920 F.2d 457 (7th Cir. 1990), 89-3600, DeBruyne v. Equitable Life Assur. Soc. of United States

Docket Nº:89-3600.
Citation:920 F.2d 457
Party Name:, 13 Employee Benefits Ca 1193 Dean Peter DeBRUYNE and Evelyn S. Carlyle, individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES and Equitable Capital Management Corporation, Defendants-Appellees.
Case Date:December 14, 1990
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 457

920 F.2d 457 (7th Cir. 1990)

, 13 Employee Benefits Ca 1193

Dean Peter DeBRUYNE and Evelyn S. Carlyle, individually and

on behalf of all others similarly situated,

Plaintiffs-Appellants,

v.

EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES and

Equitable Capital Management Corporation,

Defendants-Appellees.

No. 89-3600.

United States Court of Appeals, Seventh Circuit

December 14, 1990

Argued Sept. 5, 1990.

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Edward T. Joyce, Joyce & Kubasiak, Stephen B. Diamond, Lawrence W. Schad, Andrew H. Haber, Beeler, Schad & Diamond, and David A. Genelly, Fishman & Merrick, Chicago, Ill., for plaintiffs-appellants.

James P. Cusick, Donald G. Kempf, Jr., and Jeffrey S. Powell, Kirkland & Ellis, Chicago, Ill., for defendants-appellees.

Before BAUER, Chief Judge, WOOD, Jr., Circuit Judge, and PELL, Senior Circuit Judge.

HARLINGTON WOOD, Jr., Circuit Judge.

Plaintiffs, two participants in a retirement benefits program, sought to hold their investment manager liable for losses incurred in the stock market crash of October 19, 1987. The district court granted defendants' motion for summary judgment on all counts of the complaint, and we affirm.

I.

  1. Background

    Plaintiffs DeBruyne and Carlyle were participants in the ABA Members Retirement Plan ("Plan"), a retirement benefits program sponsored by the American Bar Retirement Association ("ABRA"). The Plan is funded through a group annuity contract issued by Equitable Life Assurance Society of the United States, which also manages the annuity funds along with its wholly owned subsidiary, Equitable Capital Management Corporation (collectively, "Equitable"). 1

    At all relevant times, the Plan allowed participants to choose from a variety of funds managed by Equitable. Some of these options guaranteed a fixed investment return. Other options did not guarantee a return but did hold out the potential for higher profits. This latter group of options included three "equity funds": the "Aggressive Equity Fund"; the "Growth Equity Fund"; and the "Balanced Fund." Plaintiffs invested in guaranteed accounts during their first years of participation, but later transferred money into the Balanced Fund.

    The Balanced Fund, as described by Equitable, achieved a compromise between the equity-laden (but more precarious) Aggressive Equity and Growth Equity Funds and the relatively sedate (but likely less profitable) guaranteed account options. The method by which Equitable sought to accomplish this compromise was the creation of a fund that had a "balanced" portfolio of equity and debt securities. This balance, Equitable disclosed in its prospectuses, would include common stocks, publicly traded debt securities, and money market instruments. "Debt securities," as defined in its prospectuses, included an unspecified mix of long-term, short-term, and convertible debt. Equitable also repeatedly disclosed in its prospectuses and annual reports that the "mix" of securities in the Balanced Fund was determined by the portfolio manager and involved an actively managed and constantly changing blend of investments. 2

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    In its 1985, 1986, and 1987 prospectuses, Equitable included a chart entitled "Investment Option Characteristics." In 1987, the chart disclosed that the "objective" for the Balanced Fund was a "[c]ompetitive return through a growth of capital and current income." The 1987 chart also listed the objectives of the other options and cautioned that "[t]here is no assurance that any of the investment objectives of the Funds will be achieved."

    The 1985 and 1986 charts described the risk to principal of the Balanced Fund in the same manner as the risk to principal of the Growth Equity Fund. Those same charts described the volatility of the Balanced Fund as the "[l]owest of the three [equity] funds." In the 1987 prospectus, the risk to principal of the Balanced Fund was described as "[s]omewhat lower than [the] Growth Equity Fund" and Equitable described the Balanced Fund's volatility with the following phrase: "[g]enerally lower than pure equity funds, but degree may vary depending on market conditions." The 1987 disclosures about the other two equity funds generally spoke of higher risk and volatility.

    In the first three quarters of 1987, the stock market continued to rise and the bond market remained sluggish. In a semiannual report that plaintiffs received in September 1987, Equitable forecast that stock prices would continue to rise and that bond prices would stabilize and decline. Based on these projections, the semiannual report informed investors that the balance of the Balanced Fund would tilt in favor of equity securities but would remain hedged with convertibles.

    On October 19, 1987--Black Monday--the Dow Jones 30 Industrial Average suffered a cataclysmic one-day decline of over 508 points. The Balanced Fund was not immune to the chaos that ensued, and its investment portfolio--61.7% in common stock, 3.8% in convertible preferred stock, 12.7% in convertible debt, 3.5% in nonconvertible debt, and 18.3% in short-term debt and cash--substantially declined in value. The plaintiffs concluded that the substantial losses belied Equitable's statements and duties with respect to the balance, risk to principal, and volatility of the Balanced Fund. 3 On November 30, 1988, they turned to the courts for redress.

    The plaintiffs' complaint contained six counts. Count I charged Equitable with a breach of section 404(a)(1)(D) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. Sec. 1104(a)(1)(D), for

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    its alleged failure to manage the Balanced Fund "in accordance with the documents and instruments governing the plan." Count II charged Equitable with a violation of section 404(a)(1)(B) of ERISA, 29 U.S.C. Sec. 1104(a)(1)(B), for its alleged failure to manage the Balanced Fund "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." Counts III, IV, and V charged Equitable with violations of sections 11 and 12(2) of the Securities Act of 1933 (" '33 Act"), 15 U.S.C. Secs. 77k, 77l (2); section 10(b) of the Securities Act of 1934 (" '34 Act"), 15 U.S.C. Sec. 78j(b); and rule 10b-5, 17 C.F.R. Sec. 240.10b-5, for its alleged material misrepresentations. Count VI, invoking the doctrine of pendent jurisdiction, charged Equitable with a violation of section 4226 of the New York Insurance Law, N.Y. INS. LAW Sec. 4226(a)(1), for its alleged misrepresentation of the "terms, benefits or advantages of its policies or contracts." The plaintiffs also sought class certification.

  2. District Court Proceedings

    The proceedings that followed before the district court were relatively short-lived, but notable. On January 24, 1989, at the first status hearing, Equitable asked the district court for a period of time in which to conduct limited discovery and file a comprehensive motion to dismiss. At that same hearing, plaintiffs requested permission to conduct discovery on class certification issues and promised to file a motion for class certification on the same day that Equitable filed its motion. The judge granted both requests and incorporated counsels' representations into an order.

    On April 27, 1989, Equitable filed a comprehensive motion for summary judgment. Contrary to their promise and the order of the district court, plaintiffs filed nothing. Nor had they used their time to seek discovery for their class certification motion.

    On May 25, almost one month after Equitable's motion was filed, plaintiffs filed a motion for additional time in which to conduct discovery. This motion, as later admitted by plaintiffs' counsel, was deficient 4 for its failure to include a rule 56(f) affidavit. 5 Furthermore, plaintiffs' counsel failed to appear before the district court to argue the motion at the time that they themselves had requested.

    After the district court denied the May 25 motion, plaintiffs thereafter filed a motion for reconsideration on June 8, 1989. This motion included a rule 56(f) affidavit, but it failed to explain why an affidavit had not been attached to the May 25 motion or why such an affidavit could not have been attached to the May 25 motion. Moreover, it did not explain why plaintiffs' counsel had failed to appear before the district court on May 25. 6

    After the district court denied the June 8 motion, plaintiffs filed their answer to Equitable's motion for summary judgment. Accompanying their answer memorandum was the affidavit of the plaintiffs' expert, Hanan. Hanan's affidavit first compared the percentage loss of the Balanced Fund with the percentage gains and losses of twenty-two other publicly traded balanced funds. Hanan then presented calculations

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    with respect to the investment risk 7 of the Balanced Fund for the periods 1980-84, 1980-85, and 1980-86, but did not present calculations incorporating the year 1987. As to 1987, Hanan stated only that the Balanced Fund lost money, that the Balanced Fund was neither prudently invested nor "balanced" within the understanding of "the average investor or typical plan manager managing a mutual fund," and that the "typical balanced fund portfolio manager" would have followed a different course of action in 1987.

    On September 6, 1989, the district court decided the summary judgment motion in favor of Equitable on all counts of the complaint. DeBruyne v. Equitable Life Assur. Soc'y of United States, 720 F.Supp. 1342 (N.D.Ill.1989). In response, plaintiffs filed a notice of appeal and a motion for...

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