Gray v. Citigroup Inc. (In re Citigroup Erisa Litig.)

• Decision Date: 19 October 2011
• Docket Number: Docket No. 09–3804–cv.
• Citation: 662 F.3d 128,51 Employee Benefits Cas. 1737
• Parties: In re CITIGROUP ERISA LITIGATION.Stephen Gray, James Bolla, and Samier Tadros, Lead Plaintiffs–Appellants,Sandra Walsh, Anton K. Rappold, and Alan Stevens, Plaintiffs–Appellants, v. Citigroup Inc., Citibank, N.A., The Plans Administration Committee, The Plans Investment Committee, Charles O. Prince, Robert E. Rubin, Jorge Bermudez, Michael Burke, Steve Calabro, Larry Jones, Faith Massingale, Thomas Santangelo, Alisa Seminara, Richard Tazik, James Costabile, Robert Grogan, Robin Leopold, Glenn Regan, Christine Simpson, Timothy Tucker, Leo Viola, Donald Young, Marcia Young, and John Does 1–20, Defendants–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

51 Employee Benefits Cas. 1737

662 F.3d 128

In re CITIGROUP ERISA LITIGATION.Stephen Gray, James Bolla, and Samier Tadros, Lead Plaintiffs–Appellants,Sandra Walsh, Anton K. Rappold, and Alan Stevens, Plaintiffs–Appellants,

v.Citigroup Inc., Citibank, N.A., The Plans Administration Committee, The Plans Investment Committee, Charles O. Prince, Robert E. Rubin, Jorge Bermudez, Michael Burke, Steve Calabro, Larry Jones, Faith Massingale, Thomas Santangelo, Alisa Seminara, Richard Tazik, James Costabile, Robert Grogan, Robin Leopold, Glenn Regan, Christine Simpson, Timothy Tucker, Leo Viola, Donald Young, Marcia Young, and John Does 1–20, Defendants–Appellees.

Docket No. 09–3804–cv.

United States Court of Appeals, Second Circuit.

Argued: Sept. 28, 2010.Decided: Oct. 19, 2011.

Marc I. Machiz, Cohen Milstein Sellers & Toll PLLC, Philadelphia, PA (Robert I. Harwood, Samuel K. Rosen, Tanya Korkhov, Harwood Feffer LLP, New York, NY; Marian P. Rosner, Andrew E. Lencyk, James Kelly–Kowlowitz, Wolf Popper LLP, New York, NY, on the brief), for Plaintiffs–Appellants.

Lewis Richard Clayton, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, N.Y. (Brad S. Karp, Susanna Michele Buergel, Douglas M. Pravda, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY; Lawrence B. Pedowitz, Jonathan M. Moses, John F. Lynch, Wachtell, Lipton, Rosen & Katz, New York, NY, on the brief), for Defendants–Appellees.

Thomas Tso, Attorney (Deborah Greenfield, Acting Deputy Solicitor of Labor, Timothy D. Hauser, Associate Solicitor for Plan Benefits Security, Elizabeth Hopkins, Counsel for Appellate and Special Litigation, on the brief), United States Department of Labor, Washington, DC, for amicus curiae Hilda L. Solis, Secretary of the United States Department of Labor.Jay E. Sushelsky, AARP Foundation Litigation, Washington, DC (Melvin Radowitz, AARP, Washington, DC), for amicus curiae AARP.Ellen M. Doyle, Stember Feinstein Doyle & Payne, LLC, Pittsburgh, PA (Rebecca M. Hamburg, National Employment Lawyers Association, San Francisco, CA; Jeffrey Lewis, Lewis, Feinberg, Lee, Renaker & Jackson P.C., Oakland, CA), for amicus curiae National Employment Lawyers Association.Ira G. Rosenstein, Orrick, Herrington & Sutcliffe LLP, New York, N.Y. (Ira D. Hammerman, Kevin M. Carroll, Securities Industry and Financial Markets Association, Washington, DC; Joseph Liburt, Orrick, Herrington & Sutcliffe LLP, Menlo Park, CA), for amicus curiae Securities Industry and Financial Markets Association.Charles C. Jackson, Morgan, Lewis & Bockius, LLP, Chicago, IL (David Ackerman, Morgan, Lewis & Bockius, LLP, Chicago, IL; John A. Kober, Morgan, Lewis & Bockius LLP, New York, NY; Jamie M. Kohen, Morgan, Lewis & Bockius, LLP, New York, NY), for amicus curiae ESOP Association.Thomas L. Cubbage III (John M. Vine), Covington & Burling LLP, Washington, DC, for amicus curiae ERISA Industry Committee and American Benefits Council.

Before: WALKER, CABRANES, and STRAUB, Circuit Judges.

Judge STRAUB dissents in part and concurs in part in a separate opinion.

JOHN M. WALKER, JR., Circuit Judge:

Plaintiffs, participants in retirement plans offered by defendants Citigroup Inc. and Citibank, N.A., and covered by the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq., appeal from the judgment of the United States District Court for the Southern District of New York (Sidney H. Stein, Judge ) dismissing their ERISA class action complaint. ¹ Plan documents required that a stock fund consisting primarily of employer stock (the Citigroup Common Stock Fund) be offered among the investment options. Plaintiffs allege that, because Citigroup stock became an imprudent investment, defendants' failure to limit plan participants' ability to invest in the company violated ERISA. We hold that the plan fiduciaries' decision to continue offering participants the opportunity to invest in Citigroup stock should be reviewed for an abuse of discretion, and we find that they did not abuse their discretion here. We also hold that defendants did not have any affirmative duty to disclose to plan participants nonpublic information regarding the expected performance of Citigroup stock, and that the complaint does not sufficiently allege that defendants, in their fiduciary capacities, made any knowing misstatements to plan participants regarding Citigroup stock. We therefore AFFIRM the district court's dismissal of plaintiffs' complaint.

BACKGROUND

I. Factual Background

Plaintiffs are participants in the Citigroup 401(k) Plan (the “Citigroup Plan”) or the Citibuilder 401(k) Plan for Puerto Rico (the “Citibuilder Plan”) (collectively, the “Plans”). These employee pension benefit plans are governed by ERISA, which characterizes them as “eligible individual account plans.” ² 29 U.S.C. § 1107(d)(3); see also 29 U.S.C. § 1002(2)(A) (defining “employee pension benefit plan”). Defendant Citigroup Inc. (“Citigroup”), a Delaware corporation and financial services company, is the sponsor of the Citigroup Plan. Defendant Citibank, N.A. (“Citibank”), a subsidiary of Citigroup, is the sponsor of the Citibuilder Plan and the trustee of the Citigroup Plan. The Citibuilder Plan's trustee—not a defendant in this action—is Banco Popular de Puerto Rico. Each Plan is managed by the same two committees: the “Administration Committee,” consisting of eight members, charged with administering the Plans and construing the Plans' terms, and the “Investment Committee,” consisting of ten members, responsible for selecting the investment fund options offered to Plan participants.

The Citigroup Plan is offered to Citigroup employees, and the Citibuilder Plan is offered to Puerto Rico employees of Citibank. In all material respects, the Plans are the same. Participants in each Plan may make pre-tax contributions, up to a certain percentage of their salary, to individual retirement accounts. The participants are then free to allocate the funds within their accounts among approximately 20 to 40 investment options selected by the Investment Committee. Both Plans state that participants' accounts are to be invested in these investment options “in the proportions directed by the Participant.”

The Citigroup Common Stock Fund (the “Stock Fund” or the “Fund”) is an investment option offered by both Plans, which define the Fund as “an Investment Fund comprised of shares of Citigroup Common Stock.” By offering the Stock Fund, the Plans provide a vehicle that enables Plan participants to invest in the stock of their employer. The Plans also authorize the Fund to “hold cash and short-term investments in addition to shares of Citigroup Common Stock,” “[s]olely in order to permit the orderly purchase of Citigroup Common Stock in a volume that does not disrupt the stock market and in order to pay benefits hereunder.”

Both Plans mandate that the Fund be included as an investment option. Section 7.01 of each provides that the Plan trustee “shall maintain, within the Trust, the Citigroup Common Stock Fund and other Investment Funds,” and section 7.01 of the Citigroup Plan adds that “the Citigroup Common Stock Fund shall be permanently maintained as an Investment Fund under the Plan.” Section 7.09(e) of each Plan states that “provisions in the Plan mandate the creation and continuation of the Citigroup Common Stock Fund.” Further, section 15.06(b) of the Citigroup Plan requires that the Trustee “maintain at least 3 Investment Funds in addition to the Citigroup Common Stock Fund.”

II. Procedural History

Plaintiffs filed their Consolidated Class Action Complaint on September 15, 2008, following a sharp drop in the price of Citigroup stock that began in late 2007 and continued into 2008. Citigroup, Citibank, and the Administration and Investment Committees are all defendants, as are Charles Prince (“Prince”), Citigroup's CEO from 2003 through November 2007, and each member of Citigroup's Board of Directors (with Prince, the “Director Defendants”). Plaintiffs challenge defendants' management of the Plans and, in particular, the Stock Fund. Plaintiffs represent a putative class of participants in or beneficiaries of the Plans who invested in Citigroup stock from January 1, 2007 through January 15, 2008 (the “Class Period”), during which Citigroup's share price fell from $55.70 to $26.94.

Plaintiffs allege that Citigroup's participation in the ill-fated subprime-mortgage market caused the price drop during the Class Period. Citigroup, according to plaintiffs, consistently downplayed its exposure to that market, even as it recognized the need to start reducing its subprime-mortgage exposure in late 2006. At the end of 2007, Citigroup publicly reported a subprime-related loss of $18.1 billion for the fourth quarter, and further substantial losses continued through 2008.

Count I of the Complaint (the “Prudence Claim”) alleges that the Investment Committee, the Administration Committee, Citigroup, and Citibank breached their fiduciary duties of prudence and loyalty by refusing to divest the Plans of Citigroup stock even though Citigroup's “perilous operations tied to the subprime securities market” made it an imprudent investment option. Plaintiffs argue that a prudent fiduciary would have foreseen a drop in the price of Citigroup stock and either suspended participants' ability to invest in the Stock Fund or diversified the Fund so that it held less Citigroup stock. Count II (the “Communications Claim”) alleges that Citigroup, the Administration Committee, and Prince breached their fiduciary duties by failing to provide complete and accurate information to Plan participants regarding the Fund and its exposure to the risks associated with the subprime market.

Counts III–VI, in substance, are derivative of the violations alleged in Counts I and II. Count III alleges that Citigroup and the Director Defendants failed to properly monitor the fiduciaries that they appointed; Count IV alleges that the same defendants,...