Summary
holding no breach of fiduciary duty for failing to act on `insider' information
Summary of this case from Edgar v. Avaya, Inc.Opinion
C/A No.: 3:00-778-17
February 9, 2001
ORDER ON DEFENDANTS' MOTION TO DISMISS
This matter is before the court on defendants' motion to dismiss. After careful consideration of the substantial memoranda filed by the parties and after full oral argument, this court is constrained to grant the motion for the reasons set forth below.
Standard of Review
A motion to dismiss should be granted only when it appears that plaintiff can prove no set of facts in support of a claim that would entitle plaintiff to relief on that claim. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). In considering a motion to dismiss, the court must view the complaint in the light most favorable to plaintiff and resolve every doubt in plaintiffs favor. The plaintiffs allegations are to be taken as true for the purpose of ruling upon the motion. Jenkins v. McKeithen, 395 U.S. 411, 421-22 (1969). In addition, any inference reasonably drawn from the complaint must be considered together with plaintiff's allegations of fact. Murray v. City of Milford, 380 F.2d 468, 470 (2d Cir. 1967). However, the court may not consider conclusions of law or unwarranted deductions of fact. Mylan Laboratories, Inc. v. Akzo, N.V., 770 F. Supp. 1053, 1059 (D.Md. 1991). It is also well-settled that a complaint cannot be amended by plaintiffs briefs in opposition to a motion to dismiss. Id. at 1068.
In the present case, the complaint refers to and is dependent on an employee pension benefit plan (hereinafter "the Plan"). Defendants have submitted a copy of the Plan documents and rely on provisions of the Plan in support of their motion to dismiss. Plaintiff has not challenged either defendants' reliance on the Plan or defendants' legal argument that it would be proper for the court to consider the Plan language in ruling on the motion to dismiss. Indeed, plaintiff also relies on the Plan language in her responsive memorandum. Under these circumstances, it is proper for the court to consider language contained in the Plan documents even though the Plan is not attached to or incorporated into the complaint. See Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993) ("When determining the sufficiency of plaintiffs' claim for Rule 12(b)(6) purposes, consideration is limited to the factual allegations in plaintiffs' . . . complaint, which are accepted as true, to documents attached to the complaint as an exhibit or incorporated in it by reference, to matters of which judicial notice may be taken, or to documents either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit"); In re Criimi Mae, Inc., Sec. Litig., 94 F. Supp.2d 652, 656 (D. Md. 2000) (on 12(b)(6) motion, court may consider press releases and public disclosure documents referred to in the complaint); Krim v. Coastal Physician Group, Inc., 81 F. Supp.2d 621, 626 fn. 2 (M.D.N.C. 1998) (on 12(b)(6) motion, court may consider filings with the Securities and Exchange Commission and news articles which were referred to and were integral to the complaint), aff'd 201 F.3d 436 (4th Cir. 1999)(table).
Allegations of Complaint
Plaintiff is a participant in an employee pension benefit plan (the "Plan") sponsored by her employer, defendant Policy Management Systems Corporation. The Plan is what is generally known as a 401(k) Retirement Savings Plan. Employees may contribute a percentage of their salary to their individual accounts under the Plan. The employee decides how these employee-contributed funds are invested.
Defendant Policy Management Systems Corporation is presently doing business as MYND Corporation, but will be referred to herein as "PMSC", its name at the time of the alleged class period.
The employer matches some portion of the employees' contribution. These employer-contributed matching funds do not, however, vest immediately and the employee lacks control over the funds until they vest. A committee of three individuals, who are also defendants in this action, makes the investment decisions as to the nonvested employer-matching funds.
The funds at issue in this action were invested in PMSC's common stock. The price of that stock ultimately dropped sharply after certain negative information was released to the general public. That drop generated this and a related securities action.
Seeking to represent a class of persons similarly situated, the plaintiff alleges that the various defendants breached fiduciary duties owed to the employee pension benefit Plan in one or more of the following ways: (1) by providing misinformation relating to PMSC's value as a corporation; (2) by failing to provide accurate information; or (3) by failing to obtain accurate information. According to plaintiff, the misinformation and lack of accurate information led to the Plan's continued purchase and retention of PMSC stock in the nonvested employer-matching contribution portion of the Plan at a time when the share price was overvalued. Plaintiff seeks, therefore, to hold the defendants liable for the Plan's losses occasioned by the drop in the share price of PMSC's stock because defendants allegedly knew or should have known that the stock was overvalued during a time when the Plan was either purchasing or holding company stock.
A separate class action has been initiated by shareholders who purchased shares during the relevant period of time alleging that certain company insiders, including one defendant named in the present action, provided false information or failed to provide accurate information relating to the value of PMSC. In essence, that action alleges fraud on the market. By order entered February 2, 2001, this court denied a motion to dismiss the separate securities action. The Plan and, derivatively, its participants (including the plaintiff in this action) stand to benefit from any recovery under the securities action to the same extent as any other shareholder who purchased shares during the relevant period.
That action is referred to as Kimmey v. PMSC, C/A 3:00-130-17 (In re Policy Management Securities Litigation), which is also pending before the undersigned.
The defendants in the present action fall into two categories and the specific allegations must be addressed separately as to each group. The first group of defendants consists of the company itself, Policy Management Systems Corporation ("PMSC"), and its Chief Executive Officer, G. Larry Wilson. These defendants shall be referred to herein as "the corporate defendants." The second group consists of three persons who served on the committee which is vested by the Plan documents with authority to make investment decisions for nonvested employer-matching funds within the Plan. These defendants shall be referred to herein as "the Committee" or "the Committee defendants."
Pursuant to the Plan documents, the sole responsibility for decisions as to investment of nonvested employer matching contributions held by the Plan rests with the Committee. Defendant PMSC concedes that it is a fiduciary to the Plan due to its status as Plan sponsor and administrator. It is, in any case, listed as a named fiduciary in the Plan. See Plan § 7.01(i). Nothing in the Plan documents however, suggests that PMSC's fiduciary responsibility extends to investment decisions. See, e.g., Plan §§ 7.01 7.02 (fiduciary duties of "the Company"). Similarly, to whatever extent defendant Wilson, as a member of the Board of Directors, may be a fiduciary, the Plan documents do not suggest that his duties extend to making investment decisions. See Plan § 7.01(ii) (listing "The Board" as a fiduciary).
For these reasons and based on the authority discussed in the Standard section above, this court concludes that it may consider the Plan documents. Even were this not permissible under a Fed.R.Civ.P. 12(b)(6) motion, the court would find that plaintiff had, by failure to object and by relying on the document in her responsive brief, consented to resolution of the motion under Fed.R.Civ.P. 56, at least to the extent of considering the Plan documents.
The majority of allegations of wrongdoing contained in the complaint relate to the corporate defendants' alleged dissemination of misinformation and failure to disclose information which plaintiff contends the corporate defendants were obligated to disclose. These allegations effectively mirror the allegations in the related securities litigation. Neither the complaint nor the plaintiffs memorandum suggests that either of the corporate defendants assumed fiduciary duties to the Plan beyond those expressly stated in the Plan document. Most particularly, plaintiff does not assert that the corporate defendants made any investment decisions for the Plan or did anything specifically directed to the Plan or the Committee to encourage or cause the Plan to purchase PMSC stock.
As to the Committee defendants, who clearly are vested with discretion as to investment decisions, plaintiff primarily alleges that they breached their fiduciary duties by failing to acquire information that was available to the corporate defendants or otherwise available within the corporation. Plaintiff alleges that the Committee defendants should have known, based on prior lawsuits relating to the corporation's alleged failure to make full disclosures of negative information, that PMSC stock might be overvalued. Plaintiff does not allege that the Committee defendants ever purchased PMSC stock at a price higher than the normal market price or that their decisions to purchase and hold stock were unreasonable in light of information known generally to the market. Indeed, facts such as the prior lawsuits which plaintiff alleges should have placed the Committee on notice of the potential misrepresentations would have been as well known to the market as they were to the Committee.
Discussion
Plaintiff names numerous defendants in her complaint. Only one cause of action, however, is asserted. That is, plaintiff alleges all defendants violated the fiduciary duty requirements imposed under the Employee Retirement Income Security Act of 1974 ("ERISA"). See 29 U.S.C. § 1109 (imposing personal liability for breach of a fiduciary duty applicable under ERISA) and § 1132(a)(2) (providing for a private civil action for relief under Section 1109). The fiduciary duties imposed by ERISA require fiduciaries to "discharge [their] duties with respect to the plan solely in the interest of the participants and beneficiaries and . . . 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) (B). An ERISA fiduciary is also required to act "in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [ERISA]." 29 U.S.C. § 1104(a)(2)(D).
Whether the defendants here named were acting as fiduciaries is, therefore, a threshold question as to the claims at issue in this action. ERISA provides, inter alia, that "a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting the management of such plan or exercises any authority or control respecting management or disposition of its assets." 29 U.S.C. § 1002(21)(A)(i). An individual may, therefore, be a fiduciary in some of his or her actions, but not in regard to others. See, e.g., Akers v. Palmer, 71 F.3d 226, 230 (6th Cir. 1995) ("a company is only subject to fiduciary restrictions when managing a plan" — noting, in particular, that actions relating to the management of plan assets are subject to fiduciary standards).
The issue of the extent of fiduciary duties frequently arises in the context of actions taken by employers who, absent very limited and unusual circumstances, are not held to a fiduciary standard in regard to their general business decisions, See generally, Varity Corp. v. Howe, 516 U.S. 489 (1996) (finding fiduciary duty existed as to dissemination of information). In Varity Corp., the Court held that an employer acted as a fiduciary when it "intentionally connected its statements about [a new division's] financial health to statements it made about the future of benefits, so that its intended communication about the security of benefits was rendered materially misleading." Id. at 505. The Court made this distinction in addressing the dissent's concern that the ruling might subject employers to liability for ordinary business decisions or statements about corporate financial conditions simply because the statements or decisions have an adverse impact on a plan. Id. The Court, quite clearly, left intact the distinction between the ordinary business decisions made by an employer which might have an adverse collateral effect on a plan and actions specifically directed toward the plan or its beneficiaries.
which placed them squarely at odds with their continuing assent to have the Plan invest in Policy Management stock. The other defendants, members of the Administrative Committee of Policy Management's Plan . . . failed to make an adequate investigation of the investment in Policy Management stock in light of the information that was available to them.
Memorandum in Opposition at 3. As to the corporate defendants, she further specifies that they
breached their fiduciary duties to Plan participants by: (1) continuing to have the Plan invest in Policy Management stock and have employer matching contributions made to the Company's stock fund . . . despite the fact that the information available should have revealed to them that investing in Policy Management stock was an unsound investment; (2) failing to disclose, much less to resolve, their own conflicts of interests [sic] arising from their participation in making false and misleading statements about Policy Management's financial condition that artificially inflated the price of the stock for their own benefit while failing to consider the grave consequences of these practices on Plan participants; and (3) failing to provide Plan participants with accurate information about Policy Management stock and instead negligently misleading them about the risks of investing in Policy Management stock.
Memorandum in Opposition at 5. While these arguments attempt to explain the claims in a manner which might distinguish them from the allegations in the related securities action, they do not address the critical threshold inquiry: whether the actions at issue were taken in the corporate defendants' capacity as Plan fiduciaries.
As noted above, the Plan imposes only limited fiduciary duties on the corporate-employer and its Board. E.g., Plan §§ 2.33 (defining fiduciary), 7.01 (naming fiduciaries), 7.02 (duties of "Company"), 7.03 (duties of Board), 7.07 (fiduciary standard). The authority to make investment decisions as to employer-matching contributions is not vested with either the corporate-employer or the Board, but with the Plan Committee. Plan § 4.01(a); Infra § II. See also § 2.33 (limiting fiduciary duties to those specifically allocated); § 7.01 (vesting only powers which are not otherwise expressly allocated in the employer). The corporate defendants, therefore, rely first
For present purposes, therefore, the first question is whether the complained of actions were taken in a fiduciary role. The court answers this question in the negative as to the corporate defendants which disposes of the claims against them. Infra § I. As to the Committee defendants, who clearly were acting as fiduciaries in investing Plan assets, the court must reach the second question: whether the Committee defendants breached the applicable standard of care in exercising their fiduciary duties. The court also answers this question in the negative, finding no allegation adequate to support a claim that the Committee defendants breached their fiduciary duties,
I. The claims against the corporate defendants are dismissed under Fed, R. Civ. P. 12(b)(6) as the allegations of the complaint, taken together with the relevant Plan provisions, do not support the conclusion that the complained of actions were taken in a fiduciary capacity.
In the motion to dismiss, the corporate defendants argue that plaintiffs allegations are nothing more than an ineffective attempt to recast the securities action as an ERISA action. They further argue that the claims cannot survive as to these two defendants because, even if the allegations of wrongdoing were true, the alleged wrongful acts were not undertaken in the corporate defendants' fiduciary capacity. This court disposes of the claim against the corporate defendants on the latter ground.
In her memorandum in opposition to the motion to dismiss, plaintiff characterizes her allegations against the corporate defendants as follows:
Certain . . . defendants, namely Policy Management and Wilson, were also participants in a scheme to defraud open market investors in Policy Management stock as alleged with painstaking particularity in the Securities Case. However, the false and misleading statements attributed to these two defendants in the ERISA Complaint are based on what they should have known based on information available to them — a negligence standard. The information that should have been known to these two defendants based on information available to them, indicated to these two defendants that Policy Management stock was a bad investment for Plan participants,
on the Plan's allocation of responsibility, and second on the lack of any allegation of fact adequate to suggest that they assumed a greater fiduciary role than set forth in the Plan.
Plaintiff does not challenge the completeness or accuracy of the Plan document as presented by defendants or point the court to any provision vesting authority for investment decisions in the employer or Board. Neither does she suggest any facts which would demonstrate that the corporate defendants have assumed duties beyond those set forth in the Plan document.
There are, for instance, no allegations that the corporate defendants specifically directed or pressured the Committee to make certain investments or that the corporate defendants provided information to the Committee which was not provided to other investors. The only allegations against the corporate defendants suggest that their wrongs, if any, were directed to the market generally. This being the case, the Plan, its Committee and participants stand in no different position as to the corporate defendants than do all other shareholders.
Rather, in seeking to demonstrate that the alleged actions would have been taken in a fiduciary capacity, plaintiff refers the court to Sections 7.03 and 7.07 of the Plan. The first of these empowers the Board of Directors to "appoint and remove the members of the Committee." The Plan also provides, however, that "The Board shall have no other responsibilities with respect to the Plan." Plan § 7.03(b). See also §§ 2.33 7.01 (limiting powers of fiduciaries to those expressly delegated by the Plan). For present purposes, the court will presume, without deciding, that the duty imposed on the Board as a body applies equally to a single member of the Board: defendant G. Larry Wilson.
Plaintiff next suggests that Section 7.07 imposes an implied "duty to supervise the activities or at least be cognizant of the actions of the Committee." The actual language of Section 7.07, however, is far more generic. It essentially repeats the fiduciary standard contained in ERISA itself, adding nothing to the scope of the duties delegated to any individual or body. This section is not specific to any particular fiduciary but governs the general "Standard of Fiduciary Duty." Plan § 7.07 (section heading).
Thus, the court must look only to Section 7.03, with its clear limitation on the delegation of powers, to determine if defendant Wilson has some particular duty as to investment decisions. Possibly recognizing the outcome of this inquiry, plaintiff uses her memorandum in opposition to re-characterize her allegations against defendant Wilson as a failure of supervision.
In the first instance, the complaint does not submit to such a reading. See, e.g., Complaint ¶¶ 14 15 (collectively setting forth nine categories of wrongful activity, none of which suggests deficiencies in the selection, retention or supervision of the Committee). The complaint's many pages of specific allegations of wrongdoing by the corporate defendants focus exclusively on allegations of dissemination of misleading information and failures to make proper and timely disclosures of accurate information. Indeed, within the forty-one page complaint, the court finds only two brief and generic allegations which relate in any way to the role of the Board in selecting the Committee:
37. The Company's Board of Directors, of which Defendant Wilson is Chairman, has the following powers and duties with respect to the Plan: (i) to cause the Company to make contributions to the Plan, (ii) to appoint and remove the members of the Committee, and (iii) to terminate the Plan in whole or in part,
38. The Committee is appointed by and serves at the pleasure of the Board to administer the Plan. The Board has the right to remove any member of the Committee at any time, with or without cause. The Committee has complete control over the administration of the Plan with all powers necessary to enable it to properly carry out the provision of the Plan.
Complaint ¶¶ 37 38. No allegation goes farther to suggest a breach of duty by the Board in exercising its limited powers of appointment and removal.
In short, as to defendant Wilson, the Complaint contains only allegations of breach of duty to provide information to the Plan or duty not to provide false information. By contrast, the Plan itself imposes no duties whatsoever on defendant Wilson except to the extent he, as a member of the Board, may participate in the appointment or removal of Committee members. Therefore, the breaches alleged do not relate to matters as to which Wilson owed or assumed a duty to the Plan any different from the duties owed to all other shareholders. Even assuming the Board's right to remove Committee members might be stretched to include a duty of supervision (despite the Plan's language expressly limiting the Board's duties), and even assuming that the duty of the Board as a body might be placed individually at Wilson's feet, there are simply no allegations in the complaint adequate to support a claim for failure to supervise the Committee. For these reasons, this court concludes that the complaint fails to state a claim against defendant Wilson,
As to the employer, PMSC, plaintiff relies on Section 7.05(d) which plaintiff quotes partially as requiring the employer to "supply full and timely information of all matters . . . and such other pertinent facts as the Committee may require." Plaintiff then characterizes this duty to provide information as requiring PMSC to inform the Committee of pertinent facts regarding the value of PMSC's stock. Memorandum in Opposition at 18-19 (citing also Plan § 8.03 which authorizes the Committee to invest in PMSC stock).
Plaintiff has badly mischaracterized the quoted portion of the Plan by leaving out language critical to understanding its scope. The proper quotation, with the previously omitted language expressed in italics, is set forth below:
To enable the Committee to perform its functions, the Employer shall supply full and timely information of all matters relating to the Compensation and length of service of all Participants, their Retirement, death or other cause of Termination of Employment, and such other pertinent facts as the Committee may require. Plan § 7.05(d) (emphasis added).
The italicized language clearly demonstrates that the "all matters" to which the information requirement relates is intended to cover matters related to an employee's service with the company. Therefore, the "other pertinent facts" would reasonably be read as limited to related types of information, at least absent a specific request by the Committee for other types of information. Certainly, it would be an unreasonable reading of this section to impose a duty on the employer, PMSC, to keep the Committee informed of what can only be characterized as "inside information" for use in the making of its investment decisions.
The court also notes that the major heading for this section of the Plan is "Committee," This extensive section covers two pages and addresses numerous duties of the Committee. By contrast, the section addressing the employer's or ("Company's") duties consists of three lines. Compare Plan § 7.02 with § 7.05.
Despite her extensive allegations of wrongdoing by PMSC, both as set forth in the complaint and as more broadly characterized in her memorandum in opposition to dismissal, plaintiff does not direct the court to any fiduciary duty owed by PMSC to the Plan which would be implicated by the alleged wrongs. Therefore, as with defendant Wilson, the court must dismiss the ERISA claim against PMSC for lack of a showing of a fiduciary duty which would have been breached by the wrongs alleged.
In sum, while the Plan documents demonstrate that the corporate defendants owed certain limited fiduciary duties to the Plan, and while plaintiff includes numerous allegations of wrongdoing by the corporate defendants, there is no connection between the two. If the allegations of wrongdoing, including allegations of providing misinformation and failing to provide accurate information, ultimately prove true, the Plan's remedy will be the same as for the plaintiff class in the related securities action. This result is not at all unreasonable as the duties of disclosure owed to the Plan by the corporate defendants are not based on the duties owed by an ERISA fiduciary to a Plan and its participants, but the general duties of disclosure owed by a corporation and its officers to the corporation's shareholders.
II. The claims against the Committee defendants are dismissed under Fed. R. Civ. P. 12(b)(6) as the allegations of the complaint do not suggest any wrongful act that would constitute a breach of fiduciary duty.
The majority of the plaintiffs complaint focuses on the alleged misdeeds of the corporate defendants in providing misinformation or failing to provide accurate information as to the value of PMSC. E.g., Complaint ¶¶ 2-4. The allegations as to the Committee defendants are far less extensive but boil down to an allegation that the Committee defendants breached their fiduciary duties by failing to discover the truth about PMSC's value and failing to act on that information. That is, plaintiff alleges that the Committee defendants breached the appropriate standard of care by failing to learn of the corporate defendants' alleged misrepresentations and by failing to act on the information as to corporate value that plaintiff alleges the Committee should have discovered. See generally, Complaint ¶¶ 2 15. Plaintiff does not and cannot complain that the basic decision to invest the matching funds in PMSC stock was improper. See Plan § 4.01(d)(iv) ("All Employer Matching Contributions made shall be invested in one or more investment Funds designated by the Committee, which may, at the Committee's discretion, include a Fund comprised primarily of Company Stock").
Quite critically, plaintiff does not allege that the Committee defendants themselves had any actual knowledge of any misinformation or that they participated in the dissemination of information they knew or should have known was misleading, Plaintiff does not allege that the Committee defendants failed to act independently or yielded to any pressure by the corporate defendants to make any particular investment decision. Likewise, plaintiff does not allege that the Committee defendants ever made any purchases of PMSC stock at more than market price, or that they purchased or held stock in contravention of information generally available to investors and the then existing advice of market experts.
Arguably, some of plaintiff's allegations are vague enough that they could encompass these varieties of conduct which, as noted in the text, are not now alleged. See Complaint ¶ 15("(4) failing to act in the best interests of the Plan participants; (5) paying more than adequate consideration for the . . . stock"). The court will not, however, presume that these generic and vague allegations were intended to encompass the variety of conduct which the court notes might be actionable, particularly when the specified conduct also falls within these general allegations. In any event, plaintiff has had an opportunity to respond both in writing and at oral argument to the pending motion to dismiss, but has not suggested any category of conduct beyond failure to discover and act on accurate information of a type not generally available to the market.
In essence then, plaintiff seeks to hold the Committee defendants liable for the alleged wrongs of others or at least to a different standard of care as to the Committee's purchase of PMSC stock than would be applied to its purchase of any other stock. In many respects, this standard would put the Committee in the untenable position of choosing one of three unacceptable (and in some instances illegal) courses of action: (1) obtain "inside" information and then make stock purchase and retention decisions based on this "inside" information; (2) make the disclosures of "inside" information itself before acting on the discovered information, overstepping its role and, in any case, likely causing the stock price to drop; or (3) breach its fiduciary duty by not obtaining and acting on "inside" information.
Plaintiff argues that at least the decision to refrain from additional purchases would not violate securities laws and regulations prohibiting insider trading. Assuming without deciding that this is true, plaintiffs theory would, nonetheless, violate the spirit of these rules and, at the least, impose a higher standard on ERISA fiduciaries as to Plan purchases of employer stock than would be applied to other stock purchases. Plaintiff has offered no authority for such a dual standard and the court is aware of none. Likewise, the court finds no authority for allowing plaintiff to proceed against the Committee for failing to uncover the alleged misrepresentations of other defendants. See, e.g., Plan § 7.01 ("Except as otherwise provided herein, no Fiduciary shall have any liability for, or responsibility to inquire into, the acts and omissions of any other Fiduciary in the exercise of powers or the discharge of responsibilities assigned to such other Fiduciary under this Plan").
For the reasons set forth above, the court concludes that the facts asserted against the Committee defendants do not state a cause of action. They must, therefore, be dismissed under Fed.R.Civ.P. 12(b)(6).
Conclusion
For the reasons stated herein, this court concludes that the motion to dismiss should be granted as to all defendants.
IT IS SO ORDERED.