Gearren v. McGraw Cos., Inc. ( 2011 )

10-792-cv (L)
Gearren v. McGraw-Hill Cos., Inc.
1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT
3
4 August Term 2010
5 (Argued: September 28, 2010 Decided: October 19, 2011)
6 Docket No. 10-792-cv (L) 10-934-cv(Con)
7
8 ------------------------------------------------------x
9 PATRICK L. GEARREN, JAN DEPERRY, MARY SULLIVAN, HARVEY
10 SULLIVAN, and CYNTHIA DAVIS, on behalf of themselves and
11 all others similarly situated,
12
13 Plaintiffs-Appellants,
14
15 -- v. --
16
17 THE MCGRAW-HILL COMPANIES, INCORPORATED, THE PENSION
18 INVESTMENT COMMITTEE OF MCGRAW-HILL, MARTY MARTIN, THE
19 BOARD OF DIRECTORS OF THE MCGRAW-HILL COMPANIES,
20 INCORPORATED, WINFRIED BISCHOFF, DOUGLAS N. DAFT, LINDA
21 KOCH LORIMER, HAROLD MCGRAW, HILDA OCHOA-BRILLEMBOURG,
22 MICHAEL RAKE, JAMES H. ROSS, EDWARD B. RUST, KURT L.
23 SCHMOKE, SIDNEY TAUREL, JOHN DOES 1-20, ROBERT J.
24 BAHASH, HENRY HIRSCHBERG, ALEX MATURRI, JAMES H.
25 MCGRAW, IV, DAVID L. MURPHY, JOHN C. WEISENSEEL,
26 KATHLEEN A. CORBET, PHIL EDWARDS, ROBERT P. MCGRAW, and
27 PEDRO ASPE,
28
29 Defendants-Appellees.*
30
31 ------------------------------------------------------x
32
33 B e f o r e : WALKER, CABRANES, and STRAUB, Circuit Judges.
34 Plaintiffs-Appellants appeal from a decision of the District
35 Court for the Southern District of New York (Richard J. Sullivan,
36 Judge) granting defendants’ motion to dismiss plaintiffs’ class-
*
1 The Clerk of Court is directed to amend the caption as set
2 forth above.
1
1 action complaints for failure to state a claim upon which relief
2 can be granted. Plaintiffs, participants in two retirement plans
3 offered by The McGraw-Hill Companies, Inc. (“McGraw-Hill”),
4 brought suit alleging breach of fiduciary duty under the Employee
5 Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et
6 seq. As in the companion Citigroup case, plaintiffs allege (1)
7 that defendants acted imprudently by including employer stock as
8 an investment option in the retirement plans and (2) that
9 defendants failed to provide adequate and truthful information to
10 participants regarding the status of employer stock. We hold
11 that the facts alleged by plaintiffs are, even if proven,
12 insufficient to establish that the defendants abused their
13 discretion by continuing to offer Plan participants the
14 opportunity to invest in McGraw-Hill stock. We also hold that
15 plaintiffs have not alleged facts sufficient to prove that
16 defendants made any statements, while acting in a fiduciary
17 capacity, that they knew to be false. AFFIRMED.
18 Judge STRAUB dissents for substantially the same reasons
19 expressed in his dissent and partial concurrence in In re:
20 Citigroup ERISA Litigation, No. 09-3804-cv (2d Cir. [DATE]).
21 EDWIN J. MILLS, Stull, Stull &
22 Brody, New York, NY (Michael J.
23 Klein, Stull, Stull & Brody, New
24 York, NY; Francis A. Bottini, Jr.
25 Albert Y. Chang, Johnson Bottini,
26 LLP, San Diego, CA, on the brief),
27 for Plaintiffs-Appellants.
28
2
1 MYRON D. RUMELD, Proskauer Rose LLP,
2 New York, NY (Russell L. Hirschhorn,
3 Proskauer Rose LLP, New York, NY;
4 Howard Shapiro, Proskauer Rose LLP,
5 New Orleans, LA; Floyd Abrams, Susan
6 Buckley, Tammy L. Roy, Cahill Gordon
7 & Reindel LLP, New York, NY, on the
8 brief), for Defendants-Appellees.
9
10 MICHAEL SCHLOSS, Senior Trial
11 Attorney (M. Patricia Smith,
12 Solicitor of Labor, Timothy D.
13 Hauser, Associate Solicitor for Plan
14 Benefits Security, Elizabeth
15 Hopkins, Counsel for Appellate and
16 Special Litigation, on the brief),
17 United States Department of Labor,
18 Washington, DC, for amicus curiae
19 Hilda L. Solis, Secretary of the
20 United States Department of Labor.
21
22 CAROL CONNOR COHEN, Arent Fox LLP,
23 Washington, DC (Caroline Turner
24 English, Arent Fox LLP, Washington,
25 DC; Robin S. Conrad, Shane B. Kawka,
26 National Chamber Litigation Center,
27 Washington, DC), for amicus curiae
28 Chamber of Commerce of the United
29 States of America.
30
31 JOSEPH M. MCLAUGHLIN, Simpson
32 Thacher & Bartlett LLP, New York, NY
33 (George S. Wang, Agnès Dunogué,
34 Hiral D. Mehta, Simpson Thacher &
35 Bartlett LLP, New York, NY; Ira D.
36 Hammerman, Kevin M. Carroll,
37 Securities Industry and Financial
38 Markets Association, Washington,
39 DC), for amicus curiae Securities
40 Industry and Financial Markets
41 Association.
42
43
44
45
46
47
3
1 PER CURIAM:
2 Plaintiffs-Appellants Patrick L. Gearren, Jan Deperry, Mary
3 Sullivan, Harvey Sullivan, and Cynthia Davis, on behalf of
4 themselves and a putative class of persons similarly situated
5 (“Plaintiffs”), appeal from a decision of the District Court for
6 the Southern District of New York (Richard J. Sullivan, Judge)
7 granting defendants’ motion to dismiss plaintiffs’ complaints for
8 failure to state a claim upon which relief can be granted.1
9 Plaintiffs, participants in two retirement plans offered by The
10 McGraw-Hill Companies, Inc. (“McGraw-Hill”), brought suit alleging
11 breach of fiduciary duty under the Employee Retirement Income
12 Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. As in the
13 companion Citigroup case, plaintiffs allege (1) that defendants
14 acted imprudently by including employer stock as an investment
15 option in the retirement plans and (2) that defendants failed to
16 provide adequate and truthful information to participants regarding
17 the status of employer stock. We hold that the facts alleged by
18 plaintiffs are, even if proven, insufficient to establish that the
19 defendants abused their discretion by continuing to offer Plan
20 participants the opportunity to invest in McGraw-Hill stock. We
21 also hold that plaintiffs have not alleged facts sufficient to
1
1 The district court consolidated for resolution two
2 substantially identical complaints. All references in this
3 opinion to the “Complaint” are to the complaint brought by
4 plaintiffs Harvey and Mary Sullivan.
4
1 prove that defendants made any statements, while acting in a
2 fiduciary capacity, that they knew to be false.
3 BACKGROUND
4 This case was argued in tandem with In re: Citigroup ERISA
5 Litig., No. 09-3804-cv, which raised similar issues and which we
6 decide by separate opinion filed today. The facts alleged by
7 plaintiffs are substantially similar to those alleged in the
8 Citigroup case. Plaintiffs are participants in one of two defined-
9 contribution retirement plans offered by McGraw-Hill: the 401(k)
10 Savings and Profit Sharing Plan of the McGraw-Hill Companies, Inc.
11 and Its Subsidiaries (the “McGraw-Hill Plan”) and the Standard and
12 Poor’s 401(k) Savings and Profit Sharing Plan for Represented
13 Employees (the “S&P Plan”) (collectively, the “Plans”). Both Plans
14 are eligible individual account plans (“EIAPs”), 29 U.S.C. §
15 1107(d)(3)(A). The Plans allow McGraw-Hill employees to make pre-
16 tax contributions from their salaries to individual retirement
17 accounts. The employees are then able to allocate the funds within
18 their accounts among a set of investment options. Each Plan was
19 managed by Defendant Marty Martin, who served as McGraw-Hill’s Vice
20 President for Employee Benefits and as each Plan’s name
21 administrator, and by the Pension Investment Committee, which was
22 responsible for selecting the investment options to be offered to
23 Plan participants. The McGraw-Hill Stock Fund (the “Stock Fund”),
24 which was “invested primarily in the Common Stock of [McGraw-
5
1 Hill],” remained an investment option in both Plans throughout the
2 Class Period (December 3, 2006, through December 5, 2008), as
3 mandated by the Plan documents.
4 Plaintiffs filed their class action complaint on June 12,
5 2009, following a drop in the price OF McGraw-Hill stock from
6 $68.02 to $24.23 during the Class Period. The defendants are
7 McGraw-Hill, Marty Martin, the Pension Investment Committee, and
8 McGraw-Hill’s Board of Directors. Plaintiffs challenge the
9 defendants’ management of the Plans and, in particular, the Stock
10 Fund. They allege that McGraw-Hill became an imprudent investment
11 option during the Class Period because its financial services
12 division, Standard and Poor’s (S&P), knowingly provided inflated
13 ratings to financial products linked to the subprime-mortgage
14 market. The public’s discovery of these ratings practices,
15 plaintiffs allege, led to the sharp drop in the price of McGraw-
16 Hill stock.
17 Count I of plaintiffs’ complaint alleges that the defendants
18 breached their fiduciary duties by continuing to offer the Stock
19 Fund as an investment option in the Plans throughout the Class
20 Period, while “McGraw-Hill’s true adverse financial and operating
21 condition was being concealed.” Compl. ¶ 86. Count II alleges
22 that the defendants violated their duty of loyalty by making
23 misrepresentations and nondisclosures regarding McGraw-Hill’s
24 financial condition and S&P’s ratings practices. Compl. ¶ 93.
6
1 Counts III and IV are, in substance, derivative of Counts I and II.
2 Count III alleges that the defendants violated their duty of
3 loyalty by acting “in their own interests rather than solely in the
4 interests” of the Plans’ participants. Compl. ¶ 102. Finally,
5 Count IV alleges that the Board of Director defendants failed to
6 properly appoint, monitor, and inform the members of the Pension
7 Investment Committee.
8 On February 10, 2010, the district court granted in full
9 defendants’ motion to dismiss. See Gearren v. McGraw-Hill Cos.,
10 Inc., 690 F. Supp. 2d 254 (S.D.N.Y. 2010). With respect to Count
11 I, the district court held that the defendants were entitled to a
12 presumption that their decision to offer the Stock Fund as an
13 investment option was prudent. The court concluded that the facts
14 alleged by plaintiffs were, if proven, insufficient to overcome the
15 presumption. Id. at 265-70. The court also rejected Count II,
16 finding that the defendants had no affirmative duty to disclose
17 McGraw-Hill’s financial position to Plan participants and that any
18 alleged misrepresentations were not made in the defendants’
19 capacity as ERISA fiduciaries. Id. at 271-73. The court dismissed
20 Counts III and IV because they depended on the success of Counts I
21 and II. Id. at 273.
22 Plaintiffs now appeal from the district court’s judgment
23 dismissing the complaint.
24
7
1 DISCUSSION
2 We review de novo the district court’s dismissal under
3 Federal Rule of Civil Procedure 12(b)(6). Gallop v. Cheney, 642
4 F.3d 364, 368 (2d Cir. 2011). “To survive a motion to dismiss,
5 a complaint must contain sufficient factual matter, accepted as
6 true, to ‘state a claim to relief that is plausible on its
7 face.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting
8 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). We
9 consider each of plaintiffs’ claims in turn and conclude that
10 plaintiffs have failed to state a claim for relief.
11 I. Count I: Inclusion of the McGraw-Hill Stock Fund as an
12 Investment Option
13 Plaintiffs first argue that the district court erred by
14 dismissing their claims that the defendants acted imprudently by
15 continuing to allow plan participants to invest in McGraw-Hill
16 stock during the Class Period. We disagree. As we explain in
17 the companion Citigroup opinion, we adopt the Moench presumption
18 and review defendants’ decision to continue to allow Plan
19 participants to invest in employer stock, in accordance with the
20 Plans’ terms, for an abuse of discretion. See Moench v.
21 Robertson, 62 F.3d 553, 571 (3d Cir. 1995) (“[A]n ESOP fiduciary
22 who invests the assets in employer stock is entitled to a
23 presumption that it acted consistently with ERISA by virtue of
24 that decision.”). Plan fiduciaries are only required to divest
8
1 an EIAP or ESOP of employer stock where the fiduciaries know or
2 should know that the employer is in a “dire situation.” Edgar v.
3 Avaya, Inc., 503 F.3d 340, 348 (3d Cir. 2007). “Mere stock
4 fluctuations, even those that trend downward significantly, are
5 insufficient to establish the requisite imprudence to rebut the
6 presumption.” Wright v. Or. Metallurgical Corp., 360 F.3d 1090,
7 1099 (9th Cir. 2004).
8 Here, we agree with the district court that even if we
9 assume that plaintiffs’ allegations are proved, plaintiffs are
10 unable to establish that defendants knew or should have known
11 that McGraw-Hill was in a dire situation. Plaintiffs’
12 allegations relate entirely to operations within the Credit
13 Market Services group of S&P, which is one of McGraw-Hill’s three
14 operating segments. More specifically, plaintiffs allege that
15 Credit Market Services provided inflated ratings to two
16 structured-finance products: collateralized debt obligations and
17 residential mortgage backed securities. Even if the defendant
18 fiduciaries were aware of these problems in the Credit Market
19 Services group of S&P, the facts alleged do not support
20 plaintiffs’ contention that defendants should have determined
21 that McGraw-Hill itself was in a dire situation. Defendants
22 could not reasonably have foreseen, based on the information
23 alleged to have been available to them at the time, the sharp
24 decline in the price of McGraw-Hill stock that occurred after the
9
1 problems with S&P’s ratings practices become public. Moreover,
2 they were not compelled to conclude that McGraw-Hill was in the
3 kind of dire situation that would have required them to limit
4 participants’ investments in the Stock Fund.
5 II. Count II: Misstatements and Omissions
6 Plaintiffs also allege that defendants breached their
7 fiduciary duty of loyalty both by failing to disclose information
8 about McGraw-Hill’s financial condition to Plan participants and
9 by making false or misleading statements about McGraw-Hill to the
10 participants. In the Citigroup opinion, we explained why we
11 reject the argument that fiduciaries have a duty to disclose
12 nonpublic information about the expected performance of the
13 employer’s stock. Accordingly, plaintiffs cannot state a claim
14 for relief based on defendants’ failure to disclose to
15 participants information regarding S&P’s rating practices and,
16 more generally, McGraw-Hill’s financial strength.
17 Plaintiffs’ claims that defendants made false or misleading
18 statements or omissions regarding McGraw-Hill stock also cannot
19 survive defendants’ motion to dismiss. The only specific false
20 or misleading statements identified by defendants are those
21 contained in SEC filings that were later incorporated into the
22 Plans’ Summary Plan Descriptions (“SPDs”). ERISA, however, only
23 holds fiduciaries liable to the extent that they were “acting as
24 a fiduciary . . . when taking the action subject to the
10
1 complaint.” Pegram v. Herdrich, 530 U.S. 211, 226 (2000). Here,
2 defendants who signed or prepared the SEC filings were acting in
3 a corporate, rather than ERISA fiduciary, capacity when they did
4 so. See Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 257
5 (5th Cir. 2008) (defendants were not “acting in anything other
6 than a corporate capacity” when preparing SEC filings).
7 Therefore, in the circumstances presented here, these defendants
8 may not be held liable under ERISA for misstatements contained in
9 the SEC filings.
10 Plaintiffs also argue that because the Plans’ SPDs
11 incorporated the SEC filings, the SPDs contained the same
12 misstatements as the SEC filings. Defendant Marty Martin, as the
13 Plans’ administrator, was responsible for distributing the SPDs
14 to participants. 29 U.S.C. § 1021(a)(1). We have held that a
15 fiduciary may be held liable for false or misleading statements
16 when “the fiduciary knows those statements are false or lack a
17 reasonable basis in fact.” Flanigan v. Gen. Elec. Co., 242 F.3d
18 78, 84 (2d Cir. 2001). Plaintiffs have not provided any specific
19 allegations as to how Martin knew or should have known that S&P’s
20 rating practices were improper or that, consequently, the SEC
21 filings contained misstatements or omissions. While plaintiffs
22 do allege in conclusory fashion that all of the defendants “knew
23 or should have known of the material misrepresentations”
24 contained in the SEC filings, Compl. ¶ 48, they provide no basis
11
1 for this conclusion, especially as it is applied to Martin, who
2 served as McGraw-Hill’s Vice President for Employee Benefits.
3 Accordingly, plaintiffs have not adequately alleged that Martin
4 made any intentional or knowing misstatements to Plan
5 participants by incorporating SEC filings into the SPDs.
6 III. Plaintiffs’ Remaining Claims
7 Finally, plaintiffs allege both that defendants failed to
8 manage the Plans “solely in the interests of the Participants”
9 and that the Board of Director defendants failed to properly
10 appoint, monitor, and inform the members of the Plans’ Pension
11 Investment Committee about the condition of McGraw-Hill stock.
12 Compl. ¶¶ 103, 109. Before both the district court and this
13 court, plaintiffs have conceded that these secondary claims fail
14 if plaintiffs are unable to survive Rule 12(b)(6) as to their
15 primary claims, addressed above. Gearren v. McGraw-Hill Cos.,
16 Inc., 690 F. Supp. 2d 254, 273 (S.D.N.Y. 2010); Plaintiffs-
17 Appellants’ Brief at 50. Accordingly, we affirm the district
18 court’s dismissal of plaintiffs’ theories of secondary liability.
19 CONCLUSION
20 We have carefully considered all of appellants’ other
21 arguments and found them to be without merit. For the foregoing
22 reasons, the judgment of the district court is hereby affirmed.
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