Bendaoud v. Hodgson

Decision Date24 September 2008
Docket NumberCivil Action No. 06cv11873-NG.
Citation578 F.Supp.2d 257
PartiesSoufiane BENDAOUD, individually and on behalf of others similarly situated, Plaintiff, v. John C. HODGSON, et al., Defendants.
CourtU.S. District Court — District of Massachusetts

Adam M. Stewart, Thomas G. Shapiro, Shapiro Haber & Urmy LLP, Boston, MA, Stephen J. Fearon, Jr., Squitieri & Fearon, LLP, Thomas J. McKenna, Friedman, Wittenstein & Hochman, New York, NY, for Plaintiff.

Charles C. Platt, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, Jeffrey B. Rudman, Michael R. Dube, Wilmer Hale LLP, Boston, MA, for Defendants.

ORDER ON MOTIONS TO DISMISS

GERTNER, District Judge:

                TABLE OF CONTENTS
                I. BACKGROUND................................................................260
                     A. Facts..................................................................260
                     B. Procedural History.....................................................262
                II. LEGAL STANDARD...........................................................262
                III. STANDING................................................................262
                     A. Standing and § 1132(a)(2) Suits.................................263
                     B. Whether Bendaoud Has Alleged an Injury In Fact.......................268
                           1. Economic Loss to Analog Stock Fund Holdings as a Result of the
                Backdating...........................................................269
                           2. Bendaoud's Economic Loss as a Result of Investing in the Analog
                Stock Fund...............................................271
                           3. The Fiduciaries' Unlawful Profit Through "Use Of" Plan Assets...273
                IV. WHETHER BENDAOUD HAS STATED A CLAIM UPON WHICH
                RELIEF CAN BE GRANTED..............................................274
                      A. Which Defendants Are Amenable to Suit as ERISA Fiduciaries...........274
                      B. Whether the Defendants' Acts Were Those of ERISA Fiduciaries.........276
                      C. Whether the Plaintiff Has Sufficiently Alleged a Material
                Misrepresentation.............................................278
                      D. Whether the Relief Plaintiff Seeks Is Available......................279
                V. THE RELEASE................................................................279
                VI. CONCLUSION................................................................280
                

This case centers on allegations that certain officers at Analog Devices, Inc. ("ADI") abused their positions of trust as fiduciaries under the Employee Retirement Income Security Act of 1974 ("ERISA").1 The plaintiff, Soufiane Bendaoud ("Bendaoud" or "plaintiff'), is a former employee of ADI. While an employee, he participated in ADI's benefit plan, the Investment Partnership ("the Plan"). The Plan is a defined contribution plan regulated, in part, by ERISA. This case concerns a single investment option available to Plan participants—the Analog Devices Stock Fund ("the Analog Stock Fund"), which bought and held shares of ADI common stock. Bendaoud invested in the Analog Stock Fund.

According to Bendaoud, certain officers at ADI unlawfully backdated stock options they had received as compensation. Information regarding the improper practice was withheld from Plan participants, as well as the stock market as a whole. When information regarding the improper practices came to light, due to an investigation by the Securities and Exchange Commission, the value of ADI stock declined precipitously, harming the interests of Plan participants who had invested in the Analog Stock Fund.

Before the Court are two Motions to Dismiss—one for want of standing and the other for failure to state a claim. The first, the defendants' Motion to Dismiss for Lack of Jurisdiction (document # 7), contends that Bendaoud has not suffered an injury in fact. That Motion is DENIED. While not all of Bendaoud's claims present a legally cognizable harm, he has alleged that the Analog Stock Fund was an imprudent investment option and that the defendants improperly withheld from him material information affecting its value and predicting its future performance. Each of those allegations arguably states a claim for breach of fiduciary duty under ERISA, regardless of whether Bendaoud can actually prove that he lost a specific amount of money in connection with his sale of ADI stock offered in the Analog Stock Fund.

The second motion, the defendants' Motion for Dismissal Pursuant to Rule 12(b)(6) (document # 8), is GRANTED in part and DENIED in part. The defendants are correct that setting and receiving executive compensation is the act of a corporate officer, not an ERISA fiduciary. But the two cognizable harms Bendaoud alleges, maintenance of an imprudent investment option and withholding of information regarding the backdating practice, are the acts of ERISA fiduciaries.

The final issue presented by the defendants on their Motions to Dismiss, whether Bendaoud has released his claims against ADI, is not appropriate for resolution at this time, on this record. The Court will order an abbreviated discovery schedule to address the issues the release presents.

I. BACKGROUND
A. Facts

On a motion to dismiss, the Court accepts all of the plaintiffs well-pleaded facts as true and draws from them all reasonable inferences in the plaintiffs favor. See, e.g., Clark v. Boscher, 514 F.3d 107, 112 (1st Cir.2008). In this case, the defendants have averred additional facts by affidavit, and the plaintiff has not disputed them; the Court accepts them where they do not conflict with the plaintiff's Complaint.

ADI maintained the Plan at all times material to this case, from October 2000 forward. Since the Plan is a defined contribution plan, see Compl. ¶ 42 (document # 1), participants have the option of directing their investments toward any of several investment options sponsored by the Plan. One such option was the Analog Stock Fund. The Analog Stock Fund purchases exclusively ADI stock on the open market, and investors in the Fund own a portion of all of the Fund's holdings. Granato Aff. ¶ 7 (document # 15).2

Bendaoud invested in the Analog Stock Fund for the first time in July 2000, when the price of a share of ADI stock was approximately $71.00. Over the next two and a half years, he made several transactions involving the Analog Stock Fund, eventually cashing out of it entirely in December 2002, when the price of a share of ADI common stock was approximately $30.00. See id. ¶¶ 9, 31. Despite that decline, it is not disputed that Bendaoud made a modest profit on his investments in the Analog Stock Fund. See id. ¶¶ 19, 29, 30.

In choosing to invest in the Analog Stock Fund, Bendaoud relied on the information in the Plan and on various documents incorporated into the Plan by reference—including a number of filings made with the Securities and Exchange Commission ("SEC"). See The Investment Partnership Prospectus ("Prospectus") at 15-16, Bates ADI 000234-235, Ex. A to Dube Aff. Supp. Def. Mot. Dismiss Pursuant to Rule 12(b)(6) ("Dube 12(b)(6) Aff.") (document # 13);3 see also Compl. ¶42 (document # 1) (citing 11-K filing). Several incorporated documents discussed the manner in which certain ADI employees and directors could receive and exercise stock options. Compl. ¶¶ 53-71 (document # 1). Notably, those documents required that the exercise price of the options be set at the fair market value of ADI's common stock on the day the option was granted. Id. ¶¶ 64, 66-71.

But according to Bendaoud, that practice was not followed. Instead, despite the public statements to the contrary, various directors and executives at ADI systematically backdated their stock options to fix a lower purchase price for ADI stock. See id. ¶¶ 72-78. The practice remained secret until November 2004, when ADI disclosed that the SEC was investigating its options practices for the preceding five years. ADI did not admit, however, that any backdating actually occurred. Id. ¶¶ 79-81.

About a year later, ADI reached a tentative settlement with the SEC, and admitted in a press release that it should have disclosed to the public that certain stock options had been inappropriately dated for the day before favorable financial results were released. See id. ¶ 82. Officially, the settlement also meant that ADI neither admitted nor denied the SEC's charges. Id.4

Following the disclosure of the improper option practice in November 2004, the value of ADI stock "plummeted." Id. ¶ 9.5 According to Bendaoud, the improper options practice hurt the value of ADI stock, thereby diminishing the value of his and others' holdings. See id. ¶ 122. He further claims that the defendants acted imprudently in allowing him to invest in the ADI fund because they knew or should have known that its value was not what it seemed, and because the company's executive compensation practices were not what they represented. See, e.g., id. ¶ 144; Pl. Mem. Opp. Mot. Dismiss Pursuant to Rule 12(b)(6) ("Pl.12(b)(6) Mem.") at 16 (document # 31).

B. Procedural History

As noted above, the defendants have asserted two separate arguments underlying its claims that the case must be dismissed. The Court held a hearing on the Motions, and took them under advisement. It has since twice requested supplemental briefing from the parties regarding whether the suit could redress Bendaoud's alleged injury. See Electronic Order (Feb. 14, 2008); Second Mem. & Order Requesting Suppl. Br. (Mar. 20, 2008) (document # 52). The parties have responded.

II. LEGAL STANDARD

On a motion to dismiss, the factual allegations of the complaint are taken as true and the reviewing court draws all reasonable inferences in the plaintiff's favor. Trans-Spec Truck Serv., Inc. v. Caterpillar, Inc., 524 F.3d 315, 320 (1st Cir.2008).

The complaint must state facts that demonstrate a "claim to relief that is plausible on its face." Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007)) (internal quotation marks omitted).

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