13‐2504‐cv(L) G. Kenneth Coulter, et al. v. Morgan Stanley & Co. Inc., et al.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT ______________

August Term, 2013

(Argued: March 28, 2014 Decided: May 29, 2014)

Docket Nos. 13‐2504‐cv(L), 13‐2509‐cv(con) ____________

G. KENNETH COULTER, JOHN SIEFKEN, GREGORY MAJOR, MICHAEL CHIEKO, ELI MOND, JOHN SUDOLSKY, on behalf of themselves and all others similarly situated, CAROLYN EGAN, on behalf of herself and all others similarly situated, CELESTE MARTINEZ, on behalf of herself and all others similarly situated,

Plaintiffs‐Appellants,

ELENA RAMOS, ALVIN SAINI,

Plaintiffs,

–v.–

MORGAN STANLEY & CO. INCORPORATED, MORGAN STANLEY, THE INVESTMENT COMMITTEE OF THE MORGAN STANLEY 401(K) PLAN, THE MORGAN STANLEY GLOBAL DIRECTOR OF HUMAN RESOURCES, JOHN J. MACK, KAREN JAMESLEY, WALID A. CHAMMAH, CHARLES CHASIN, JAMES P. GORMAN, ELLYN A. McCOLGAN, MICHAEL J. PETRICK, MICHAEL RANKOWITZ, MICHAEL T. CUNNINGHAM, R. BRADFORD EVANS, KIRSTEN FELDMAN, EDMUND C. PUCKHABER, WILLIAM B. SMITH, JOHN DOES DEFENDANTS 1‐10, THOMAS C. SCHNEIDER, RICHARD PORTOGALLO, NEIL A. SHEAR, CORDELL G. SPENCER, CAITLIN LONG, ZOE CRUZ, JOHN DOE, 1‐30, JOHN DOES 1‐10, UNKNOWN MEMBERS OF THE MANAGEMENT DEFENDANTS, JOHN DOES 11‐20, UNKNOWN MEMBERS OF THE INVESTMENT COMMITTEE, JOHN DOES 21‐ 30, UNKNOWN MEMBERS OF THE PLAN ADMINISTRATOR DEFENDANTS,

Defendants‐Appellees,

ROY J. BOSTOCK, ERSKINE B. BOWLES, ROBERT C. KIDDER, DONALD T. NICOLAISEN, CHARLES H. NOSKI, HUTHAM S. OLAYAN, CHARLES E. PHILLIPS, JR., LAURA D. TYSON, KLAUS ZUMWINKEL, O. GRIFFITH SEXTON,

Defendants.*

______________

Before: WESLEY, CARNEY, Circuit Judges, RAKOFF, District Judge. **

______________

Appeal from two March 28, 2013 orders in related cases by the United States District Court for the Southern District of New York (Deborah A. Batts, Judge). In these related cases, Plaintiffs‐Appellants allege various violations of the Employee Retirement Income Security Act of 1974 (“ERISA”),

, et seq. The district court granted Defendants‐Appellees’ Rule 12(b)(6) motions to dismiss on the basis that the Moench presumption of fiduciary prudence applies to Defendants‐Appellees’ conduct and that Plaintiffs‐ Appellants fail to rebut this presumption. Although we make no judgment as to this finding, we conclude that the challenged conduct did not trigger fiduciary

The Clerk of the Court is directed to amend the official caption as noted above. *

The Honorable Jed S. Rakoff, of the United States District Court for the Southern **

District of New York, sitting by designation. 2

liability under ERISA, and therefore AFFIRM the district court’s dismissals on this alternative basis.

MICHAEL JAFFE, Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY (Mark C. Rifkin, Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY; Sanford P. Dumain, Lori G. Feldman, Arvind Khurana, Milberg LLP, New York, NY; Robert I. Harwood, James G. Flynn, Tanya Korkhov, Harwood Feffer LLP, New York, NY; Thomas J. McKenna, Gainey & McKenna, New York, NY; Jeffrey Abraham, Abraham, Fruchter & Twersky, LLP, New York, NY; Milo Silberstein, Dealy Silberstein & Braverman, LLP, New York, NY, on the brief), for Plaintiffs‐Appellants.

ROBERT F. WISE, JR. (Charles S. Duggan, Elyse Jones Cowgill, Andrew Ditchfield, on the brief), Davis Polk & Wardwell LLP, New York, NY, for Defendants‐Appellees.

______________

PER CURIAM:

Appeal from two March 28, 2013 orders in related cases by the United

States District Court for the Southern District of New York (Deborah A. Batts,

Judge). In these related cases, Plaintiffs‐Appellants (“Plaintiffs”) allege violations

of the Employee Retirement Income Security Act of 1974 (“ERISA”),

, et seq. The district court, in finding that the Moench presumption of

prudence applies to Defendants‐Appellees’ conduct and that Plaintiffs fail to

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rebut this presumption, granted Defendants‐Appellees’ Rule 12(b)(6) motions to

dismiss. Although we make no ruling as to this finding, we conclude that the

challenged conduct did not trigger fiduciary liability under ERISA and therefore

AFFIRM the district court’s dismissals on this alternative ground.

BACKGROUND

Plaintiffs comprise a class of individuals who participated in the Morgan

Stanley 401(k) Plan and the Morgan Stanley Employee Stock Ownership Plan

(collectively, the “Plans”). The Plans are “defined contributions plan[s]” or

“individual account plan[s]” within the meaning of ERISA § 3(34),

(34), and were designed to provide eligible Morgan Stanley

employees with a source of retirement income through tax‐deferred participant

contributions and matching employer contributions.1 In January 2007 and

January 2008, Morgan Stanley elected, pursuant to its express authority under

the Plans, to make its employer contributions to the Plans in the form of Morgan

Stanley stock (“Company Stock”) instead of cash.

1 For a more detailed review of the Plans, the parties, and Plaintiffs’ allegations, see In re Morgan Stanley ERISA Litig., No. 07 CIV. 11285 (DAB),

(S.D.N.Y. Mar. 28, 2013), and In re Morgan Stanley ERISA Litig.,

, 350‐53 (S.D.N.Y. 2009). 4

Between December 14, 2007 and February 6, 2008, after Morgan Stanley’s

stock price plunged in conjunction with the broader economic downturn,2

Plaintiffs filed five complaints related to the Plans. See In re Morgan Stanley

ERISA Litig.,

, 349‐50 (S.D.N.Y. 2009). The actions sought to

recover for losses the Plans suffered as a result of the drop in Morgan Stanley’s

stock price.

On July 28, 2008, after these cases were consolidated pursuant to Federal

Rule of Civil Procedure 42(a), Plaintiffs filed a Consolidated Amended Class

Action Complaint (the “MS I Complaint”). See

. The MS I Complaint,

which the district court dismissed in one of the appealed‐from orders, alleges,

inter alia, that Defendants violated various ERISA fiduciary duties by electing to

make Morgan Stanley’s Plan contributions for the 2006 and 2007 Plan years in

Company Stock instead of cash. Although the MS I Complaint named additional

defendants,3 the defendants relevant to this claim include Morgan Stanley

2 At the end of 2007, the total combined value of Company Stock in the Plans was approximately $2.2 billion. At the end of 2008, Plan assets in Company Stock had dropped to roughly $675,000,000. With limited exception, the Plans called for employer contributions, once made, to be invested in Company Stock.

3 For instance, the MS I Complaint also named the Plan Administrator with respect to

Plaintiffs’ claims alleging failure to prudently invest Plan assets. Apparently in light of our decisions in Citigroup and Gearren (cited and discussed in the text, infra), Plaintiffs 5

(“Morgan Stanley” or “Company”); John Mack (“Mack”), the Chairman of

Morgan Stanley’s Board of Directors and Morgan Stanley’s Chief Executive

Office; Morgan Stanley & Co. Inc. (“MS & Co.”); and MS & Co.’s Board of

Directors (“MS & Co. Board”) (collectively, “Defendants”).

On September 26, 2008, Defendants filed a Motion to Dismiss, which Judge

Robert W. Sweet denied on December 9, 2009.4

. The parties then

proceeded with discovery, and on January 25, 2011, Magistrate Judge Andrew J.

Peck limited discovery to the period from the start date alleged in the MS I

Complaint to the date on which the MS I Complaint was filed. The class period

in MS I accordingly runs from November 30, 2006 through July 25, 2008.5 On

March 16, 2011, in response to the January 2011 discovery ruling, Plaintiffs

commenced MS II, the second related case, which asserts essentially the same

claims but for a purported class period of January 2, 2008 through December 31,

2008.

decided to limit their appeal to claims relating to Company contributions and therefore do not challenge the dismissal of prudent investing claims vis‐à‐vis the Plans’ named Administrator.

4 This action was reassigned to the Honorable Deborah A. Batts on December 15, 2009.

5 Although the MS I Complaint alleges a start date of August 9, 2006, plaintiffs

subsequently shortened the class period by changing the start date to November 30, 2006. 6

Before discovery had concluded in MS I or MS II, this Court decided In re

Citigroup ERISA Litigation,

(2d Cir. 2011) (“Citigroup”), and Gearren

v. McGraw Hill Cos.,

(2d Cir. 2011) (per curiam) (“Gearren”). These

opinions adopted the Moench “presumption of prudence,” a pleading standard

that presumes plan fiduciaries act in “compliance with ERISA when [a plan]

fiduciary invests assets in the employer’s stock.” Citigroup,

(citing

Moench v. Robertson,

(3d Cir. 1995)); Gearren,

(same).

When applicable, the presumption can be overcome only by alleging that the

underlying “circumstances plac[ed] the employer in a ‘dire situation.’” Id. at 140.

In light of Citigroup and Gearren, Defendants renewed their motion to

dismiss in MS I and filed a corresponding motion to dismiss in MS II.

Defendants argued (1) that the “presumption of prudence” standard applied to

Plaintiffs’ claims and (2) that Plaintiffs had failed to allege circumstances placing

the Company in the “dire situation” necessary to overcome the presumption.

On March 28, 2013, the district court issued two orders dismissing the two

related cases. See In re Morgan Stanley ERISA Litig., No. 07 CIV. 11285 (DAB),

(S.D.N.Y. Mar. 28, 2013) (the “MS I Dismissal”); Coulter v.

Morgan Stanley & Co., Inc.,

(S.D.N.Y. 2013) (the “MS II

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Dismissal”). The district court declined to reverse its prior ruling that

Defendants were fiduciaries under ERISA because they had “authority to

determine whether to make contributions in either cash or Company [S]tock,”

but applied the Moench “presumption of prudence” and determined that

Plaintiffs had not alleged the existence of dire circumstances during the class

periods. MS I Dismissal,

, at *3‐5; MS II Dismissal, 936 F. Supp.

2d at 315‐19.

On appeal, Plaintiffs challenge these dismissals and seek primarily to

reinstate their claims that Defendants breached their duty of prudence by

electing to satisfy Company contribution obligations for the 2006 and 2007 Plan

years with Company Stock instead of cash. Plaintiffs also seek to reverse the

district court’s dismissal with prejudice of their ERISA claims against Defendants

concerning (1) conflict of interest, (2) failure to properly monitor, and (3) co‐

fiduciary duties. We affirm the district court’s dismissals because the challenged

conduct, even if it negatively impacted the Plans, did not occur in the

performance of a fiduciary function and therefore cannot trigger fiduciary

liability under ERISA. Absent fiduciary liability, Plaintiffs’ secondary claims also

fail.

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DISCUSSION

We review the district court’s grant of a motion to dismiss de novo, but may

affirm on any basis supported by the record. See Scott v. Fischer,

(2d Cir. 2010).

1. ERISA Duty of Prudence

“In every case charging breach of ERISA fiduciary duty . . . the threshold

question is . . . whether that person was acting as a fiduciary (that is, was

performing a fiduciary function) when taking the action subject to complaint.”

Pegram v. Herdrich,

(2000); see also

(21)(A),

1109.6 It is undisputed that Defendants were not named fiduciaries under the

Plans. Plaintiffs’ claims may therefore lie against Defendants only to the extent

that Defendants, in electing to make Company contributions with Company

Stock, acted as de facto fiduciaries.

Even if not a named fiduciary, a person is a de facto fiduciary under ERISA

“to the extent” she, inter alia, (a) “exercises any discretionary authority or

6 It is undisputed that each Defendant is a “person” under ERISA. “The term ‘person’ means an individual, partnership, joint venture, corporation, mutual company, joint‐ stock company, trust, estate, unincorporated organization, association, or employee organization.”

(9). 9

discretionary control respecting management of such plan or exercises any

authority or control respecting management or disposition of its assets,” or (b)

“has any discretionary authority or discretionary responsibility in the

administration of such plan.”

(21)(A); accord Mertens v. Hewitt

Assocs.,

, 251‐52 (1993). We have previously explained that “[u]nder

this definition, a person may be an ERISA fiduciary with respect to certain

matters but not others”; fiduciary status exists only “to the extent” that the

person “has or exercises the described authority or responsibility” over a plan.

F.H. Krear & Co. v. Nineteen Named Trs.,

, 1259 (2d Cir. 1987).

Plaintiffs allege that Morgan Stanley, MS & Co. and the MS & Co. Board

acted as de facto fiduciaries because “each provided Defendant Mack with the

authority and means to fund Company Contributions with Company Stock.”

Appellant’s Br. 21. According to Plaintiffs, Mack is a de facto fiduciary because

“he had the authority to determine whether to fund Company Contributions in

cash or Company Stock and exercised such authority by satisfying all such

obligations with Company Stock.” Id.

Even assuming that Defendants had full authority and discretion to satisfy

Company contributions in stock or cash, the exercise of this discretion does not

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constitute fiduciary conduct under ERISA; the discretionary act must be

undertaken with respect to plan management or administration. See

(21)(A); Lockheed Corp. v. Spink,

(1996). In defining the

scope of a fiduciary’s duty under ERISA, courts have distinguished between

fiduciary functions, which give rise to ERISA liability, and “settlor” functions,

which are akin to actions taken by the settlor of a trust and do not trigger ERISA

liability. See, e.g., Spink,

; Flanigan v. Gen. Elec. Co.,

, 88

(2d Cir. 2001); Akers v. Palmer,

(6th Cir. 1995). Fiduciary

functions include, for instance, “the common transactions in dealing with a pool

of assets: selecting investments, exchanging one instrument or asset for another,

and so on.” Harris Trust & Sav. Bank v. John Hancock Mut. Life Ins. Co.,

(2d Cir. 2002) (quoting Johnson v. Georgia‐Pacific Corp.,

(7th Cir. 1994)). “Settlor” functions, in contrast, include conduct such as

establishing, funding, amending, or terminating a plan. See Spink,

; Flanigan, 242 F.3d at 88; Akers,

. One treatise on the subject

similarly states that non‐fiduciary duties generally include “decisions relating to

the timing and amount of contributions.” Lee T. Polk, ERISA Practice and

Litigation § 3:32 (2013).

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In Akers, trust beneficiaries appealed the district court’s dismissal of their

suit challenging a company board’s decision to create and initially fund a plan in

company stock at fair market value. See

. The Sixth Circuit

affirmed; in addition to questioning plaintiffs’ underlying legal theory, the court

determined that the board’s decision to establish and initially fund a plan with

newly‐issued stock did not constitute fiduciary conduct under ERISA. See

. At a basic level, the board’s decisions constituted “the act of a settlor,

immune from scrutiny under” ERISA.

This conclusion was reinforced by the

fact that the challenged conduct occurred prior to the fund’s existence; absent

existing assets, the conduct could not have involved fund management or

administration.

We see no reason to reach a different result here. Unlike in Akers,

Defendants’ decision to make Company contributions in Company Stock

occurred after the fund was already active. This distinction does not alter the

underlying analysis. Just as in Akers, Defendants’ decision to fund Company

contributions in Company Stock could not constitute a fiduciary act because, at

the time of the decision, the Company Stock was not a Plan asset. See id.; see also

In re Wachovia Corp. ERISA Litig., No. 3:09CV262,

(W.D.N.C.

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Aug. 6, 2010). More broadly, Defendants were not fiduciaries because they had

“no authority or responsibility over” either Plan. Flanigan, 242 F.3d at 87. As

alleged by Plaintiffs, Defendants were not named fiduciaries and their discretion

began and ended with selecting the form of Company contributions.

Finally, Defendants’ decision to fund the Plans with Company Stock does

not constitute fiduciary conduct even if the challenged conduct negatively

impacted the Plans. As stated above, fiduciary status turns on ERISA’s plain

language and does not exist simply because an employer’s business decision

proves detrimental to a covered plan or its beneficiaries. “[T]he employer acts as

a fiduciary when administering a plan but not when designing or making

business decisions allowed for by a plan, even though in all three situations its

determinations may impact on its employees.” Noorily v. Thomas & Betts Corp.,

(3d Cir. 1999). Courts have consistently explained that conflicts

may exist between an employer’s interests and an employee’s interests and that,

as a result, settlor functions may detrimentally impact a benefits plan. See, e.g.,

Akers,

. We see no reason to deviate from this well‐reasoned

analysis. The challenged conduct, even to the extent detrimental to the Plans,

was not undertaken in performance of a fiduciary function.

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2. Plaintiffs’ Additional Claims

Plaintiffs also challenge the district court’s dismissals of their related

claims alleging (1) conflict of interest, (2) failure to properly monitor, and (3) co‐

fiduciary duty violations.

Plaintiffs’ conflict of interest claim against Defendant Mack fails for at least

two reasons. First, because Mack’s decision to fund the Plans with Company

stock did not constitute a fiduciary function, Mack had no fiduciary duty under

ERISA to avoid a conflict of interest. Second, even had the challenged conduct

triggered fiduciary liability, Plaintiffs fail to state a claim because they allege only

that Mack decided to fund the Plans with Company Stock as a result of bias

stemming from his personal investment in Company Stock. In Citigroup, we

stated that a conflict of interest claim cannot “be based solely on the fact that an

ERISA fiduciary’s compensation was linked to the company’s stock.”

. The district court properly dismissed Plaintiffs’ conflict of interest claim,

which alleged no more than this.

Plaintiffs’ latter two claims – failure to monitor and breach of co‐fiduciary

duty – constitute derivative claims that cannot survive absent a viable claim for

breach of a duty of prudence. Because the underlying duty of prudence claim

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fails, so do these derivative claims. See Rinehart v. Akers,

(2d

Cir. 2013).

Finally, Plaintiffs contend that the district court abused its discretion in

dismissing their claims with prejudice. See Williams v. Citigroup Inc.,

(2d Cir. 2011). We disagree. Plaintiffs have identified no facts that, if

alleged, would establish a valid claim. The district court therefore did not abuse

its discretion because any amendment to the allegations concerning Defendants’

fiduciary status would be futile. See Lucente v. Int’l Bus. Machs. Corp.,

(2d Cir. 2002).

CONCLUSION

We have considered all of Plaintiffs’ arguments and find them to be

without merit. We hereby AFFIRM the district court’s orders of March 28, 2013,

which granted Defendants’ motions to dismiss in the two related cases

consolidated for this appeal.

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