Frederico Quan v. Computer Sci.s Corp.
| Decision Date | 30 September 2010 |
| Docket Number | No. 09-56190,09-56248.,09-56190 |
| Citation | 623 F.3d 870 |
| Parties | Frederico QUAN, individually and on behalf of all others similarly situated; Walter Gray, individually and on behalf of all others similarly situated; Don Tyrone Ballard, individually and on behalf of all others similarly situated; Jeanine L. Shamaly, Plaintiffs-Appellants, v. COMPUTER SCIENCES CORPORATION; CSC Retirement and Employee Benefits Plans Committee; Leon J. Level; Van B. Honeycutt; Irving W. Bailey, II; F. Warren McFarlan; Thomas H. Patrick; Donald G. Debuck; Howard D. Fisk; Michael E. Keane; Nathan Siekierka; Frederick F. Vollrath, Defendants-Appellees. Frederico Quan, individually and on behalf of all others similarly situated; Walter Gray, individually and on behalf of all others similarly situated; Don Tyrone Ballard, individually and on behalf of all others similarly situated; Jeanine L. Shamaly, Plaintiffs-Appellees, v. Computer Sciences Corporation; CSC Retirement and Employee Benefits Plans Committee; Leon J. Level; Frederick F. Vollrath; Donald G. Debuck; Michael E. Keane; Nathan Siekierka; Irving W. Bailey, II; F. Warren McFarlan; Thomas H. Patrick, Defendants-Appellants, and Van B. Honeycutt; Howard D. Fisk, Defendants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
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Patrice L. Bishop, Stull, Stull & Brody, Los Angeles, CA; Edwin J. Mills, Michael J. Klein, Stull, Stull & Brody, New York, NY, for plaintiffs-appellants-cross-appellees.
Charles C. Jackson, Thomas F. Hurka, Christopher J. Boran, Morgan, Lewis & Bockius, L.L.P., Chicago, IL; Dean J. Kitchens, Gibson, Dunn & Crutcher, L.L.P., Los Angeles, CA; Perrie M. Weiner, Edward D. Totino, Joshua Briones, DLA Piper, L.L.P., Los Angeles, CA; Paul Blankenstein, Gibson, Dunn & Crutcher, L.L.P., Washington, D.C., for defendants-appellees-cross-appellants.
Appeal from the United States District Court for the Central District of California, S. James Otero, District Judge, Presiding. D.C. No. 2:08-cv-02398-SJO-JWJ.
Before: ALEX KOZINSKI, Chief Judge, JOHNNIE B. RAWLINSON, Circuit Judge, and MARK W. BENNETT, District Judge. *
This is a class action pursuant to ERISA by participants in an employer's 401(k) plan against named and de facto fiduciaries of the plan. The participants appeal the district court's order granting the fiduciaries' summary judgment motion on the participants' claims that the fiduciaries 1) imprudently invested plan assets in the employer's stock; 2) negligently misrepresented and failed to disclose material information about the employer's finances and operations; and 3) failed to properly appoint, monitor, and inform the retirement plans committee and its members. The fiduciaries cross-appeal the district court's failure to award them costs as the prevailing parties in the litigation. We affirm the district court's grant of summary judgment and remand for findings regarding whether to award costs under Federal Rule of Civil Procedure 54(d). We also join the United States Courts of Appeals for the Third, Fifth, and Sixth Circuits by adopting the rebuttable “ Moench presumption” that fiduciaries acted consistently with ERISA in their decisions to invest plan assets in employer stock. See Moench v. Robertson, 62 F.3d 553, 571 (3d Cir.1995); see also In re Syncor ERISA Litig., 516 F.3d 1095, 1102 (9th Cir.2008) ().
This case involves a participant-directed 401(k) Matched Asset Plan (the Plan) offered by Computer Sciences Corporation (CSC) to certain of its employees. CSC is a multibillion dollar Fortune 500 information technology company with major operations in the United States and more than 60 other countries. Its revenue grew in every year but one between December 31, 1998, and January 23, 2008, the Class Period, and it was profitable in every year during that period. Its stock was and is heavily held by private and institutional investors, including public pension funds.
Participants in the Plan could contribute up to 50% of their salaries to their individual investment accounts. At regular intervals, the Plan gave participants full discretion to allocate and reallocate the voluntary contributions among fourteen diverse investment alternatives, which included a non-diversified fund holding CSC stock (the CSC Stock Fund). Under the Plan's governing document, the CSC Stock Fund was a mandatory investment offering designed to allow participants to “own part of the company for which [they] work.” CSC then matched a part of these voluntary contributions with “matching contributions” equal to fifty cents for every dollar a participant contributed to his individual account, up to 3% of the participant's salary. Prior to January 2007, matching contributions were allocated to the CSC Stock Fund, and plan participants could only reallocate the contributions to other diversified funds in the Plan when they met certain age and service requirements. 1 Later, from January 2007 onward, Plan participants could direct and reallocate “matching contributions” to any fund or funds in the Plan.
At times during the Class Period, the Plan held approximately ten million shares of CSC common stock. The CSC Retirement Plans Committee (the Committee), which consisted of CSC officers, was responsible for selecting Plan investment options. The Plan required that the CSC Stock Fund be one of the investment options.
Plaintiffs are a class of current and former employees of CSC and participants in the Plan (the Participants). Defendants are named and allegedly de facto fiduciaries of the Plan (the Fiduciaries), consisting of CSC, the Committee, and current and former officers and directors of CSC. The Participants' claims arise from alleged material weaknesses in CSC's stock option granting and tax accounting practices. The Participants allege that these material weaknesses caused over 9,000 errors in the pricing of stock options; deficiencies relating to accounting for income taxes; two restatements of CSC's financial statements within seven months; a one-day 12% drop in CSC's stock price; and an alleged loss of hundreds of millions of dollars in retirement savings to CSC employees and retirees.
CSC provided stock options as incentives to certain executives. The stock options purportedly had an exercise price equal to 100% of the market value on the option grant date. However, CSC followed a common practice for identifying the measurement date as the earliest date on which a company knows the option recipients, number of options to be issued, and the exercise price of the options. Thus, the stock option grant dates were actually changed between 5% and 10% of the time to adjust the market value of the stock options. On June 29, 2006, CSC announced that the Securities and Exchange Commission (SEC) had made an informal request for information about CSC's stock option granting practices. Other significant matters were also announced on June 29, 2006, including that CSC was no longer for sale and had decided to repurchase up to $2 billion of its common stock, amounting to about 19% of its outstanding shares. The following day, CSC's stock suffered a one-day drop of about 12% in value (from $55.88 to $48.56).
The stock price quickly rebounded after the announcements, to $52.72 within a week, to $53.57 within two weeks, and to $61.79 approximately a year later.
In September 2006, the SEC's Office of the Chief Accountant issued new guidance on how the measurement date for stock options was to be determined, recognizing that there had been widespread confusion on that point. CSC established a special committee of directors to oversee an internal investigation into CSC's stock option granting practices. The investigation involved a law firm and an accounting firm, and cost more than $22 million. The special committee identified no intentional wrong-doing, but did identify necessary adjustments to CSC's pricing of 9,234 stock option grants. In addition, an independent audit had revealed tax deficiencies including accounting for income taxes, errors in income tax expenses and related liabilities, and errors in deferred tax assets. As a consequence of repricing its stock options and correcting its tax deficiencies, CSC restated its financial statements twice, on June 13, 2007, and on January 11, 2008.
The Participants allege that the Fiduciaries misrepresented CSC's accounting and income tax problems by stating that stock options were granted at 100% of the market value on the day of the grant; by filing financial statements with the SEC on Forms 10-Q and 10-K that later had to be restated in 2007 and 2008, after they had been incorporated into information to Plan participants about the CSC Stock Fund; and by stating that the June 2006 stock price drop was caused by “the market, not CSC.” The Participants also assert that certain of the Fiduciaries breached their monitoring duties by failing to ensure that the Committee had access to information about CSC's business problems, which made CSC stock an imprudent retirement investment; and by failing to ensure that the monitored fiduciaries completely appreciated the huge risk of investing a significant amount of rank and file employees' retirement savings in CSC stock.
The Participants assert that the Fiduciaries' improper conduct caused class period damages to the Plan of over $700 million. The Fiduciaries concede that the total charge resulting from the 2007 and 2008 Restatements was a reduction of reported income for fiscal years 2005 to 2007 and retained earnings for fiscal year 2004 of $458.9 million, but they argue that those charges had no impact on the financial health of CSC, and were later largely offset by a settlement with the IRS concerning historic tax positions and accounting practices. The...
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