OPINION
This сlass action is brought by participants in the Morgan Stanley 401(k) Plan (“401 (k) Plan”) and the Morgan Stanley Employee Stock Ownership Plan (“ESOP”) (collectively the “Plans”) against Defendants Morgan Stanley (“Morgan Stanley” or the “Company”), Morgan Stanley & Co., Inc. (“MS & Co.”), Karen Jamesley, Morgan Stanley’s Global Director of Human Resources (“Jamesley”), John Mack, the Chairman of Morgan Stanley’s Board of Directors and Morgan Stanley’s Chief Executive Officer (“Mack”), members of MS & Co.’s Board of Directors (the “MS & Co. Board”), and members of the Investment Committee (the “Investment Committee Defendants”) (collectively, the “Defendants”).
Plaintiffs allege Defendants violated their fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”) from September 15, 2008 through December 31, 2008 (the “Class Period”).
Defendants have moved to dismiss the Cоrrected Amended Class Action Complaint (the “Complaint”) pursuant to Federal Rule of Civil Procedure 12(b)(6). For reasons that follow, Defendants’ Motion to Dismiss is GRANTED in its entirety.
1. BACKGROUND
A. Procedural History
Plaintiffs commenced a related action before this Court, asserting similar claims for breaches of ERISA fiduciary duties. In re Morgan Stanley ERISA Litig., No.
In light of two Second Circuit decisions, In re Citigroup ERISA Litigation,
B. Parties
The following facts alleged in the Complaint are assumed to be true for the purposes of the Motion to Dismiss before the Court.
This action is brought by and on behalf of participants in the 401(k) Plan and the ESOP, who held Morgan Stanley stock in their individual 401(k) Plan or ESOP accounts during the Class Period. (Compl. ¶¶ 14-19.) Plaintiffs allege that all Defendants were fiduciaries of the Plans during the Class Period. (Compl. ¶ 20.)
Morgan Stanley is a financial services company headquartered in New York, New York. It provides its clients and customers with financial advisory services, investment advisory services, global asset management products and services in equity, fixed income, alternative investments, and private equity. (Compl. ¶ 21.) Morgan Stanley is the ESOP’s sponsor. (Compl. ¶ 23.)
MS & Co., a wholly-owned subsidiary of Morgan Stanley, is headquartered in New York, New York. (Compl. ¶ 28.) ' As part of Morgan Stanley’s Global Wealth Management Group, MS & Co. is Morgan Stanley’s primary broker-dealer in the Unitеd States. (Compl. ¶ 28.) MS & Co. is the 401(k) Plan’s “sponsor.” (Compl. ¶ 29.)
Karen Jamesley was Morgan Stanley’s Global Director of Human Resources and the Plan Administrator of the 401(k) Plan and the ESOP during the Class Period. (Compl. ¶¶ 25-26.) John J. Mack, was Morgan Stanley’s Chief Executive Officer and its Chairman of the Board during the Class Period. (Compl. ¶ 27.)
Walid A. Chammah, Charles Chasin, James P. Gorman, Ellyn A. McColgan, Michael J. Petrick, Richard Portogallo, Neal A. Shear, and Cordell G. Spencer were members of the MS & Co. Board of Directors during the Class Period. (Compl. ¶ 31.)
During the Class Period, the Plans’ management was in the hands of the Investment Committee, members of which were appointed by ánd served at the pleasure of the MS & Co. Board. (Compl. ¶ 32.) Under the Plans’ terms, the Investment Committee consisted of no fewer than three persons, each of whom was an employee or advisory director of Morgan Stanley or MS & Co. (Compl. ¶ 32.) Michael Rankowitz, Thomas C. Schneider, Michael T. Cunningham, R. Bradford Evans, Kirsten Feldman, Edmund C. Puckhaber, William B. Smith, and Caitlin Long served as members of the Investment
Additionally, Plaintiffs’ Complaint names unknown “John Doe” Defendants 1-10, individuals including members of the Investment Committee and officers, directors and employees of Morgan Stanley and MS & Co. These John Doe Defendants were fiduciaries of the Plans during the Class Period, but their identities are currently unknown to Plaintiffs. (Compl. ¶ 34.)
C. The Plans
Judge Sweet thoroughly described the 401(k) Plan and the ESOP, including employee eligibility and the allocation of employee and Company contributions. Morgan Stanley,
Before August 31, 2008, the Plans’ assets were combined and commingled in the Morgan Stanley Defined Contribution Master Trust held in trust by Mellon Bank, N.A. (Compl. ¶ 51.) On August 31, 2008, the ESOP’s assets were mеrged into the 401(k) Plan, resulting in one ERISA plan. (Compl. ¶ 52.) Pursuant to that merger, all assets were transferred to the 401(k) Plan on October 20, 2008. (Compl. ¶ 52.)
At the end of 2007, the total combined value of Company stock in the Plans was approximately $2.2 billion. (Compl. ¶ 56.) At the end of 2008, the 401(k) Plan’s value in Company stock was approximately $673.6 million. (Compl. ¶ 56.)
D. Factual Allegations
Plaintiffs allege Defendants breached their fiduciary duties to the Plans, their participants, and their beneficiaries during the Class Period in violation of ERISA sections 404(a) and 405. Despite warnings throughout 2007 that the subprime housing market was deteriorating and despite Morgan Stanley being aware of the crisis in 2007, Mоrgan Stanley continued investing in subprime and mortgage backed securities. (Compl. ¶¶ 87-118.) As a result of the crisis and the Company’s subprime investments, Morgan Stanley reported $9.4 billion in mortgage-related write-downs during 2007. (Compl. ¶ 114.)
Despite knowing of those events and of market volatility, on January 2, 2008, Mack made the decision to fund all Company contributions to the Plans solely in Company stock. (Compl. ¶¶ 119-29.) Plaintiffs allege that after the collapse of Bear Stearns in March 2008 and because the risks the Company would face if another banking institution failed, Defendants knew or should have known that Morgan Stanley stock was too risky an investment for the Plans. (Compl. ¶¶ 126-27.) Concerns of the systemic problems in the banking and mortgage sectors increased from March to July 2008. (Compl. ¶¶ 138-55.)
Plaintiffs claim Morgan Stanley faced dire circumstances after Fannie Mae and Freddie Mac were placed into conservator-ship, after Lehman Brothers collapsed, and when hedge funds made a multi-billion dollar run on Morgan Stanley during the week of September 15, 2008. (Compl. ¶¶ 157-92.) As a result of these occurrences, Morgan Stanley lost $128.1 billion in prime brokerage deposits during the weeks of September 15, 2008 and Septem
According to the Complaint, while looking back on these events, Mack speculated that Morgan Stanley was “next in line” to collapse and that the Company was “close to really going out of business, call it near death.” (Compl. ¶¶ 159, 205.) And, on September 17, 2008 Morgan Stanley’s CFO Colm Kelleher (“Kelleher”) told Mack, “We’re going to be out of money on Friday.” (Compl. ¶ 175.) After Mack asked Kelleher to recheck the numbers, Kelleher said, “Maybe we’ll make it through early next week.” (Compl. ¶ 175.) As a rеsult of these concerns, Morgan Stanley began seeking a merger or an investor. (Compl. ¶¶ 174, 176, 180, 182, 186, 191.) On September 21, 2008, Mitsubishi UFJ, Japan’s largest bank, agreed to invest $9 billion in Morgan Stanley, yet the Company still needed a source of additional funding. (Compl. ¶ 193.) After the Troubled Asset Relief Program (“TARP”) was enacted, the government called in the heads of nine banks, including Morgan Stanley, to encourage them to take TARP financing; Mack was the first to accept. (Compl. ¶¶ 203-05.)
Plaintiffs claim that Defendants could have provided the Plans’ participants with specific warnings, suspended or limited future investments of Company stock in the 401(k) Plan, liquidatеd Company stock in the Plans and converted those assets into cash, or funded Company contributions in cash. (Compl. ¶ 208.) Instead, Defendants did nothing even' though Morgan Stanley’s stock traded at $32.19 at the beginning of the Class Period, then to under $20 after Lehman Brothers’ collapse, dropping to under $10 on- October 10, 2008 and November 20, 2008, and remaining around $15 for the rest of 2008. (Compl. ¶ 209; Wise Decl. Ex. I.) '
11. DISCUSSION
A. Legal Standards
1. Rule 12(b)(6) Motion to Dismiss
For a complaint to survive dismissal under Federal Rules of Civil Procedure 12(b)(6) (“Rule .12(b)(6)”), a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,
[W]hen the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a “probability requirement,” but it asks for more than a sheer possibility that a defendant has acted unlawfully. .Where a complaint pleads facts that are “merely consistent with” a defendant’s liability, it “stops short of -the line between possibility and plausibility of ‘entitlement to relief.’ ”
A court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.
Iqbal,
In ruling on a Rule 12(b)(6) motion, a court may consider the complaint as well as “any written instrument attached to the complaint, statements or documents incorporated into the complaint -by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd,.,
2. ERISA Claims for Breaches of Fiduciary Duties
ERISA “ ‘protects] beneficiaries of employee benefit plans’ ..., by imposing fiduciary duties of prudence and loyalty on plan fiduciaries.” Citigroup,
A participant in retirement plan may bring a civil action against a person for breaching ERISA fiduciary duties. 29 U.S.C. § 1132(a)(2); 29 U.S.C. § 1109(a). However, “[a] person is only subject to these fiduciary duties ‘to the extent’ that the person, among other things, ‘exercises any discretionary authority or discretionary control respecting management of such plan’ or ‘has any discretionary authority or discretionary responsibility in the administration of such plan.’” Citigroup,
B. Whether Plaintiffs Adequately Pled an Imprudence Claim
Plaintiffs allege Defendants failed to manage prudently the Plans’ assets and that Mack failed to fund prudently Compa
1. Whether Defendants Acted in a Fiduciary Capacity with Respect to Plan Investments
Defendants concede that Jamesley is a named fiduciary for the 401(k) Plan and the ESOP. (Defs.’ Mot. Dismiss 10.) As Plan Administrator for the 401(k) Plan, Jamesley had' the authority to impose processes, conditions, or limitations on the selection of investments by the 401(k) Plan participants. See Citigroup,
Relying on Citigroup, Defendants argue that Morgan Stanley, MS & Co., the MS & Co. Board, and Mack were not fiduciaries with respect to Plaintiffs’ imprudence claim because they lacked any fiduciary duties to add or eliminate investment funds and lacked the authority to veto investment options. (Defs.’ Mot. Dismiss 10-12.) Howеver, they were de facto fiduciaries of the Plans because Morgan Stanley, MS & Co., the MS & Co. Board, and Mack had the authority to determine whether to make contributions in either cash, or Company stock. In re Fannie Mae ERISA Litig., No. 09 Civ. 1350,
2. The Moench Presumption
The Second Circuit recently adopted the Moench presumption “of compliance with ERISA when an ESOP [or an EIAP] fiduciary invests assets in' the employer’s stock.” Citigroup,
The Moench presumption “protects] fiduciaries from liability where ‘there is room for reasonable fiduciaries to disagree as to whether they are bound to divest from company stock.’ ” Citigroup,
3. Whether the Moench Presumption Applies to the Plans
Defendants assert that the Plans mandated or strongly favored investment in Company stock. (Wise Deck Ex. G, Summary Plans Description, at 6 (“SPD”); 401(k) Plan § 8(b)(ii)(A); ESOP § 4.01(a).) Although the Plans allow for instances in which the fiduсiaries may choose not to invest in Company stock, those terms closely mirror those in Citigroup.
Plaintiffs argue the Moench presumption is inapplicablе because, even though a cash contributions to the ESOP could eventually be invested in Company stock, Morgan Stanley, MS & Co., the MS & Co. Board, and Mack had the discretionary authority to decide whether to make Company contributions in cash or stock. (Pis.’ Opp’n 19-21.) The abuse of discretion standard still applies. See In re Fannie Mae,
4. Applying the Moench Presumption
Plaintiffs allegé that by September 15, 2008, Defendants knew or should have known that Morgan Stanley’s viability was in serious jeopardy. (Pis.’ Opp’n 18; Compl. ¶¶ 158-72.) Thereby, Plaintiffs assert, Defendants breached their duty of prudence by continuing to invest the Plans’ assets in Compаny stock and by Morgan Stanley, MS & Co., the MS & Co. Board, and Mack contributing to the Plans in Company stock. (Pis.’ Opp’n 18.) Defendants assert, however, that Plaintiffs fail to plead that Jamesley or the Investment Committee knew of those circumstances and that the situation was not dire. (Defs.’ Reply 5.) -
a. Continuing to Invest in Company Stock
Plaintiffs make no specific allegations that Jamesley or the Investment Committee knew of the alleged dire circumstances, including the withdrawals of prime brokerage deposits following Lehman’s collapse, what amount of withdrawals the Company considered catastrophic, and that the Federal Reserve loaned Mоrgan'Stanley money. Accordingly, Jamesley and the Investment Committee could not have breached their duty because the Complaint never claims they knew or should have known of those events. Gearren,
Even if Jamesly and the Investment- Committee knew of the circumstances at Morgan Stanley, those circumstances were not dire. Courts have found that similar banking entities, with similar factual allegations, did not face dire circumstances during approximately thе same time as the instant Class Period. See Citigroup,
Additionally, “[although proof of the employer’s impending collapse may' not be required to establish liability, ‘mere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the presumption.’ ” Citigroup,
Despite the considerable problems in the financial sector during the Class Period, Morgan Stanley demonstrated several indiciа of viability. Although net revenues were down, in the first three quarters of 2008, Morgan Stanley earned a profit, with net revenues of $22.9 billion. See Fisher,
Moreover, Morgan Stanley’s circumstances during the Class Period were wholly unlike those circumstances in which courts have found sufficient to overcоme the Moench presumption. See In re Fan
b. Funding the Plans with Company Stock
Plaintiffs claim Morgan Stanley, MS & Co., the MS & Co. Board, and Mack breached their duty both with the 2007 and 2008 Plan contributions when they chose to fund the Plans with Company stock rather than cash. However, Plaintiffs make no allegations that the Company was in dire circumstances before September 15, 2008, and since the decision to fund Company contributions in Company stock for the 2007 Plan year was made in January 2008, Morgan Stanley, MS & Co., the MS & Co. Board, and Mack did not breach their duty.' Moreover, the alleged breach occurred before the Class Period began. With respect to the 2008 Plan contribution, which was made on December 31, 2008, Plaintiffs make no allegations that the Company, save reporting its fourth quarter loss оn December 17, 2008, was in dire circumstances in December 2008.
C. Whether Plaintiffs Adequately Pled a Disclosure Claim
Plaintiffs claim that Morgan Stanley and Jamesley breached their duty of loyalty by (1) failing to provide complete and accurate information regarding Morgan Stanley’s subprime exposure and impending problems and (2) disseminating inaccurate, incomplete, and materially misleading statements to participants of the Plans. (Compl. ¶¶ 240-51.)
1. Duty to Provide Information
Although ERISA sets forth a “comprehensive set of ‘reporting and disclosure’ requirements,” Curtiss-Wright Corp. v. Schoonejongen,
Plaintiffs allege Morgan Stanley and Jamesley communicated with Plan participаnts through “SEC filings, annual reports, press releases and Plan documents ..., which included and/or reiterated . these statements.” (Compl. ¶ 243.) The SEC filings were incorporated into the SPDs and Form S-8 registration statements. (Compl. ¶ 243.) These communications, Plaintiffs allege, were actionable misstatements. (Compl. ¶¶ 245-47.)
With respect to Morgan Stanley, Plaintiffs’ argument fails becáuse the Company was not “a Plan administrator responsible for communicating with Plan participants, [and] therefore [did not] act[] as a Plan fiduciary when making the statements at issue.” Citigroup,
Jamesley, as the Plan Administrator for the 401(k) Plan and the ESOP, was responsible for communicating with the Plans’ participants. (Compl. ¶¶ 25-26, 44.) Plaintiffs do not allege that Jamesley was responsible for the alleged misstatements but rather that those statements and omissions are actionable because she incorporated them by reference in communications with the Plans’ participants. (Compl. ¶ 243; Pls.’ Opp’n 27-30.) Simply because the SPDs and Form S-8 rеgistration statements incorporated the communications in question does not “give rise to ERISA liability absent allegations supporting the inference that individual Plan administrators made ‘intentional or knowing misstatements ... by incorporating SEC filings into the SPDs.’ ” In re GlaxoSmithKline,
D. Whether Plaintiffs Adequately Pled a Duty to Avoid Conflict of Interests Claim
Plaintiffs claim Defendants breached their - duty to avoid conflicts of interest by failing to engage timely third parties to make independent judgments concerning Plan investments and by placing their own interests over those of the Plans’' participants. (Compl. ¶¶ 252-59.) These alleged conflicts of interest existed because Defendants had significant personal investments in Company stock and were сompensated based on the stock’s performance. (Compl. ¶ 223, 255-56.)
The Second Circuit has explained, “[We] refuse[ ] to hold that a conflict of interest claim can be based solely on the fact that an ERISA fiduciary’s compensation was linked to the company’s stock.” Citigroup,
E. Plaintiffs’ Remaining Claims of Secondary Liability
Plaintiffs also claim that (1) Morgan Stanley, MS & Co., the MS & Co. Board, and Mack failed to properly monitor other fiduciaries and (2) all Defendants are liable as co-fiduciaries. (Compl. ¶¶ 260-79.) “[T]hese secondary claims fail if plaintiffs are unable to survive Rule 12(b)(6) as to their primary claims.” Gearren,
III. CONCLUSION
For the forgoing reasons, Defendants’ Motion to Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure is GRANTED. Plaintiffs may file a second amended complaint that presents adequate allegations of their disclosure claim against Jamesley and their theories of secondary liability. All other claims are dismissed with prejudice because Plaintiffs are “unable to demonstrate that [they] would be able to amend [their] complaint in a manner which would survive dismissal.” Beachum v. AWISCO New York Corp.,
Any amended complaint shall be filed within 45 days of the date of this Order. Failure to do so shall result in dismissal of this case in its entirety without further Order of the Court.
SO ORDERED.
Notes
. In their Complaint, Plaintiffs allege the Class Period began January 1, 2008. In a letter dated April 26, 2012, Plaintiffs notified the Court that they wished to limit the Class Period from September 2008 through December 31, 2008, indicating that they could submit a redlined version of the Complaint. After the Court requested a redlined copy, Plaintiffs submitted a letter to the Court, dаted November 20, 2012, indicating that they wanted the Class Period to begin on September 15, 2008.
. Plaintiffs clarified, in a November 20, 2012 letter to the Court, that their claim for breach of the duty of candor is limited to only Morgan Stanley and Jamesley.
. On September 15, 2008, Morgan Stanley executives informed the Federal Reserves that a loss of $21.1 billion during that two-week period would be catastrophic. (Compl. ¶ 164.)
. Plaintiffs explain: "As of September 29, 2008, after borrowing $107.1 billion from the Federal Reserve ..., Morgan Stanley reported $99.8 billion of liquidity. Thus, without the $107.1 billion in emergency loans from the Federal Reserve, Morgan Stanley would have becomе illiquid sometime between September 15, 2008 ... and September 29, 2008.” (Compl. ¶ 200.)
. Plaintiffs claim Morgan Stanley is a named fiduciary because the Plans’ named fiduciary is "Morgan Stanley's Global Director of Human Resources.” That is not the case. Morgan Stanley,
. The 401(k) Plan explains: "The Morgan Stanley Stock Fund [“MSSF”] shall be invested and reinvested exclusively in Morgan Stanley Stock, except that pending investments in Morgan Stanley Stock, amounts held in the [MSSF] may be invested and reinvested temporarily in interest-bearing, short-term investments ... as the Trustee deems suitable.... The [MSSF] may be liquidated, removed or closed as an Investment Fund only by amend- ' ment to the Plan.” Compare 401(k) Plan § 8(b)(ii)(A) with In re Citigroup Erisa Litig., No. 07 Civ. 9790,
. Plaintiffs argue that, had Company contributions been made in cash, the Plan Administrator could have held the cash without investing in Company stock. (Pis.’ Opp’n 19-20.) However, the ESOP provides no such discretionary authority, instead merely allows the Plan Administrator to suspend, delay, or limit a participant’s transfers into or out of Company stock if it is necessary or advisable. (ESOP § 7.04(d)(i).) It does not prevent a cash сontribution from being invested in the MSSF, as required by the ESOP. (See ESOP § 4.01; see also SPD, at 6.)
. Although not dispositive, because Morgan Stanley's share price has rebounded since the end of the Class Period, the presumption of prudence is reinforced. See Fisher,
. As discussed above, Morgan Stanley never was in dire circumstances during the Class Period; therefore, Plaintiffs claim against Morgan Stanley, MS & Co., the MS & Co. Board, and Mack fails.