In re Litig..

• Decision Date: 04 May 2011
• Docket Number: No. 09–1750.,09–1750.
• Citation: 644 F.3d 511,50 Employee Benefits Cas. 2704
• Parties: In re MOTOROLA SECURITIES LITIGATION.
• Court: U.S. Court of Appeals — Seventh Circuit

644 F.3d 511

50 Employee Benefits Cas. 2704

In re MOTOROLA SECURITIES LITIGATION.

No. 09–1750.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 5, 2009.Decided May 4, 2011.

Mark A. Stang, Chuhak & Tecson, Chicago, IL, for Plaintiff Edward A. Cox, Jr.Fay Clayton, Robinson, Curley & Clayton, Chicago, IL, for Plaintiff Class.Michael G. Cleveland, Vedder Price P.C., Chicago, IL, for Appellant Motorola, Incorporated 401(K) Profit Sharing Plan.John C. Massaro, Arnold & Porter, Washington DC, for Defendants Christopher B. Galvin, Carl F. Koenemann, Robert L. Growney, Motorola, Inc.James A. Harrod, Wolf, Popper, New York, NY, for Appellee State of New Jersey.Before EVANS and SYKES, Circuit Judges, and SIMON, District Judge. ^*SYKES, Circuit Judge.

In 2003 purchasers of Motorola, Inc., common stock brought a class-action lawsuit against Motorola and its then-principal officers alleging violations of federal securities laws. Class members included investors who purchased publicly traded Motorola common stock during the class period. Excepted from the class was any purchaser who was also an affiliate of Motorola.

The events underlying the securities-fraud case spawned parallel class-action litigation filed by current and former Motorola employees under the Employee Retirement Income Security Act (“ERISA”). See Howell v. Motorola, Inc., 633 F.3d 552 (7th Cir.2011). The cases were eventually assigned to the same district judge, and the securities-fraud action later settled for $190,000,000. Before the settlement proceeds were distributed, however, the Motorola 401(k) Profit–Sharing Plan (“the Plan”) submitted a claim to share in the settlement. The Plan is a defined-contribution retirement plan, and its participants are current and former Motorola employees who established individual retirement accounts with the Plan. During the class period, many Plan participants acquired beneficial ownership of Motorola common stock by purchasing units of the Motorola Stock Fund, one of a limited number of investment options offered by the Plan Administrator. The Plan requested a share of the settlement proceeds to distribute among its participants who, as beneficial owners of Motorola common stock, were harmed by Motorola's allegedly unlawful conduct. The participants were also the plaintiffs in the related ERISA class-action litigation. Id. at 557–58.

The district court denied the Plan's claim to a share of the settlement. The court offered two reasons for its decision. First, the court noted that the class definition was limited to persons who purchased publicly traded Motorola common stock. Because the Plan's participants purchased units of the Motorola Stock Fund, not Motorola common stock, the court held that the Plan was not a member of the class. Alternatively, the court relied on the exclusion in the class definition for any “affiliate” of Motorola. The court held that the Plan was an affiliate of Motorola and therefore was specifically excluded from the class. The Plan appealed.

We affirm, although on somewhat different reasoning. We disagree that the Plan is excluded from the class because the participants did not themselves purchase Motorola common stock. It is true that the Plan's participants purchased units of the Motorola Stock Fund, not Motorola common stock. But the claim was filed by the Plan, and it is undisputed that the Plan regularly purchased publicly traded Motorola common stock on the open market.

We agree, however, that the Plan is an affiliate of Motorola and on this basis is excluded from the class, although we arrive at this conclusion by a slightly different analysis. The district court applied the ordinary meaning of the term “affiliate,” but we think the term must be understood in light of the specialized context in which it is used here. This is a securities-fraud case, and under federal securities law, an “affiliate” is defined by reference to control; one who controls, is controlled by, or is under common control with an issuer of a security is an affiliate. Motorola appoints the Plan's administrator—the Motorola 401(k) Profit–Sharing Committee—and the members of this Committee serve at the pleasure of Motorola's Board of Directors. This structural organizational control is sufficient to render the Plan an affiliate of Motorola. Accordingly, the Plan is excluded from the class definition, and the district court properly denied its claim to a share of the settlement proceeds.

I. Background

A. The Motorola 401(k) Profit–Sharing Plan and the Motorola Stock Fund

The Plan is a participant-directed, defined-contribution retirement plan established for the benefit of current and former Motorola employees and administered pursuant to Section 404(c) of ERISA. See 29 U.S.C. § 1104. The Motorola 401(k) Profit–Sharing Committee is the Plan Administrator. Members of the Profit–Sharing Committee are appointed by Motorola's Board of Directors, and the Board retains the power to remove Committee members at any time and without cause. The Plan's charter states that the Profit–Sharing Committee is charged with the “authority and discretion to control and manage the operation and administration of the Plan.” The Committee may delegate its operating authority, and it has done so by appointing a Trustee to manage the Plan's day-to-day operations.

The Plan is structured as follows: Plan assets are held in the Motorola Profit–Sharing and Investment Trust (“the Trust”), which is managed by the Trustee. Plan participants defer wages from their paychecks into the Trust and may choose to invest their contributions among several preselected investment funds offered by the Committee. Prior to July 1, 2000, participants could choose among four investment options; after that date participants had nine options. At all pertinent times, one available investment option was the Motorola Stock Fund. The Motorola Stock Fund is a unitized investment vehicle that allows Plan participants to acquire beneficial ownership of Motorola common stock by purchasing units of the Fund. The Fund's assets consist almost entirely of Motorola common stock (about 99%), along with a nominal amount of cash (about 1%). When a participant purchases units of the Motorola Stock Fund, he acquires a pro rata interest in the Motorola common stock held by the Fund. The Trustee, not the participants, holds title to the Motorola common stock in the Fund. As participants buy or sell Fund units, the Trustee reallocates the Motorola common stock to the participants' accounts in amounts corresponding to each participant's unit ownership interest. If there is not enough Motorola common stock in the Fund to satisfy all of the participants' purchase orders for units in the Fund, the Trustee purchases additional stock on the open market and allocates it accordingly.

The stock in the Motorola Stock Fund is voted by the Trustee in accordance with instructions from the participants. As to shares for which no participant instructions are received, the Trustee votes those shares “proportionately,” in the same manner as the shares for which he has received voting instructions. The value of a participant's interest in the Motorola Stock Fund fluctuates as the market price for Motorola common stock changes.

B. The Motorola Litigation

In 2003 the State of New Jersey, Department of Treasury, Division of Investment, initiated a securities-fraud class action against Motorola and its then-principal officers, Christopher Galvin (Chairman and Chief Executive Officer), Carl Koenemann (Chief Financial Officer), and Robert Growney (Chief Operating Officer). The factual basis for this litigation is described in more detail in an opinion recently issued by a different panel of this court in the related ERISA class-action litigation. See Howell, 633 F.3d at 555–56. Briefly, New Jersey alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq., claiming that from February 3, 2000, to May 14, 2001, Motorola artificially inflated the prices of its securities, including Motorola common stock, by making materially false and misleading statements regarding a deal with Telsim, a Turkish wireless provider. New Jersey alleged that Motorola issued press releases claiming that the Telsim transaction could yield billions of dollars but never disclosed information about certain high-risk loans that were part of the deal. Id.

The district court certified the securities suit for class treatment and defined the class as follows:

[A]ll persons who purchased publicly traded Motorola, Inc. common stock or registered debt securities during the period from February 3, 2000 through May 14, 2001 ... and who allegedly were damaged thereby. Excluded from the Class are the Defendants herein, members of the Individual Defendants' immediate families, any subsidiary, affiliate, or control person of any such person or entity, the officers of Motorola and the legal representatives, heirs, successors or assigns of any such excluded party.

(Emphasis added.) This class definition was reproduced in several subsequent court documents, including the notice alerting putative class members to the litigation.

The parties eventually settled the securities action for $190,000,000, and the terms of the settlement agreement were memorialized in a Stipulation of Settlement. The Stipulation incorporated by reference the class definition as it appeared in prior court orders and in the class notice. The district court approved the Stipulation and designated a claims administrator to oversee disbursement of the settlement proceeds, subject to the district court's supervision.

Shortly thereafter, the Plan filed a claim with the claims administrator seeking a share of the settlement proceeds. The Plan asserted that during the class period, 76,954 Plan participants acquired beneficial ownership of 21,113,303 shares of Motorola common stock via their...