary judgment motions to define disputed facts and to dispose of
unmeritorious claims." Swierkiewicz v. Sorema, 534 U.S.
506, 508 (2002). Defendants face a heavy burden in bringing a motion to dismiss
for failure to state a claim. A "complaint should not be dismissed for failure
to state a claim 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). |
To qualify for dismissal under Rule 12(b)(6), a
complaint must on its face show a bar to relief. United States v.
Uvalde Consolid. Indep. School Dist., 625 F.2d 547, 549 (5th Cir. 1980),
cert. denied, 451 U.S. 1002 (1981). Rule 12(b)(6) is not a
substitute for a request for a more definite pleading within the meaning of
Fed. R. Civ. P. 8. Clark v. Amoco Prod. Co., 794 F.2d 967,
970 (5th Cir. 1986). Nor is a Rule 12(b)(6) dismissal warranted even if the
district court believes a plaintiff is unlikely to prevail on the merits.
Clark, 794 F.2d at 970 (citing Scheuer v. Rhodes,
416 U.S. 232, 236 (1974)). Even if it seems "almost a certainty to the court
that the facts alleged cannot be proved to support the legal claim," the claim
may not be dismissed so long as the complaint states a claim. Boudeloche v.
Grow Chemical Coatings Corp., 728 F.2d 759, 762 (5th Cir. 1984). This is
because it is the "well-established policy of the federal rules that the
plaintiff is to be given every opportunity to state a claim. . . . [A] court
ordinarily should not dismiss the complaint except after affording every
opportunity [for] the plaintiff to state a claim upon which relief [can] be
granted." Sosa, 646 F.2d at 993 (citations omitted). |
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II. The Complaint
Adequately Alleges that the Administrative Committee Members were Fiduciaries
Responsible for Managing Plan Assets and that Enron, the Compensation
Committee, and Lay were Fiduciaries Responsible for Monitoring the
Administrative Committee |
A. ERISA Defines Fiduciaries in Functional
Terms |
ERISA § 404(a)(1), 29 U.S.C. §
1104(a)(1), imposes broad obligations on fiduciaries for the protection of
participants and beneficiaries. ERISA §§ 404(a)(1)(A) and (B)
provide: |
[A] fiduciary shall discharge his duties with
respect to a plan solely in the interest of the participant and beneficiaries
and: (A) for the exclusive purpose of: |
(i) providing benefits to participants and their
beneficiaries; and (ii) defraying reasonable expenses of administering the
plan; |
(B) with the care, skill, prudence, and diligence
under the circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. |
29 U.S.C. § 1104(a)(1)(A) and (B). These
fiduciary obligations, known as the "duty of loyalty" and the "duty of care,"
are among the "highest known to the law." See, e.g., Bussian, 223 F.3d
at 294; Sommers Drug Stores Co. Employee Profit Sharing Trust v.
Corrigan Enters., Inc., 793 F.2d 1456, 1468 (5th Cir. 1986),
cert. denied, 479 U.S. 1089 (1987). The "duty of loyalty"
requires fiduciaries to act with "complete and undivided loyalty to the
beneficiaries of the trust" and with an "eye single to the interests of the
participants and beneficiaries." See, e.g., Leigh v.
Engle, 727 F.2d 113, 123 (7th Cir. 1984), cert. denied sub
nom., Engle v. Estate of Johnson, 479 U.S. 1078
(1989); Donovan v. Bierwirth, 680 F.2d 263, 271 (2nd
Cir.), cert. denied, 459 U.S. 1069 (1982). ERISA's "duty of care"
requires each fiduciary to act with the "care, skill, prudence, and diligence
under the circumstances then prevailing, that a prudent man acting in a like
capacity and familiar with such matters" would employ. 29 U.S.C. §
1104(a)(1)(B). These duties originate in the common law of trusts, to
which Congress specifically looked when legislating ERISA's fiduciary duties.
Central States, Southeast & Southwest Areas Pension Fund v.
Central Transp. Inc., 472 U.S. 559, 570 (1985), citing S. Rep.
No. 93-127, p. 29 (1973), 1974 U.S.C.C.A.N. (88 Stat. 832) 4639, 4865 ("The
fiduciary responsibility section, in essence, codifies and makes applicable to
these fiduciaries certain principles developed in the evolution of the law of
trusts."); H.R. Rep., No. 93-533, p. 11 (1973), 1974 U.S.C.C.A.N. (88 Stat.
832) 4649 (identical language). |
ERISA provides, in pertinent part, that a person
is a fiduciary "to the extent (i) he exercises any discretionary authority or
discretionary control respecting management of such plan or exercises any
authority or control respecting management or disposition of its assets . . .
or (iii) he has any discretionary authority or discretionary responsibility in
the administration of such plan." ERISA § 3(21)(A)(i) and (iii). The term
"fiduciary" is liberally construed in keeping with the remedial purpose of
ERISA. American Fed. of Unions Local 102 Health & Welfare Fund
v. Equitable Life Assurance Soc'y of the U.S., 841 F.2d 658, 662
(5th Cir. 1988). Fiduciary status extends only to those aspects of the plan
over which the fiduciary exercises authority or control. Furthermore, fiduciary
status is defined not only by reference to particular titles, but also by the
authority which a particular person has or exercises over an employee benefit
plan. Bannistor v. Ullman, 287 F.3d 394, 401 (5th Cir.
2002). "Determining whether someone is a fiduciary is a very fact specific
inquiry which is difficult to resolve on a motion to dismiss." In re
Fruehauf Trailer Corp., 250 Bankr. L. Rep. (CCH) 168, 204 (D. Del.
2000)(citing Kramer v. Smith Barney, 80 F.3d 1080, 1084
n.2 (5th Cir. 1996), for the proposition that ERISA fiduciary status is mixed
question of fact and law); Bell v. Exec. Comm. of the United Food
& Commercial Workers Pension Plan for Employees, 191 F. Supp. 2d 10, 15
(D.D.C. 2002). |
B. The Plaintiffs Have Properly Alleged that
the Members of the Administrative Committee, the Compensation Committee, Ken
Lay and Enron were Fiduciaries Without Regard to Their Corporate Status
|
Without question, as the persons and entity
charged with responsibility for managing the plans and their assets, the
members of the Administrative Committee were plan fiduciaries. One member of
the Administrative Committee, Cindy Olson, in an argument adopted by the
members of the Compensation Committee, asserts, however, that she is relieved
of fiduciary status because she was purportedly acting on behalf of Enron and
within her capacity as an officer of Enron. See Olson Brief, at 18;
Compensation Committee Reply Brief, at 16 n.15. The argument rests on one Third
Circuit opinion, Confer v. Custom Engineering Co., 952
F.2d 34, 37 (3rd Cir. 1991), which held that officers who exercise discretion
on behalf of a corporation are not fiduciaries unless they have individual
discretionary roles over plans, thus effectively insulating such officers to
the extent that they are acting for the corporation. Even if Confer were
correct, Olson would not be absolved of her status as fiduciary. She was not
simply acting on the corporation's behalf in a corporate capacity, but rather
served the plans as an Administrative Committee member who was directly charged
with managing and protecting the plans' assets under the plans' express terms.
Complaint at ¶ 45. There is simply no sensible argument that would absolve
her of liability for her acts or inaction as a fiduciary. |
Confer, however, is not correct. It is
contrary to the Fifth Circuit's decision in Bannistor, which held that company
officers were acting both as plan administrators and as representatives
of the employer under ERISA. 287 F.3d at 405-407. Although the Fifth Circuit
agreed with the officers that it was error for the bankruptcy court to have
assigned them per se fiduciary status based on their role as officers,
it nonetheless concluded that the officers were fiduciaries because they had
discretionary authority or responsibility in the administration of the plan and
thus satisfied ERISA's definition of fiduciary. Ibid. Moreover, other
courts have expressly rejected Confer, correctly recognizing that such a
rule would create an exception for corporate officers that does not exist for
any other functional fiduciaries. See, e.g., Kayes v. Pacific
Lumber, 51 F.3d 1449, 1460 (9th Cir.) (rejecting argument based on
Confer because it would allow corporations to shield its decisionmakers
from personal liability merely by stating in plan documents that their actions
are taken on behalf of the company), cert. denied, 516 U.S. 914
(1995); Martin v. Schwab, 15 Employee Ben. Cas. 2135
(BNA), 1992 WL 296531, at *5 (W.D. Mo. 1992)("Defendants' contention they have
no individual exposure as fiduciaries [because they were on the Board of
Directors] is clearly at odds with the language of the statute. . . . Congress
'conferred fiduciary status on persons and entities by activity and not by
label.'") (citation omitted). As an Eastern District of Louisiana court
recently noted, |
[U]nder the broad scope of the ERISA fiduciary
definition, corporate employees and officers who fit under section 1002(21)(A),
while nevertheless acting on behalf of a corporate entity, face potential
fiduciary liability in their individual capacities with no necessity of
piercing the corporate veil. . . . A contrary approach would ignore "[t]he
broadly based liability policy underpinning ERISA and its functional definition
of 'fiduciary,' " and allow a corporation "to shield its decision-makers from
personal liability" in contravention of what Congress intended in ERISA.
|
Musmeci v. Schwegmann Giant Super
Markets, 159 F.Supp.2d 329, 353 (E.D. La. 2001)(citing Kayes).
|
Defendants' argument is thus inconsistent with the
holdings of many courts, which, like the Fifth Circuit, have routinely held
officers and directors to be fiduciaries when they have discretionary authority
or control over plans. See, e.g., Yeseta v. Baima, 837
F.2d 380, 384-85 (9th Cir. 1988) (corporate officer of plan sponsor which also
administered the plan held to be a fiduciary based on his discretionary
authority and responsibility in the administration of the plan); Leigh
v. Engle, 727 F.2d 113, 134-135 (7th Cir. 1984); Brock
v. Self, 632 F. Supp. 1509, 1520, 1521, 1523 (W.D. La. 1986);
McNeese v. Health Plan Marketing, Inc., 647 F. Supp. 981,
983-85 (N.D. Ala. 1986); Freund v. Marshall & Ilsley
Bank, 485 F. Supp. 629, 641 (W.D. Wisc. 1979). Nor can Confer's
approach be reconciled with the statutory language, which explicitly defines a
fiduciary as a "person . . . to the extent that he exercises any discretionary
authority or discretionary control" over plan management or plan assets. 29
U.S.C. § 1002 (21). This definition contains no exemption for a "person"
who is acting on behalf of a corporation; to the extent that such persons have
discretionary authority or control over the plan, they are plan fiduciaries
regardless of any other role that they play. The exception Olson and the
Compensation Committee assert is not only foreclosed by the statutory language
and the Fifth Circuit's decision in Bannistor, it also does not accord
with the Fifth Circuit's policy of giving "the term fiduciary a liberal
construction in keeping with the remedial purpose of ERISA." Reich
v. Lancaster, 55 F.3d 1034, 1046 (5th Cir. 1995). |
In addition to the members of the Administrative
Committee, who were expressly charged with responsibility for managing the plan
and their assets, Enron, Lay and the Compensation Committee were also
fiduciaries, but by virtue of a somewhat different role. As persons who had the
power to appoint, retain and remove plan fiduciaries, Complaint at ¶ 777,
they had discretionary authority over the management or administration of a
plan under ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), and were thus
themselves fiduciaries. Coyne & Delany Co. v. Selman,
98 F.3d 1457, 1465-66 (4th Cir. 1996); Leigh, 727 F.2d at 134-35; see
also Liss v. Smith, 991 F. Supp. 278, 310 (S.D.N.Y. 1998)("It
is by now well-established that the power to appoint plan trustees confers
fiduciary status."). "[C]ase law clearly provides that officers and directors
of an employer who sponsors a pension plan may be fiduciaries to the extent
they maintain authority for the selection, oversight, or retention of plan
administrators." Martin v. Schwab, 15 Employee Benefits
Cas. (BNA) 2135, No. CIV.A. 91-5059-CVSW-1, 1992 WL 296531, at *4 (W.D. Mo.
Aug. 11, 1992)(citing cases). A fiduciary who appoints trustees has the
responsibility and liability for those functions over which he exercises
authority or control, i.e., selection and retention of fiduciaries.
Sommers Drug, 793 F.2d at 1459-60; 29 C.F.R. § 2509.75-8 at D-4.
|
|
|
III. Plaintiffs
Adequately Allege that Enron, Lay and the Compensation Committee Breached Their
Fiduciary Duties by Failing to Monitor the Administrative Committee
|
A. The Plaintiffs have Sufficiently Alleged
Fiduciary Liability |
The "ongoing responsibilities of a fiduciary who
has appointed trustees" require that "[a]t reasonable intervals the performance
of trustees and other fiduciaries should be reviewed by the appointing
fiduciary in such a 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." 29 C.F.R. § 2509.75-8 at
FR-17; see also Miniat v. Globe Life Ins. Group, Inc., 805
F.2d 732, 736 (7th Cir. 1987)(fiduciaries have duty to monitor administrators
they selected). "[I]mplicit in [a fiduciary's] power to select the Plans' named
fiduciaries is the duty to monitor the fiduciaries' actions, including their
investment of plan assets." Mehling v. New York Life Ins.
Co., 163 F. Supp. 2d 502, 509-10 (E.D. Pa. 2001); see also Liss, 991 F.
Supp. at 311 (fiduciaries who appoint trustees have "the obligation to ensure
that the appointees are performing their fiduciary obligations."). Thus, an
appointing fiduciary has a duty of oversight to promote compliance with ERISA's
fiduciary obligations and to prevent misconduct or injury. See, e.g.,
Leigh, 727 F.2d at 134-35; Coyne, 98 F.3d at 1465; Martin
v. Feilen, 965 F.2d 660 (8th Cir. 1992). |
Plaintiffs allege that Enron itself was charged
with responsibility for selecting and monitoring the members of the
Administrative Committee and other fiduciaries, and that Enron, Lay, and the
Compensation Committee Defendants acted as fiduciaries by selecting, appointing
and removing the fiduciaries of the Savings Plan and ESOP. Complaint at
¶¶ 674, 777. These Defendants allegedly failed to ensure that the
Administrative Committee monitored the prudence of the Plans' investment in
Enron stock, and allegedly knew or should have known the truth about Enron's
precarious financial condition, but withheld the facts from the Administrative
Committee that had overall responsibility for the Plans' investments. Complaint
at ¶ 675. As a result, the Administrative Committee allegedly invested the
employer contributions for the Savings Plan in Enron stock and retained the
Enron stock fund as an investment option for participants without any
investigation of the prudence of the investments. Complaint at ¶ 740.
|
These allegations are more than adequate to state
a claim for failure to properly oversee the Administrative Committee in
violation of the duties of prudence and loyalty under ERISA §§
404(a)(1)(A) and (B), 29 U.S.C. 1104(a)(1)(A) and (B). Corporate officers who
appoint fiduciaries must "ensure that the appointed fiduciary clearly
understands his obligations, that he has at his disposal the appropriate tools
to perform his duties with integrity and competence, and that he is
appropriately using those tools." Martin v. Harline, 15
EBC 1138, 1149 (D. Utah 1992). |
In accordance with these duties of "surveillance
and oversight" (Leigh, 727 F.2d at 135 n.33), the Defendants had an
obligation to monitor the Administrative Committee's conduct and to take
appropriate action if the Committee was not adequately protecting the interests
of the Plans' participants and beneficiaries. The precise nature of the actions
required is a question of fact, dependent on the circumstances. Liss,
991 F. Supp. at 311 ("The duty to monitor carries with it, of course, the duty
to take action upon discovery that the appointed fiduciaries are not performing
properly."); Atwood v. Burlington Indus. Equity, Inc., No.
2:92CV00716, 1994 WL 698314, at *13 (M.D.N.C. Aug. 3, 1994); Whitfield
v. Tomasso, 682 F. Supp. 1287, 1305 (E.D.N.Y. 1988). Often, it is
enough to remove the appointees. In other cases, such as this one, however, it
may be necessary to take other action, such as freezing investments. See,
e.g., Whitfield v. Cohen, 682 F. Supp. 188, 197 (S.D.N.Y. 1988)(once
monitoring fiduciary became aware that trustee was resisting the plan's request
for information about plan investments, he should have taken prompt action to
protect plan assets by withdrawing the investments if necessary). |
In the context of the allegations in this case,
the duty to monitor also included the duty to ensure that the appointees had
accurate information on Enron's financial condition, particularly in light of
the Defendants' own alleged complicity in deceiving the investing public,
including the Plans.(2) Cf. Glaziers and
Glassworkers Union Local No. 252 Annuity Fund v. Newbridge Sec.,
Inc., 93 F.3d 1171, 1181-82 (3d Cir. 1996) (if securities firm was a
fiduciary it had an obligation to disclose to plans that firm's former employee
had resigned because of investment improprieties before the plans hired the
former employee). Enron, Lay and the Compensation Committee could not stand by
and silently watch the Administrative Committee and other responsible
fiduciaries make decisions based on information that obscured the catastrophic
financial condition of Enron and the Plan's investments. |
In response to the Plaintiffs' allegations, the
Defendants note that an individual officer or director is liable as a fiduciary
only "to the extent" of his responsibilities as a fiduciary. Sommers Drug
Store Co. Employee Profit Sharing Plan v. Corrigan
Enterprises, 793 F.2d 1456, 1459-60 (1986). Under Sommers Drug,
Enron, Lay, and the Compensation Committee are not responsible for fiduciary
activities that they did not control and that fell outside the ambit of their
fiduciary responsibility. Their obligation was to select and oversee the
Administrative Committee and other fiduciaries, not to perform fiduciary
activities delegated to others. |
The Defendants err, however, in arguing that
Sommers Drug absolves them of responsibility for failing to monitor the
Administrative Committee. Sommers Drug stands for the unexceptional
proposition that fiduciaries can only be held liable for conduct that falls
within their fiduciary authority, and that they cannot be held directly liable
for investment decisions over which they had no control. Id. at
1459-1460. In that case, the Fifth Circuit held that fiduciaries with the
authority to appoint and remove trustees could not be held liable for a plan's
sale of stock based on their presumed control over the plan's assets if the
trustees, in fact, exercised control over the sale, rather than the appointing
fiduciaries. |
The fiduciaries in this case, unlike the
fiduciaries in Sommers Drug, are accused of breaching the very
obligations that made them fiduciaries: the duties to monitor appointees,
ensure that appointee fiduciaries were performing their duties, and take
appropriate action in response to the appointees' failures. The Plaintiffs do
not seek to hold Enron, Lay, or the Compensation Committee liable for somebody
else's misconduct, but rather for their own alleged failure to monitor the
Administrative Committee, dissemination of misleading and inaccurate
information, and withholding of critical financial information that the
Administrative Committee needed to do its job. The opinion in Sommers
Drug did not involve such allegations much less resolve them with a blanket
rejection of the duty to monitor as now sought by the Defendants. |
The Plaintiffs' Complaint states a claim that
Enron, Lay, and the Compensation Committee violated their obligation to monitor
the appointed trustees to ensure that they were serving the interests of the
participants and beneficiaries. If the Defendants failed to monitor the
Administrative Committee as alleged, they have breached their duties as
fiduciaries. See, e.g., Henry v. Frontier Industries,
Inc., Nos. 87-3879 and 87-3898, 1988 WL 132577 (9th Cir. 1988)(as board
member, defendant had duty to monitor and review performance of appointed
trustee to ensure his performance was in compliance with plan and statutory
standards); Arakelian v. National Western Life Ins. Co.,
755 F. Supp. 1080, 1084 (D.D.C. 1990)("The fact that all administrative
functions of the Plan were delegated to the Plan administrator . . . did not
and does not absolve the trustees of their duty to review and insure that the
administrator was acting in the best interest of the participants."). Cf.
Sandoval v. Simmons, 622 F. Supp. 1174, 1215-16 (C.D. Ill.
1985) (appointing fiduciaries violate their duty of prudence and loyalty under
ERISA §404(a)(1)(A), 29 U.S.C. 1104(a)(1)(A), where they fail to create a
means to monitor the performance of the plan's appointed trustees). |
B. Plaintiffs have Sufficiently Alleged
Co-Fiduciary Liability for the Failure to Monitor |
Even if the appointing fiduciaries were not liable
under § 404 for failure to monitor, the complaint sufficiently alleges
that they have co-fiduciary liability for that failure. Under ERISA §
405(a), 29 U.S.C. § 1105(a), a fiduciary is responsible for his
co-fiduciaries' breaches if: (1) he knowingly participated in or concealed
knowledge of a breach by the other fiduciaries, unless he made reasonable
efforts under the circumstances to remedy the breach. Liss, 991 F. Supp.
at 311; see also Martin v. Harline, 15 Employee Benefits
Cas. (BNA) 1138, 1148-50 (D. Utah Mar. 31, 1992) (fiduciary responsible for
appointment and removal of plan's trustee breached duty under §
404(a)(1)(B), 29 U.S.C. 1104(a)(1)(B), to prudently appoint, periodically
review, and generally oversee trustee's performance of his responsibilities,
and therefore enabled trustee's breaches and is liable for them). Fiduciaries
have a duty to "use reasonable care to prevent a co-trustee from committing a
breach of trust or to compel a co-trustee to redress a breach of trust."
Restatement (Second) of Trusts § 184 (1987 App.). A fiduciary's inaction
and failure to act promptly to halt another fiduciary's breach can give rise to
co-fiduciary liability. See, e.g., Chicago Housing Authority v.
J.A. Hannah Inv. Advisory Service, Inc., 1996 WL 328033 at *5 (N.D. Ill.
1996) (rejecting investment advisor's argument that it cannot be liable for
another fiduciary's theft from plans, which advisor knew about for months;
advisor may have enabled fiduciary breach); Jackson v. Truck
Drivers' Union Local 42 Health and Welfare Fund, 933 F. Supp. 1134, 1141
(D. Mass. 1996)("A fiduciary who becomes aware that a co-fiduciary has breached
a fiduciary duty to plan beneficiaries may not escape liability by simply
casting a blind eye toward the breach."). |
Furthermore, the Fifth Circuit has held that even
in cases where Sommers Drug is applied to limit fiduciary liability, it
does not limit co-fiduciary liability. |
Moreover, we must stress that although Sommers
limited the liability of fiduciaries by the 'to the extent' language of §
3(21)(A), this limitation does not apply to § 1105(a). To illustrate, even
if [a defendant] is only found to be a fiduciary 'to the extent' of appointing
and removing the Plan administrator and Trustee, [the defendant] may still be
liable, for example, for the breaches of [the appointed fiduciary] if [the
defendant] 'participat[ed] knowingly in, or knowingly undert[ook] to conceal,
an act or omission of [the appointed fiduciary], knowing such act or omission
[was] a breach.' |
Landry v. Air Line Pilots Ass'n
Intern. AFL-CIO, 901 F.2d 404, 422-23 (5th Cir.), cert.
denied, 498 U.S. 895 (1990); see also American Fed. of Unions Local 102
Health & Welfare Fund v. Equitable Life Assurance Soc'y,
841 F.2d 658, 665 (5th Cir.1988) (failure to monitor and remove poorly
performing fiduciaries can lead to § 405 liability). Thus, even if the
Court were to find that Lay, Enron or the Compensation Committee were not
liable under § 404, 29 U.S.C. § 1104, the Court could find these
defendants liable under § 405, 29 U.S.C. § 1105, if their actions
enabled other fiduciaries to breach their duties. |
Plaintiffs allege that each of the ERISA
Defendants acted as co-fiduciaries within the meaning of § 405, 29 U.S.C.
§ 1105. Complaint at ¶ 739. In this regard, Plaintiffs allege that
each Defendant knowingly participated in the fiduciary breaches and enabled
their co-fiduciaries to commit breaches by their own failure to comply with
their fiduciary duties under § 404, 29 U.S.C. § 1104. Complaint at
¶¶ 741, 743, 780. For example, Plaintiffs allege that Enron, Lay and
the Compensation Committee withheld material information from the
Administrative Committee as to Enron's true financial condition, failed to
ensure that the Administrative Committee was monitoring the prudence of Enron
stock as a plan investment and contributed to the Committee's failure to
monitor the prudence of Enron stock as an investment for both the Savings Plan
and the ESOP. Complaint at ¶ 675. Because the Plaintiffs have sufficiently
alleged that these Defendants enabled the Committee members to breach their
fiduciary duties in violation of ERISA § 405(a)(2), 29 U.S.C. §
1105(a)(2), their claim for co-fiduciary liability should not be dismissed.
|
|
|
IV. Plaintiffs
Sufficiently Allege that the Administrative Committee Members, as well as
Enron, Lay and the Compensation Committee, Breached their Fiduciary Duties to
Protect the Plans from the Losses Caused by Enron's Perilous Financial
Condition and from Inaccurate and Misleading Information about Enron's
Financial Performance |
A. Plan Fiduciaries Have a Duty Not to
Materially Mislead Plan Participants and to Correct Misleading Information from
Others |
A fiduciary's duty of loyalty to plan participants
under ERISA includes an obligation not to materially mislead plan participants
and beneficiaries. See, e.g., Berlin v. Michigan Bell
Telephone Co., 858 F.2d 1154, 1163 (6th Cir. 1988); Fischer
v. Philadelphia Elec. Co., 994 F.2d 130, 135 (3rd Cir.) ("when a
plan administrator speaks, it must speak truthfully"), cert.
denied, 510 U.S. 1020 (1993). This duty of course includes a prohibition on
lying. As the Supreme Court has stated, "[L]ying is inconsistent with the duty
of loyalty owed by all fiduciaries and codified in section 404(a)(1) of ERISA."
Varity v. Howe, 516 U.S. 489, 506 (1996). Fiduciaries can
also violate their duty of loyalty by misleading participants and
beneficiaries, whether through action, inaction or silence. See, e.g.,
Becker v. Eastman Kodak Co., 120 F.3d 5, 9 (2nd Cir. 1997)
(because summary plan description and benefits counselor's advice together
amounted to materially misleading information, fiduciary breached its duty to
provide participants with complete and accurate information); Babcock
v. Hartmarx Corp., No. CIV. A. 96-3862, 1997 WL 767658, at *3
(E.D. La. Dec. 9, 1997), rev'd on other grounds, 182 F.3d 336 (5th Cir.
1999)("[D]efendant's silence, inaction and misleading advice constitute a
breach of the defendant's fiduciary duty. . . ."); Simeon v.
Mount Sinai Med. Ctr., 150 F. Supp. 2d 598, 604 (S.D.N.Y. 2001); In
re Bidermann Indus. U.S.A., Inc., 241 B.R. 76, 90 (Bankr. S.D.N.Y. 1999).
|
Here Lay and Olson are accused of breaching their
fiduciary duty of loyalty by affirmatively misleading plan participants
concerning the accounting disaster that was about to engulf the company and
cause the plans' holdings to plummet. For instance, the Complaint alleges that
even after receiving Watkins' memo, which warned of a vice-president's concerns
that the company could "implode in a wave of accounting scandals," in late
August 2001, Lay and Olson continued to encourage employees to invest in Enron
stock without telling them of the threat to Enron's financial condition.
Complaint at ¶ 268-71, 689, 691. Plaintiffs point to a September 2001
meeting at which Lay belittled the "reckless and unfounded rumors about Enron
and the financial condition of Enron." He insisted that the company's financial
status was very strong, but he did not inform the employees of the information
he had received which indicated that the company's financial status was in
jeopardy. Complaint at ¶¶ 268-272. Olson, a plan fiduciary, allegedly
stood by his side and failed to correct his statements that the
employee-participants, whom she was duty-bound to protect, should continue to
invest in Enron stock, despite dire warnings about the company's viability that
she had personally received from Sherron Watkins, a company Vice-President.
Id. at ¶¶ 691, 705-09. Plaintiffs further allege that Lay was
asked by an employee for confirmation that Enron was not engaged in accounting
irregularities, and responded that neither he nor the Board would approve the
use of any special purpose vehicles "unless we were convinced both by all our
internal officers as well as our external auditor and counsel, that they were
both legal and totally appropriate." Complaint at ¶
707. He did not, however, correct this statement by disclosing that
"internal officer" Watkins had raised serious concerns about Enron's accounting
irregularities and that, in response, Lay had asked "counsel" to determine
whether Enron's accounting was in fact legal. Complaint at ¶¶ 708.
The Complaint additionally alleges that Lay and Olson by their conduct, sought
to encourage the participants to invest their plan's assets in Enron stock.
Complaint at ¶ 240-252, 691. Thus, the Complaint sufficiently alleges that
Lay's and Olson's statements were inaccurate and misleading at best, and flatly
inconsistent with the basic fiduciary obligation of candor and loyalty.
|
But ERISA fiduciaries are charged with more than
the duty to refrain from misleading plan participants or to correct their own
misstatements. They also have a duty to protect plan participants from
misleading information. Accordingly, when a fiduciary is aware that
participants have been misinformed about the very stability of their retirement
assets, they must take action to protect the participants. Complaint at ¶
240-283. "A beneficiary, about to plunge into a ruinous course of dealing, may
be betrayed by silence as well as by the spoken word." Globe Woolen Co.
v. Utica Gas & Elec. Co., 224 N.Y. 483, 489 (N.Y.
1918)(Cardozo, J.).(3) While a
"trustee is free to stand aloof, while others act, if all is equitable and
fair," he must disclose the truth or take some other prudent action to protect
plan assets "if there is improvidence or oppression, either apparent on the
surface, or lurking beneath the surface, but visible to his practiced eye."
Globe Woolen, 244 N.Y. at 489. |
In some circumstances, the duty of loyalty may
require the fiduciary to correct the inaccurate or misleading information so
that the participants and beneficiaries will not be injured as a result of it.
See Franklin v. First Union, 84 F. Supp. 2d 720, 735 (E.D.
Va. 2000) (fiduciary had "a duty to notify the plaintiffs of the changes in the
investment funds in such a manner as to prevent any misinformation to and
misleading of the plaintiffs regarding their options"); Hudson v.
General Dynamics Corp., 118 F. Supp. 2d 226, 256 (D. Conn. 2000)
(recognizing a "'duty to correct,' in the face of a statement demonstrating a
material misunderstanding of benefits information, on plan fiduciaries in
certain situations."); Mullins v. Pfizer, Inc., 899 F.
Supp. 69, 77 (D. Conn. 1995)("If such misrepresentations were made and
defendant knew of them, defendant had an affirmative duty to correct material
misrepresentations that it knew or should have known plaintiff would rely
on."). An "ERISA fiduciary that knows or should know that a beneficiary labors
under a material misunderstanding of plan benefits that will inure to his
detriment cannot remain silentespecially when that misunderstanding was
fostered by the fiduciary's own material representations or omissions."
Griggs v. E.I. DuPont de Nemours & Co., 237 F.3d 371,
381 (4th Cir. 2001) (citation omitted); see also Davis v.
Bowman Apple Products Co., No. CIV.A. 500CV00033, 2002 WL 535068, at
*6-7 (W.D. Va. Mar. 29, 2002)(citing Griggs for "duty to correct"). But
where plan assets are in danger and participants have been misinformed, silence
and inaction are never options. See Globe Woolen, 244 N.Y. at 489.
|
B. Under Fifth Circuit Precedent, the
Fiduciaries had a Duty to Disclose Information If Necessary for Participants to
Protect Their Retirement Benefits |
The Fifth Circuit has held that, in some
circumstances, fiduciaries may have additional disclosure duties beyond
correcting misinformation. McDonald v. Provident Indemnity
Life Insurance Co., 60 F.3d 234, 237 (5th Cir. 1995). The court has
correctly recognized that where fiduciaries are aware of particular threats to
plan assets, they may have the duty under ERISA § 404(a), 29 U.S.C. §
1104(a), to disclose to participants material information necessary to protect
against these threats. McDonald, 60 F.3d at 237 ("Section 404(a) imposes
on a fiduciary the duty of undivided loyalty to plan participants and
beneficiaries, as well as a duty to exercise care, skill, prudence and
diligence. An obvious component of those responsibilities is the duty to
disclose material information."). In McDonald, the trustee of a group
health insurance plan failed to inform the employer or its employees who
participated in the plan of the health insurer's new rate schedule. The trustee
knew that the new rate schedule would result in prohibitive premiums for the
plan sponsor, a small employer, once it experienced a single catastrophic
claim, and that when this occurred, the employer would not be able to afford to
continue providing health insurance and the employees would lose coverage under
the welfare plan. The Fifth Circuit held that the information was material to
the insurer's suitability and the employer's decision to remain in the multiple
employer trust, and therefore the trustee had an obligation to disclose it and
had breached his fiduciary duty by not doing so. Id. at 237. |
The McDonald court explained that the
impact of the insurer's rate schedule, which would be prohibitive and cause the
plan to lose its insurance and therefore the benefits, was the type of material
fact that the fiduciary had a duty to disclose. As numerous other circuits have
noted, in circumstances where plan assets are seriously at risk, it is "the
core of a fiduciary's responsibility" to disclose complete and correct material
information. Watson v. Deaconess Waltham Hosp., 2002 WL
1789765, *8-9 (1st Cir. 2002)(a fiduciary has an obligation to accurately
convey material information to beneficiaries, including material information
that the beneficiary did not specifically request, if there was some particular
reason that the fiduciary should have known that his failure to convey the
information would be harmful); Bixler v. Central Pennsylvania
Teamsters Health & Welfare Fund, 12 F.3d 1292, 1300 (3rd Cir. 1993);
Griggs v. E.I. Dupont de Nemours & Co., 237 F.3d 371,
380 (4th Cir. 2001); Krohn v. Huron Memorial Hosp., 173
F.3d 542, *548 (6th Cir. 1999); Anweiler v. American Elec.
Power Serv. Corp., 3 F.3d 986, 991 (7th Cir. 1993); Howe v.
Varity Corp., 36 F.3d 746, 754, (8th Cir.), aff'd, 516 U.S. 489 (1996);
Barker v. American Mobil Power Corp., 64 F.3d 1397, 1403
(9th Cir. 1995); Eddy v. Colonial Life Insurance Co. of
America, 919 F.2d 747, 750-51 (D.C. Cir. 1990)("The duty to disclose
material information is the core of a fiduciary's responsibility, animating the
common law of trusts long before the enactment of ERISA. . . . A fiduciary has
a duty not only to inform a beneficiary of new and relevant information as it
arises, but also to advise him of circumstances that threaten interests
relevant to the [fiduciary] relationship. For example, a fiduciary bears an
affirmative duty to inform a beneficiary of the fiduciary's knowledge of
prejudicial acts by an employer."). This affirmative duty requires a trustee to
inform participants "when the trustee knows that silence might be harmful."
Bixler, 12 F.3d at 1300. This duty is in accordance with the common law
of trusts: a trustee "is under a duty to communicate to the beneficiary
material facts affecting the interest of the beneficiary which he knows the
beneficiary does not know and which the beneficiary needs to know for his
protection in dealing with a third person." The Restatement (Second) of Trusts
§ 173, cmt. d (1959). |
This is not to say that fiduciaries must inform
plan participants of every transitory corporate event that might have an impact
on the stock's price, but it does mean that fiduciaries must take action when
they know or should know of potentially ruinous facts, as alleged here. In
McDonald, for example, the court found that the failure to disclose
material information constituted a fiduciary breach, because the fiduciary knew
or should have known that the consequences of the failure to disclose the
information could be disastrous for the plan and its participants. Similarly,
Enron's plan fiduciaries allegedly knew or should have known that the company's
financial statements contained untrustworthy and wholly inaccurate
information,(4) and that the failure to
disclose that information could have grave consequences for Enron's plans and
their participants. In such circumstances, fiduciaries cannot fulfill their
vital duties of loyalty and prudence, the "highest duties known to law," by
taking no action to warn or otherwise protect their plan holdings from the
looming threat, a threat that allegedly resulted in the loss of "hundreds of
millions of dollars." Complaint at ¶ 766. Ream v.
Frey, 107 F.3d 147, 155-56 (3rd Cir. 1997)(plan trustee that resigned
breached duty to act prudently in failing to inform beneficiaries of the
circumstances, when it knew of company's and plan administrator's serious
financial problems). |
The fiduciary duty to inform participants of
circumstances that severely threaten plan assets does not require a participant
request for information before the duty is activated. The Secretary agrees with
the Third Circuit that it would be nonsensical to say that |
participants' failure to make a specific request
for information somehow alleviated any obligation [a fiduciary] would have
otherwise had to disclose the very information the Funds needed in order to
prudently conduct their affairs. Such a result would not only hoist the
beneficiary by its own petard, it is contrary to well established principles
governing the relationship between a fiduciary and beneficiary. . . . Indeed,
absent such information, the beneficiary may have no reason to suspect that it
should make inquiry into what may appear to be a routine matter. If [a party]
was a fiduciary, the Funds' failure to request information concerning [the
issue that threatened plan assets] has no bearing on whether [the fiduciary]
breached the duties it owed the Funds by not volunteering the information.
|
Glaziers, 93 F.3d at 1181. |
This does not mean, of course, that a fiduciary
must reveal all information about a corporate sponsor that bears on employees
benefits. Rather, the duty arises only in those circumstances where material
information is essential to protect the interests of the beneficiaries. As the
Third Circuit has clarified: "We do not, of course, hold that one who may have
attained a fiduciary status thereby has an obligation to disclose all details
of its [business] decisions that may somehow impact upon the course of dealings
with a beneficiary/client." Glaziers, 93 F.3d at 1182. |
Ehlmann v. Kaiser Foundation
Health Plan, 198 F.3d 552 (5th Cir. 2000), is not to the contrary. In
Ehlmann, a participant requested physician compensation plans and
reimbursement agreements, information which ERISA does not specify that
trustees must disclose. Because there were no "special circumstances" requiring
disclosure, the Ehlmann court distinguished the requested information
from the information it said was disclosable in McDonald. 198 F.3d at
556. The Ehlmann court described McDonald as a case where "the
fiduciary duties of Section 404 required disclosure . . . given the extreme
impact that [the information] could have" on the plan. Id. Thus,
McDonald is an example of one type of "special circumstance" requiring
disclosure of material information to participants: where the information is
critical to protection of the plan or plan assets, and failure to communicate
it could have disastrous consequences. Defendants read Ehlmann far too
narrowly in saying that it absolves fiduciaries from making any disclosures
other than those specified in the statute. Ehlmann explicitly recognizes
that there are some circumstances that require disclosure of information beyond
that specified in the statute, such as when the information, as alleged here,
could have an "extreme impact" on plans.(5)
|
The special circumstances present here are
analogous to those in McDonald: plaintiffs allege that the fiduciaries here
knew or should have known that there was a potentially critical threat to the
plan or plan assets. Plaintiffs allege that Enron, Lay, Olson, and the
Compensation Committee, knew or should have known about Enron's grave financial
condition and withheld that information from the participants and the
Administrative Committee. Complaint at ¶¶ 674-675, 701, 703, 704,
709. For example, Plaintiffs allege that the Watkins memo gave Lay and Olson
strong reasons to doubt the stability of the company itself and consequently of
plans' investment in Enron stock. Complaint at ¶¶ 455, 686.
Plaintiffs further allege that Watkins met with Olson personally and reiterated
in detail her concerns that the company's accounting improprieties would end in
disaster. Complaint at ¶ 701. Moreover, Plaintiffs allege that Olson
learned that Fastow wanted Watkins fired for raising these questions in her
memo, and that he ordered that Watkins' computer be confiscated. Complaint at
¶ 703. Plaintiffs allege that Olson failed to report this information to
participants, other members of the Administrative Committee, plan counsel, or
the plan's investments consultant. Complaint at ¶¶ 690-91,
704.(6) |
C. The Administrative Committee Members Could
Have Taken a Number of Steps, Consistent With Their Duties Under Federal
Securities Laws, That May Have Protected Participants in Accordance With the
Fiduciary Provisions of ERISA |
In their motions to dismiss, the Administrative
Committee Defendants and Olson have responded to the Plaintiffs' allegations by
arguing, among other things, that they could not have taken action to protect
participants without engaging in insider trading in violation of securities
laws because the information was not public. See Olson Mot. to Dismiss at 12;
AC Mot. to Dismiss at 28-29. While they allegedly sold millions of dollars
worth of their own Enron stock during this time period, Complaint at
¶¶ 64-92, 272, 681, they (Olson in particular) contend that because
the information they had or could have obtained about accounting irregularities
was not public, disclosing the information to the participants would have made
the Administrative Committee Member Defendants criminally liable for insider
trading, and would have rendered the participants who traded on the information
"tippees" subject to disgorgement of profits. Olson Mot. to Dismiss at 12-13.
Thus, Olson contends, the Plaintiffs' claim that she "breached her fiduciary
duties by failing to do something that was illegal and utterly impractical,
also should be dismissed." Olson Reply, at 7. |
Liability for insider trading is based on §
17(a) of the Securities Act of 1933, 15 U.S.C. 77q(a), § 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and SEC Rule 10b-5, 17
C.F.R. 240.10b-5. Section 17(a) provides that "it shall be unlawful for any
person in the offer or sale of securities . . . to employ any device, scheme,
or artifice to defraud, or . . . to engage in any transaction, practice or
course of business which operates or would operate as a fraud or deceit upon
the purchaser." Section 10(b) similarly provides that it shall be unlawful for
any person "to use or employ, in connection with the purchase or sale of any
security . . . any manipulative or deceptive devise or contrivance in
contravention of such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the protection of
investors." Likewise, SEC Rule 10b-5 makes it unlawful "[t]o engage in any act,
practice, or course of business which operates or would operate as a fraud or
deceit upon any person, in connection with the purchase or sale of any
security." 17 C.F.R. 240.10b-5. |
Although these provisions do not mention or
specifically forbid "insider trading," in the seminal case of In the Matter
of Cady, Roberts & Co., Exchange Act Release No. 34-6668, 40 S.E.C.
907, 1961 WL 60638 (Nov. 8, 1961), the Securities and Exchange Commission
recognized that Rule 10b-5 incorporates the affirmative duty imposed by the
common law of some jurisdictions on "corporate 'insiders,' particularly
officers, directors, or controlling stockholders" to either disclose material
nonpublic information before trading or to abstain from trading altogether.
Id. at *3. The SEC set forth two elements for establishing a 10b-5
violation: "first, the existence of a relationship giving access, directly or
indirectly, to information intended to be available only for a corporate
purpose and not for the personal benefit of anyone, and second, the inherent
unfairness involved where a party takes advantage of such information knowing
it is unavailable to those with whom he is dealing." Id. at *4. The
fraud necessary for establishing a Rule 10b-5 violation arises only where the
insider fails to disclose material nonpublic information before trading on it
and thus makes "secret profits" at the expense of those to whom he owes a
fiduciary duty of loyalty. Id. at *6 n.31.(7) The Supreme Court endorsed this basic approach
in subsequent cases. Chiarelli v. United States, 445 U.S.
222 (1980); Dirks v. SEC, 463 U.S. 646 (1983). |
Defendants' duty to "disclose or abstain" under
the securities laws does not immunize them from a claim that they failed in
their conduct as ERISA fiduciaries. To the contrary, while their Securities Act
and ERISA duties may conflict in some respects, they are congruent in others,
and there are certain steps they could have taken that would have satisfied
both duties to the benefit of the plans. First and foremost, nothing in the
securities laws would have prohibited them from disclosing the information to
other shareholders and the public at large, or from forcing Enron to do so.
See Cady, Roberts, 1961 WL 60638, at *3. The duty to disclose the
relevant information to the plan participants and beneficiaries, which the
Plaintiffs assert these Defendants owed as ERISA fiduciaries, is entirely
consistent with the premise of the insider trading rules: that corporate
insiders owe a fiduciary duty to disclose material nonpublic information to the
shareholders and trading public. See id. (incorporating common law rule
that insiders should reveal material inside information before trading); see
also Plaintiffs' ERISA Opposition at 39 n.18 (arguing that these Defendants
could have publicly disclosed or forced Enron to disclose before selling the
stock). |
Second, it would have been consistent with the
securities law for the Committee to have eliminated Enron stock as a
participant option and as the employer match under the Savings Plan. Indeed,
the Complaint alleges that "had Olson and the Committee immediately discontinue
Enron stock as an investment option for new contributions," once Olson had
learned of Watkins' allegations, the "employees would have been prevented from
throwing another $100million into Enron stock, as they did between August and
December 2, 2001, in large measure because of the continued encouragement" to
do so by Lay and the continued investment of the employer match in Enron stock.
Complaint at ¶ 689. The securities rules do not require an individual
never to make any decision based on insider information. To the contrary, the
insider trading rules require corporate insiders to refrain from buying (or
selling) stock if they have material, nonpublic information about the stock.
Thus, the "disclose or abstain" securities law rule is entirely consistent
with, and indeed contemplates, a decision not to purchase a particular
stock. See Condus v. Howard Sav. Bank, 781 F. Supp. 1052,
1056 (D.N.J. 1992) (it is perfectly legal to retain stock based on inside
information; violation of insider trading requires buying or selling of stock).
It would have been entirely consistent with the securities laws for the
fiduciaries to have eliminated Enron stock as a participant option and the
employer match. The Administrative Committee had no affirmative duty to injure
the plan by continuing to purchase stock that they allegedly knew or should
have known was artificially inflated. Finally, another option would have been
to alert the appropriate regulatory agencies, such as the SEC and the
Department of Labor, to the misstatements. |
Defendant Olson's assertion that a general
disclosure (which she decries as "utterly impractical") would have caused more
harm to the plans, see Olson Reply, at 7 & n.7, is clearly a factual issue
not amenable to disposition on a motion to dismiss. Indeed, her argument makes
the counter-factual assumption that the stock would not ultimately have
plummeted in value without regard to the fiduciaries' conduct. In actual fact,
the stock's market high was not permanently sustainable and the plans'
stockholdings lost essentially all their value even without disclosure by the
fiduciaries. Moreover, if the improprieties had been disclosed earlier, it is
possible that Enron would not have engaged in further corporate malfeasance.
But even if disclosure was not an option, the fiduciaries may have
significantly reduced the harm to the plan by eliminating Enron stock as an
investment option for participants and by investing the matching employer
contributions in something other than Enron stock. Assuming the truth of the
Plaintiffs' allegations, the Savings Plan was purchasing stock at inflated
prices as a result of Enron's fraud on the market. Merely by putting a stop to
the plan's purchases, the fiduciaries would have avoided much of the losses
that resulted when the bottom fell out of the market for Enron stock because
the Plan would not have purchased the inflated stock in the first place.
According to the Complaint, plan participants expended over $100 million on
Enron stock from August to December 2001 alone (the period after Lay and Olson
had received the Watkins memo). Complaint at ¶ 689. |
Defendants can point to only one ERISA case,
Hull v. Policy Mgmt. Sys. Corp., No. CIV.A.3:00-778-17,
2001 WL 1836286, at *2 (D.S.C. Feb. 9, 2001), to support their argument that
any action they could have taken would have violated the insider trading laws.
The court in Hull, however, noted that the plaintiffs did not allege that the
fiduciaries responsible for investments had any knowledge of any misinformation
concerning the company stock or that they participated in the dissemination of
information they knew or should have known was misleading. Moreover, to the
extent that the court suggested that fiduciaries of employee benefit plans
holding employer stock might be in violation of securities laws if they
refrained from additional purchases, the decision is simply wrong. Compare
Dirks, 463 U.S. at 661 (1983)(viewing the Cady, Roberts rule as
requiring insiders to disclose the insider information or refrain from trading
the stock). |
In sum, Plaintiffs have alleged that, instead of
taking some action to protect the plan participants, the fiduciaries continued
to purchase stock at inflated prices, which proved unsustainable and ultimately
resulted in millions of dollars in additional losses losses that would
not have occurred if the plan had simply not continued to purchase the stock.
While the Administrative Committee arguably could not have sold the plan's
Enron stock without full market disclosure, they were neither allowed under
ERISA nor required under securities law to do nothing. |
|
|
V. Plaintiffs' Claims
that Defendants Imprudently Acquired and Retained Enron Stock for the Plans are
Not Defeated by Plan Terms that Provide for Investment in Enron Stock
|
Count I of the Complaint alleges that various
Defendants violated their fiduciary duties in connection with the acquisition
and retention of Enron stock for the Savings Plan and the ESOP. Specifically,
Plaintiffs allege that Defendants breached their duty of prudence by, among
other things, selecting Enron stock as an investment alternative for
participants to direct the investment of their employee contributions to the
Savings Plan; inducing the Savings Plan participants to direct that their
employee contributions be invested in Enron stock; investing employer
contributions to the Savings Plan in Enron stock and accepting Enron stock as
employer contributions to that plan; and inducing the Savings Plan and ESOP
participants to direct or allow the plans' fiduciaries to maintain the plans'
investments in Enron stock. Complaint at ¶ 740. |
Defendants contend that Count I fails to state a
claim as a matter of law because the plan documents required them to take the
actions Plaintiffs claim breached Defendants' fiduciary duties. Defendants
assert, in other words, that Plaintiffs do not challenge their discretionary
acts as fiduciaries, but rather, challenge the design of the plans themselves
and the acts of the plan settlers who wrote the plans' provisions. As discussed
below, Defendants' argument is without merit. The investment and management of
plan assets is inherently a fiduciary activity subject to ERISA's fiduciary
duties. See ERISA § 3(21), 29 U.S.C. § 1102(21), (defining a
fiduciary as a person who exercises any authority or control respecting
management or disposition of plan assets). Moreover, in most instances, the
plans did not require the Defendants to engage in the challenged conduct. Even
where the plans arguably mandated Defendants' actions, ERISA §
404(a)(1)(D), 29 U.S.C. 1104(a)(1)(D), forbids fiduciaries from following the
plan documents if doing so would be imprudent or otherwise violate ERISA.
Therefore, the plan documents do not, as a matter of law, defeat the claims in
Count I. |
A. Defendants May Be Held Liable for
Imprudently and Disloyally Acquiring and Retaining Enron Stock for the ESOP
|
The ESOP plan document provides that "the assets
of the Plan will at all times be primarily invested" in Enron stock. ESOP at
Art. VII. The plan document deems the ESOP to be primarily invested in Enron
stock if such stock constitutes 80% or more of the ESOP's assets. Id. The ESOP
Trust states the "Trustee, except as otherwise provided in this Article, shall
invest all of the assets of the Trust Fund" in Enron stock. ESOP Trust at Art.
III. The exceptions permit the Trustee to establish a cash reserve to cover
expenses and cash distributions and to invest cash awaiting investment in Enron
stock or distribution in short term investment vehicles. |
Clearly the Trustee is an ERISA fiduciary when it
makes decisions with respect to the investment of the ESOPs assets.
Section 3(21) of ERISA expressly provides that a person is a fiduciary to the
extent he "exercises any authority or control respecting management or
disposition of [a plan's] assets." 29 U.S.C. § 1002(21). |
ERISA § 404(a)(1)(D) required Defendants to
follow the terms of the plan document only "insofar as such documents and
instruments are consistent with the provisions of [title I] and title IV" of
ERISA. 29 U.S.C. § 1104(a)(1)(D). The Defendants had a duty under §
404(a)(1)(D) to ignore the terms of the plan document where those terms
required them to act imprudently in violation of ERISA § 404(a)(1)(B). 29
U.S.C. § 1104(a)(1)(B). Central States, 472 U.S. at 568 ("trust documents
cannot excuse trustees from their duties under ERISA"). The Fifth Circuit and
other courts have uniformly held that ESOP fiduciaries must act prudently and
solely in the interest of the participants and beneficiaries in deciding
whether to purchase or retain employer securities despite plan language
requiring the ESOP to purchase employer securities. See, e.g.,
Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983),
cert. denied, 467 U.S. 1251 (1984) ("Though freed by Section 408
from the prohibited transaction rules, ESOP fiduciaries remain subject to the
general requirements of Section 404"); Kuper v. Iovenko,
66 F.3d 1447, 1457 (6th Cir. 1995); Moench v. Robertson, 62 F.3d 553,
569 (3rd Cir. 1995), cert. denied, 516 U.S. 1115 (1996);
Fink v. National Sav. Bank & Trust Co., 772 F.2d 951
(D.C. Cir. 1985) (ERISA's prudence and loyalty requirements apply to all
investment decisions made by employee benefit plans, including those made by
plans that may invest 100% of their assets in employer stock); Eaves
v. Penn, 587 F.2d 453, 459-60 (10th Cir. 1978) ("While an ESOP
fiduciary may be released from certain per se violations on investments
in employer securities . . . in making an investment decision of whether or not
a plan's assets should be invested in employer securities, an ESOP fiduciary,
just as fiduciaries of other plans, is governed by the 'solely in the interest'
and 'prudence' tests of §§ 404(a)(1)(A) and (B)"); Canale
v. Yegan, 789 F. Supp. 147, 154 (D.N.J. 1992); Ershick
v. Greb X-Ray, 705 F. Supp. 1482, 1487 (D. Kan. 1989),
aff'd, 948 F.2d 660 (10th Cir. 1991) (plan terms authorizing ESOP
fiduciary to invest up to 100% of plan assets in employer stock could be
followed only if the investment decision was prudent); Central Trust Co.
v. American Avents Corp., 771 F. Supp. 871, 874-76 (S.D. Ohio
1989) (ESOP trustee properly ignored pass-through voting provisions that would
have prevented sale of an ESOP's stock where the trustee determined that such a
sale would be prudent). This same rule applies to plans that are not ESOPs.
Even if the plan document requires an investment, the fiduciaries must override
it if it violates ERISA. Laborer's Nat'l Pension Fund v.
Northern Trust Quantitative Advisors, Inc., 173 F.3d 313, 322 (5th Cir.)
(investment manager must disregard plan if investing plan assets as required by
plan would violate its duty of prudence), cert. denied, 528 U.S.
978 (1999); In re Ikon Office Solutions, Inc. Sec Litig, 86 F.Supp. 481,
492-493 (E.D. Pa. 2000); Arakelian v. National Western Life
Ins. Co., 680 F. Supp. 400, 405-406 (D.D.C. 1987); see also Opinion
Letter No. 90-05A, 1990 WL 172964, at * 3 (Mar. 29, 1990) (despite plan
provisions to contrary, it is responsibility of fiduciaries to determine, based
on all the relevant facts and circumstances, the prudence of investing large
percentage of plan assets in qualifying employer securities); Opinion Letter
No. 83-6A, 1983 WL 22495, at *1-*2 (Jan. 24, 1983) (same). |
In Moench, the Third Circuit held that the
ESOP fiduciary is "entitled to a presumption that it acted consistently with
ERISA" that can be overcome by "establishing that the fiduciary abused its
discretion by investing in employer securities." 62 F.3d at 571. To rebut that
presumption: |
[P]laintiff may introduce evidence that "owing
to circumstances not known to the settlor and not anticipated by him [the
making of such investment] would defeat or substantially impair the [purposes]
of the trust." |
Id., quoting Restatement (Second) of Trusts
§ 227 c. g. The court also found that: |
[A]s the financial state of the company
deteriorates ESOP fiduciaries who double as directors of the corporation often
begin to serve two masters. And the more uncertain the loyalties of the
fiduciary, the less discretion it has to act. |
62 F.3d at 571-72. Furthermore, "[w]hen a
fiduciary has dual loyalties, the prudent person standard requires that he make
a careful and impartial investigation of all investment decisions." Id. at 571,
quoting Martin v. Feilen, 965 F.2d 660, 670 (8th Cir
1992). The Sixth Circuit adopted the Moench analysis in Kuper, 66
F.3d at 1459. In the view of these courts, the decision to continue holding
employer stock is due some deference in light of the Congressional policy to
promote ESOPs, but the fiduciaries are not entitled to the complete pass from
liability that the Defendants seek here. These courts also recognized the
paramount importance of "vigorously enforcing standards of fiduciary
responsibility." Moench, 62 F.3d at 568, quoting Cunningham, 716
F.2d at 1466. |
Accordingly, Plaintiffs' claim that Defendants
imprudently purchased or retained Enron stock cannot be defeated by the
language in the Enron plan document requiring the assets to be primarily
invested in Enron stock. This is true whether or not this court adopts the
somewhat more deferential standard of review for such decisions in
Moench and Kuper. Ultimately, the court must decide whether,
based on all the facts and circumstances, the Defendants acted prudently, and
this decision cannot be appropriately made upon a motion to dismiss for failure
to state a claim. |
B. Defendants May Be Held Liable for Acquiring
and Retaining Enron Stock in the Savings Plan |
1. The Savings Plan Fiduciaries Were Not Required,
Either by the Terms of the Savings Plan or Under ERISA, to Make Enron Stock an
Investment Alternative for Employee Contributions |
ERISA requires that plan assets be held in trust
and that the trustee (or the named fiduciary who directs the trustee) have
"exclusive authority and discretion to manage and control the assets of the
plan." ERISA § 403(a). Here, the Administrative Committee was the named
fiduciary with responsibility for plan assets, with the power to direct the
trustee who held the Savings Plan assets. See Savings Plan, Art. XV.2;
Trust Agreement, Art. 1.1.(8) The
Administrative Committee also had the specific authority to direct the trustee
as to the investment in Enron stock "as the Committee may deem appropriate."
See Savings Plan, Art. XIII.7(j). |
Furthermore, the Savings Plan permitted the
participants to direct that their employee contributions be invested in one or
more of several investment alternatives that included, during the relevant
period, Enron stock. See Savings Plan, Art. V.17. Under the Savings Plan
and the Trust Agreement the Administrative Committee was responsible for
selecting the investment alternatives. Id.; see Trust Agreement,
Art. 4. While the Trust Agreement included the Enron stock fund as an
investment fund alternative, it also stated that the Committee had the
authority to terminate any existing investment alternatives at any time. Trust
Agreement, Art. 4. Thus, under the trust agreement, even though the
participants could direct that their employee contributions be invested in
Enron stock, the plan's fiduciaries still had fiduciary responsibility for
insuring that all of the plan's investments were prudent investments, including
the Enron stock. With respect to employer contributions, the Savings Plan
provided that such contributions should be primarily in shares of Enron
stock, but did not require that all contributions should be so invested.
Savings Plan V.16(a). |
Thus, even under the terms of the Savings Plan,
the Administrative Committee had discretion to eliminate Enron stock as an
employee investment option and to invest at least some of the employer
contributions in other investments. However, even if the Plan purported to
limit the fiduciaries' discretion to some extent, as it arguably did in stating
that employer contributions should be invested primarily in Enron stock,
Defendants had a duty to disregard the plan where following it would be an
imprudent act or would otherwise violate ERISA, as discussed supra, at 30-32.
|
The Complaint alleges that Defendants acted
imprudently in retaining Enron as an investment alternative and inducing
participants to select that alternative; therefore, it states a claim with
respect to the employee contributions. Complaint at ¶¶ 687, 691, 740.
Moreover, Count I of the Complaint alleges that the fiduciaries violated ERISA
when they purchased and retained Enron stock with employer contributions when
they knew or should have known that doing so was imprudent (Complaint at ¶
740); therefore, it states a claim as to the employer match. |
2. ERISA § 404(c) Does Not Relieve the
Fiduciaries of Responsibility for the Investment in Enron Stock |
The only circumstances in which ERISA relieves the
fiduciary of responsibility for a participant-directed investment is when the
plan qualifies as a 404(c) plan. ERISA § 404(c) applies to individual
account plans that are designed and operated so that participants exercise
independent control over the assets in their accounts. Under ERISA §
404(c), 29 U.S.C. § 1104(c), a "person who is otherwise a fiduciary" is
not liable for losses to the plan resulting from the participant's selection of
investments in his own account, provided that the participant exercised control
over the investments and the plan met the detailed requirements of a Department
of Labor regulation. |
The Department of Labor regulation sets forth the
circumstances under which a plan qualifies as a 404(c) plan and a participant
exercises control. See 29 C.F.R. § 2550.404c-1. To qualify as a
404(c) plan, the participants must be provided an "explanation that the plan is
intended to constitute a plan described in section 404(c) and [the
regulations], and that the fiduciaries of the plan may be relieved of liability
for any losses which are the direct and necessary result of investment
instructions given by such participant or beneficiary." 29 C.F.R. §
2550.404c-1(b)(2)(B)(1)(i). Moreover, the regulation contains extensive
provisions relating to the acquisition or sale of employer securities.
See 29 C.F.R. § 2550.404c-1(d)(2)(E)(4). The regulations include,
among other things, requirements relating to the dissemination of information
to participants on the same basis as to shareholders, pass-through voting
rights, and confidentiality of information relating to pass-through voting
rights. |
Enron argues that the Plaintiffs failed to make
any factual allegations in support of their assertion that the Savings Plan
does not qualify as a 404(c) plan. Enron Corp's Motion to Dismiss, at 46. The
Plaintiffs, however, have alleged that the Savings Plan does not qualify as a
404(c) plan because the participants were not informed that it was intended to
be one. See Plaintiffs' Opposition at 33-35. Moreover, Enron, and not the
Plaintiffs, bears the burden of showing that § 404(c) applies. In re
Unisys, 74 F.3d at 446; Allison v. Bank One-Denver,
289 F.3d 1223, 1238 (10th Cir. 2002). Here, Enron has not established that
ERISA § 404(c) applies to the Savings Plan in general or to the choice of
Enron stock as an investment option within the Savings Plan in particular.
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At this stage in the proceedings and without any
showing at all by Enron, there is no basis to conclude that the Savings Plan
qualifies as a 404(c) plan. Enron has not demonstrated that the participants
and beneficiaries were provided with an explanation that the plan was intended
to qualify as a 404(c) plan or that the fiduciaries would be relieved of
liability for losses under the circumstances set forth in the regulation. Nor
has Enron demonstrated that the Savings Plan meets any of the specific
requirements relating to the investment in employer stock. Absent a showing
that the plan qualifies as a 404(c) plan, the fiduciaries retained full
fiduciary responsibility for all of the plan's investments, including the Enron
stock that the participants directed the Trustee to purchase with their
employee contributions. In re Unisys, 74 F.3d at 443-47. |
Even if the Savings Plan were a 404(c) plan, the
Defendants could not escape liability if the allegations of the Complaint are
true. By its terms, ERISA § 404(c) provides relief from ERISA's fiduciary
responsibility provisions that is both conditional and limited in scope. The
scope of ERISA § 404(c) relief is limited to losses or breaches "which
resulted from" the participant's exercise of control. Section 404(c) plan
fiduciaries are still obligated by ERISA's fiduciary responsibility provisions
to prudently select the investment options under the Plan and to monitor their
ongoing performance. See Advisory Opinion No. 98-04(A) ("In connection
with the publication of the final rule regarding participant directed
individual account plans, the Department emphasized that the act of designating
investment alternatives in an ERISA section 404(c) plan is a fiduciary function
to which the limitation on liability provided by section 404(c) is not
applicable."); Letter from the Pension and Welfare Benefits Administration,
U.S. Department of Labor to Douglas O. Kant, 1997 WL 1824017, at *2 (Nov. 26,
1997)("The responsible plan fiduciaries are also subject to ERISA's general
fiduciary standards in initially choosing or continuing to designate investment
alternatives offered by a 404(c) plan.").(9) Consequently, if, as alleged, the Defendants
violated their fiduciary duties when they continued to offer Enron stock as an
investment option, they are personally liable for the losses. |
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The Secretary does not address
all of the arguments raised by the motions 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.
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According to the Complaint,
Lay and other high-ranking corporate officers were selling off their own stock
with full knowledge that the company had misstated its finances, but failed to
take any action at all to inform the Administrative Committee of the problems,
or to ensure that the participants' interests were protected. Complaint at
¶¶ 64-92, 272, 681.
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This case pre-dates ERISA but
is based in traditional trust law, from which ERISA's fiduciary duties are
drawn. Central States, 472 U.S. at 570; H. Rep. No. 93-533, 93rd Cong.,
2d Sess. 11-12, reprinted in 1974 U.S.C.C.A.N. (88 Stat. 832) 4639,
4649. Under the common law of trusts, beneficiaries are "'always entitled to
such information as is reasonably necessary to enable [them] to enforce [their]
rights under the trust or to prevent or redress a breach of trust.'"
Restatement (Second) of Trusts § 173, cmt. c (1959), cited in
Faircloth v. Lundy, 91 F.3d 648, 656 (4th Cir. 1996),
cert. denied, 519 U.S. 1077 (1997).
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The Complaint alleges that
Olson and Lay in particular were aware of this fact, as they had read Watkins'
report and had been expressly informed of her concern that the accounting
scandals would topple the company, as indeed they did. Complaint at
¶¶ 455, 686.
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Indeed, the Supreme Court in
Varity rejected the contention that the fiduciaries are only bound by
the specific disclosure provisions of ERISA and the plan instruments,
concluding instead that "the primary function of the fiduciary duty is to
constrain the exercise of discretionary powers which are controlled by
no other specific duty imposed by the trust instrument or the legal regime."
516 U.S. at 504 (emphasis added). See also Jordan v. Federal
Express Corp., 116 F.3d 1005, 1012 (3rd Cir. 1997) (referring to this
passage from Varity, noting that "[i]t would appear that the Supreme
Court has also determined that fiduciary duties operate both independently from
and in conjunction with ERISA's specifically delineated requirements."). Thus,
under Varity, Defendants cannot claim that they have no duties to
disclose information beyond that which strictly complies with the statutory
disclosure requirements. See also Central States, 472 U.S. at 570
("rather than explicitly enumerating all of the powers and duties of
trustees and other fiduciaries, Congress invoked the common law of trusts to
define the general scope of their authority and responsibility"); In re
Unisys, 57 F.3d at1264 ("Furthermore, satisfaction by an employer as plan
administrator of its statutory disclosure obligations under ERISA does not
foreclose the possibility that the plan administrator may nonetheless breach
its fiduciary duty owed plan participants to communicate candidly, if the plan
administrator simultaneously or subsequently makes material misrepresentations
to those whom the duty of loyalty and prudence are owed."); Harte
v. Bethlehem Steel Corp., 214 F.3d 446, 451, n.6 (3rd Cir.) ("But
the fiduciary duty to disclose and explain is not achieved solely by technical
compliance with the statutory notice requirements."), cert.
dismissed, 531 U.S. 1037 (2000).
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Plaintiffs also allege these
Defendants allowed and encouraged employees to buy or retain Enron stock while
they were selling large quantities of stock that they owned individually.
Complaint at ¶¶ 253, 255-56, 272, 681.
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The SEC has since adopted a
rule regarding insider trading, which states that manipulative and deceptive
practices prohibited by Rule 10b-5 "include, among other things, the purchase
or sale of a security of any issuer, on the basis of material nonpublic
information about the security or issuer, in breach of a duty of trust or
confidence." 17 C.F.R. 240.10b5-1(a). The rule goes on to provide that "a
purchase or sale of a security of an issuer is 'on the basis of' material
nonpublic information about the security or issuer if the person making the
purchase or sale was aware of the material nonpublic information when the
person made the purchase or sale." Id. §
240.10b5-1(b).
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As explained infra, at
47-49, the status of the trustee as a directed trustee does not eliminate the
trustees liability.
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The preamble to the regulation
notes that "a fiduciary is relieved of responsibility only for the direct and
necessary consequences of a participant's exercise of control." See 57
Fed. Reg. 46,922 (1992). A clarifying footnote explains that the act of
designating a plan investment option is not a direct and necessary result of
any participant direction:
Thus, for example, in the case
of look-through investment vehicles [like a GIC], a plan fiduciary has a
fiduciary obligation to prudently select such vehicles, as well as a residual
fiduciary obligation to periodically evaluate the performance of such vehicles
to determine . . . whether they should continue to be available as participant
investment options.
Id. at n.27.
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