In re Lehman Bros. Sec. & Erisa Litig.

• Decision Date: 10 July 2015
• Docket Number: No. 09–MD–2017 (LAK).,09–MD–2017 (LAK).
• Citation: 113 F.Supp.3d 745
• Parties: In re LEHMAN BROTHERS SECURITIES AND ERISA LITIGATION.
• Court: U.S. District Court — Southern District of New York

113 F.Supp.3d 745

In re LEHMAN BROTHERS SECURITIES AND ERISA LITIGATION.

No. 09–MD–2017 (LAK).

United States District Court, S.D. New York.

Signed July 10, 2015.

Daniel W. Krasner, Mark C. Rifkin, Michael Jaffe, Matthew Guiney, Wolf Haldenstein Adler Freeman & Herz LLP, Thomas J. McKenna, Gregory M. Egleston, Gainey McKenna & Egleston, Plaintiffs' Co–Lead Counsel.

Jonathan K. Youngwood, Janet A. Gochman, Simpson Thacher & Bartlett LLP, for the Plan Committee Defendants.

Todd S. Fishman, Allen & Overy LLP, for Defendant Richard S. Fuld, Jr.

MEMORANDUM OPINION

LEWIS A. KAPLAN, District Judge.

This case is brought on behalf of beneficiaries of the Lehman Brothers Savings Plan (the "Plan"), an employee stock ownership plan ("ESOP") that held stock of Lehman Brothers Holdings, Inc. ("Lehman") and suffered a large loss when Lehman failed in the 2008 financial crisis. Plaintiffs initially sued Lehman's former directors (the "Director Defendants")¹ and members of Lehman's Employee Benefit Plans Committee (the "Plan Committee Defendants"),² although the only remaining Director Defendant is Richard S. Fuld, Lehman's former chairman and chief executive officer.³ Lehman allegedly violated the Employee Retirement Income Security Act ("ERISA")⁴ by imprudently continuing to keep Plan assets invested in Lehman stock despite Lehman's deteriorating condition.

The Court granted two previous motions to dismiss this case,⁵ and the latter dismissal was affirmed by the Second Circuit in Rinehart v. Akers.⁶ Plaintiffs sought review by the Supreme Court, which granted certiorari, vacated the judgment, and remanded the case in light of its decision in Fifth Third Bancorp v. Dudenhoeffer.⁷ The parties then filed cross-motions, with plaintiffs moving to amend the Second Consolidated Amended Complaint (the "SCAC")⁸ by replacing it with a Third Consolidated Amended Complaint (the "TCAC") and defendants renewing their motion to dismiss the SCAC.⁹ The Court granted plaintiffs' motion to amend the SCAC without prejudice to defendants' arguments in favor of dismissal.¹⁰ The Court now considers whether the TCAC plausibly alleges claims upon which relief may be granted.¹¹

Procedural History

The Court assumes familiarity with its prior opinions as well as with the Second Circuit's decision in Rinehart. A brief overview nonetheless is helpful in understanding the Court's disposition of the present motions.

I. The Court's Dismissal of the SCAC

The SCAC included three counts. Count I alleged that defendants violated their duty to manage the Plan prudently because they (i) knew or should have known that Lehman stock was not a "suitable and appropriate" investment,¹² (ii) failed to provide complete and accurate information to plan members regarding risks facing Lehman,¹³ and (iii) knowingly concealed or otherwise enabled other defendants' failure to disclose material adverse information regarding Lehman's exposure to risk.¹⁴ Count II alleged that defendants breached their duty to avoid conflicts of interest by, among other things, not engaging independent ESOP fiduciaries.¹⁵ Count III alleged that the Director Defendants (i) breached their duties to act prudently in appointing members of the Compensation Committee (who in turn appointed members of the Plan Committee) and (ii) inadequately monitored the Plan Committee Defendants.¹⁶

The Court dismissed the SCAC.¹⁷ As to Count I, the Court applied the presumption of prudence adopted in Moench v. Robertson,¹⁸ under which plaintiffs could sustain their claim that the Plan Committee Defendants imprudently managed the Plan only by pleading facts indicating defendants' "knowledge at a pertinent time of an imminent corporate collapse or other dire situation."¹⁹ The Court determined that plaintiffs' imprudence allegations were conclusory, that fluctuations in Lehman's stock price did not overcome the Moench presumption, and that the SCAC failed to allege facts supporting a conclusion that the Plan Committee Defendants knew or should have known of a dire situation at Lehman.²⁰ In addition, the Court dismissed Count I's disclosure claims because it concluded that there is no affirmative duty to disclose inside information about a company's financial condition to plan participants and that incorporation of Lehman's SEC filings into Plan communications was not an actionable misrepresentation or omission.²¹

The Court dismissed Count II's conflict of interest claims because they were based on wholly conclusory allegations.²²

The Court dismissed Count III on two principal grounds. First, it concluded that plaintiffs' allegation that the Director Defendants acted imprudently in appointing members of the Plan Committee was "unsupported by even the barest factual allegations."²³ Second, a legally sufficient improper monitoring claim necessarily is derivative of a primary breach of duty and plaintiffs' claim therefore could not survive because there was no viable claim against the Plan Committee Defendants.²⁴

II. The Second Circuit's Affirmance

The Second Circuit affirmed the dismissal of the SCAC in Rinehart. The parties disagree over the extent to which Dudenhoeffer has superseded Rinehart 's key conclusions.

First, Rinehart applied the Moench presumption of prudence in determining that the SCAC failed to state a claim that the Plan Committee Defendants, given public information, breached their fiduciary duties. The Second Circuit concluded that plaintiffs did not "plausibly allege[ ] that the [Plan Committee Defendants] knew or should have known that Lehman was an imprudent investment given the mixed signals with which the fiduciaries grappled."²⁵

Second, Rinehart considered plaintiffs' allegation that the Plan Committee Defendants acted imprudently by failing to undertake an investigation into nonpublic information regarding the riskiness of Lehman stock. The Second Circuit concluded that those defendants had no duty to undertake such an investigation, largely because imposing such a requirement would force plan fiduciaries into constant conflicts between "adher[ing] to their duty of prudence by limiting further investment in the improvident asset" and "risking liability for insider trading" by divesting an ESOP of company stock.²⁶ "Given the conflicted state of the law," the only "reasonable approach" was not to construe the duty of prudence "to include an obligation to affirmatively seek out material, nonpublic information pertaining to plan investments."²⁷

Third, Rinehart addressed plaintiffs' contention that the Director Defendants breached their duties to monitor the Plan Committee Defendants because they failed to provide them with inside information. It affirmed this Court's dismissal of that claim on the narrow ground that it was derivative of the failed prudence claim. But the Second Circuit addressed also the underlying question of whether a duty to inform even exists, stating that it would be "unlikely to conclude" that ERISA imposed such a duty on appointing fiduciaries.²⁸ In light of the Circuit's prior decision in In re Citigroup ERISA Litigation,²⁹ which concluded that ERISA fiduciaries have no obligation to furnish nonpublic information to plan beneficiaries, the "argument that the [Plan Committee Defendants] should have been privy to inside information so that they could act on it on behalf of plan-participants [was] simply not persuasive."³⁰

III. Dudenhoeffer

Dudenhoeffer is pivotal because it rejected the Moench presumption of prudence and held instead that ESOP fiduciaries are subject to the same duty of prudence as all other ERISA fiduciaries.³¹ Nevertheless, the Supreme Court there pointed out that Bell Atlantic Corp. v. Twombly³² and Ashcroft v. Iqbal³³ limit ESOP claims in two respects.

First, it stated that "where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible [and therefore legally insufficient] as a general rule, at least in the absence of special circumstances."³⁴

Second, the Court sharply constrained—without necessarily eliminating—ERISA claims based on nonpublic information. It directed lower courts "to bear in mind that the duty of prudence, under ERISA as under the common law of trusts, does not require a fiduciary to break the law."³⁵ It nonetheless suggested that it might be possible to allege a claim for breach of fiduciary duty based on nonpublic information without implicating the insider trading laws. To sustain such a claim—assuming a fiduciary possessed inside information bearing adversely on a plan's continued investment in the stock of its sponsor—"a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it."³⁶ Such actions might include disclosure or declining to invest further in the securities of the ESOP sponsor, although courts "should consider the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws."³⁷

IV. The TCAC

In light of Dudenhoeffer, plaintiffs have narrowed their claims against the Plan Committee Defendants and Fuld.³⁸

Count I of the TCAC alleges that the Plan Committee Defendants knew or should have known, based on public information, that investment in Lehman had become increasingly risky throughout 2008 and that these defendants breached their fiduciary duty by failing to consider the prudence of continuing to invest in Lehman during this period.³⁹ Plaintiffs assert that, in light of public information available at the time, "the sophisticated D...