In Re: MUTUAL FUNDS INVESTMENT LITIGATION
No. 06-2003, No. 06-2176, No. 06-2177
United States Court of Appeals for the Fourth Circuit
June 16, 2008
NIEMEYER, Circuit Judge
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
In Re: MUTUAL FUNDS INVESTMENT LITIGATION
CRAIG WANGBERGER, оn behalf of himself and all others similarly situated, Plaintiff-Appellant, v. JANUS CAPITAL GROUP, INCORPORATED; PLAN ADVISORY COMMITTEE, Defendants-Appellees, and CHARLES SCHWAB TRUST COMPANY; ADVISORY COMMITTEE; STEVEN L. SCHEID; G. ANDREW COX; PAUL F. BALSER, Defendants.
SECRETARY OF LABOR, Amicus Supporting Appellant, CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA, Amicus Supporting Appellees.
No. 06-2003
MIRIAM CALDERON, individually and on behalf of all others similarly situated, Plaintiff-Appellant, v. AMVESCAP NATIONAL TRUST COMPANY; AVZ INCORPORATED, Defendants-Appellees, and AMVESCAP PLC; AMVESCAP RETIREMENT, INCORPORATED; ROBERT F. MCCULLOUGH; GORDON NEBEKER; JEFFREY G. CALLAHAN; INVESCO FUNDS GROUP, INCORPORATED; RAYMOND R. CUNNINGHAM; DOES 1-100, Defendants.
SECRETARY OF LABOR, Amicus Supporting Appellant, CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA, Amicus Supporting Appellees.
No. 06-2176
JESSICA CORBETT, on behalf of herself and all others similarly situated, Plaintiff-Appellant, and AURORA HENAO; BARBARA WALSH, Plaintiffs, v. MARSH & MCLENNAN COMPANIES, INCORPORATED; PUTNAM INVESTMENTS, LLC; J. W. GREENBERG; FRANCIS N. BONSIGNORE; WILLIAM L. ROSOFF; SANDRA S. WIJNBERG, Defendants-Appellees, and PUTNAM INVESTMENTS TRUST; NORMAN BERHAM; LEWIS W. BERNARD; RICHARD H. BLUM; FRANK J. BORELLI; ROBERT F. ERBURU; RAY J. GROVES; GEORGE PUTNAM; JOHN D. ONG; THE RIGHT HONORABLE LORD LANG OF MONKTON; ADELE SMITH SIMMONS; A.J.C. SMITH; PETER COSTER; LAWRENCE J. LASSER; DAVID A. OLSEN; JOHN T. SINNOTT; FRANK J. TASCO; STEPHEN R. HARDIS; SAXON RILEY; GWENDOLYN S. KING; W.R.P. WHITE-COOPER; MATHIS CABIALLAVETTA; CHARLES A. DAVIS;
No. 06-2177
SECRETARY OF LABOR, Amicus Supporting Appellant, CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA, Amicus Supporting Appellees.
Appeals from the United States District Court for the District of Maryland, at Baltimore. J. Fredеrick Motz, District Judge. (1:05-cv-02711-JFM; 1:04-cv-00824-JFM; 1:04-cv-00883-JFM)
Argued: December 5, 2007
Decided: June 16, 2008
Before NIEMEYER and SHEDD, Circuit Judges, and Leonie M. BRINKEMA, United States District Judge for the Eastern District of Virginia, sitting by designation.
Reversed and remanded by published opinion. Judge Niemeyer wrote the opinion, in which Judge Shedd and Judge Brinkema joined.
ARGUED: Samuel K. Rosen, HARWOOD & FEFFER, L.L.P., New York, New York, for Appellants. Kristen Lindberg, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Amicus Supporting Appellants. Mark Andrew Perry, GIBSON, DUNN & CRUTCHER, L.L.P., Washington, D.C., for Appellees. ON BRIEF: Paul Blankenstein, Dustin K. Palmer, GIBSON, DUNN & CRUTCHER, L.L.P., Washington, D.C., for Appellees Janus Capital Group, Incorporated, and Janus Plan Advisory Committee; Robert N. Eccles, Gary S. Tell, Shannon M. Barrett, O‘MELVENY & MYERS, L.L.P., Washington, D.C., for Appellees Marsh & McLennan Companies, Incorporated, Putnam Investments, L.L.C., J. W. Greenberg, Francis N. Bonsignore, William L. Rosoff, and Sandra S. Wijnberg; Maeve L. O‘Connor, Maura K. Monaghan, DEBEVOISE & PLIMPTON, L.L.P., New York, New York, for Appellees Amvescap National Trust Company and AVZ Incorporated. Howard M. Radzely, Solicitor of Labor, Timothy D. Hauser, Associate Solicitor for Plan Benefits Security, Karen L. Handorf, Counsel for Appellate and Special Litigation, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Amicus Supporting Appellants. Robin S. Conrad, Shane Brennan, NATIONAL CHAMBER LITIGATION CENTER, Washington, D.C.; Carol Connor Flowe, Nancy S. Heermans, Caroline Turner English, ARENT FOX, L.L.P., Washington, D.C., for Amicus Supporting Appellees.
OPINION
NIEMEYER, Circuit Judge:
The plaintiffs, each of whom purports to represent a class of others similarly situated, are former employees who maintained accounts in § 401(k) defined contribution retirement plans sponsored by their employers and who, upon leaving employment, voluntarily sought and obtained full distribution of the vested benefits in their respective accounts. They commenced these actions under the Employee Retirement Income Security Act of 1974 (“ERISA“) against the fiduciaries of their respective retirement plans, for breach of their fiduciary
The defendants filed motions to dismiss the plaintiffs’ claims, challenging their standing to assert the claims under both ERISA and Article III of the Constitution. The district court granted their motions, finding that the plaintiffs did not fall within the class of individuals authorized to sue under
Because we conclude that cashed-out former employees remain “participants” in defined contribution retirement plans for purposes of
I
When Craig Wangberg,1 Miriam Calderon, Jessica Corbett, and Anita Walker retired from their respective employments, they vоluntarily “cashed out” their vested interests in defined contribution retirement plans that their employers had sponsored. “Defined contribution” plans are plans that provide for individual accounts and that define the participants’ benefits as the contents of their accounts, including contributions (from both participants and employers), as
Market timing can harm mutual fund investors by causing mutual funds to manage their portfolios in a manner that is disadvantageous to long-term shareholders. Disclosure Regarding Market Timing, 68 Fed. Reg. at 70,404. For example, investment advisors might maintain a larger percentage of fund assets in cash or liquidate certain portfolio securities prematurely to meet higher levels of redemptions due to market timing activity occurring within the fund. Id. “It would make little sense for a fund manager to invest in assets with significant long-term potential but high short-term volatility if a market timer‘s redemptions could force the quick sale of fund assets.” Pimco, 341 F. Supp. 2d at 458. Moreover, market timing can “increas[e] trading and brokerage costs, as well as tax liabilities, incurred by a fund and spread across all fund investors.” Id.
Mаrket timing can be especially problematic when it occurs in mutual funds that invest in overseas securities because the time zone differences allow market timers to purchase shares of such funds “based on events occurring after foreign market closing prices are established, but before the fund‘s NAV calculation.” Disclosure Regarding Market Timing, 68 Fed. Reg. at 70,403. Prior to the daily NAV calculation, which in the United States generally occurs at or near the closing time of the major U.S. securities markets, the fund
The harm that market timing can cause to the interests of investors, especially long-term investors, has led many mutual funds to adopt рolicies and to impose fees intended to limit market timing within their funds. It has also led to increased regulatory action by the Securities and Exchange Commission. See, e.g., Disclosure Regarding Market Timing, 68 Fed. Reg. at 70,402. In addition, in 2003, both state and federal regulators began investigating mutual funds that allowed the practice. These investigations led to SEC-sponsored settlements totaling more than $3.5 billion paid by investment advisors to mutual funds in approximately 20 mutual fund complexes. In the wake of this regulatory activity, hundreds of civil actions alleging abusive mutual fund market timing were filed by mutual fund investors and participants in employee retirement plans.
The civil actions concerning mutual fund market timing, including the four cases appealed to us, were transferred by the Judicial Panel on Multidistrict Litigation to three judges in the District of Maryland for coordinated pretrial proceedings. See In re Janus Mut. Funds Inv. Litig., 310 F. Supp. 2d 1359, 1361-62 (J.P.M.L. 2004).
The plaintiffs in the four cases initially before us filed class action claims against their employers and other fiduciaries of their defined contribution retirement plans, which had invested in mutual funds allowing market-timing activity. At the time they commenced these actions, none of the plaintiffs remained employed by the companies sponsoring their plans, nor did any continue to have open accounts
The district court initially denied the defendants’ motions to dismiss in three of the cases, finding that the cashed-out former-employee plaintiffs in those cases had standing to bring their ERISA claims. Corbett v. Marsh & McLennan Cos., Inc., No. MDL-15863, Civ. JFM-04-0883, 2006 WL 734560 (D. Md. Feb. 27, 2006); Calderon v. Amvescap PLC, No. MDL-15864, Civ. JFM-04-0824, 2006 WL 735006 (D. Md. Feb. 27, 2006); Walker v. Mass. Financial Servs. Co., No. MDL-15863, Civ. JFM-04-1758, 2006 WL 734796 (D. Md. Feb. 27, 2006). When it came time to decide the motion to dismiss in Wangberg‘s case, however, the district court reached a contrary conclusion and granted the motion, concluding that cashed-out former employees are not afforded the right to sue under
My ruling . . . should not be read as implying that former participants do not have standing to sue Plan fiduciаries or the Plan itself in the event that a Plan obtains a recovery in an investor class action . . . and then chooses not to distribute a pro rata portion of the recovery to former participants whose retirement accounts held shares in the relevant mutual funds during the class period. If that were to occur, the focus of litigation instituted by a former Plan participant would be upon how to allocate a sum certain among various beneficiaries with conflicting claims, not upon determining the fiduciaries’ asserted liability for making imprudent investments and, in the event of a finding of liability reducing to a set amount alleged investment losses of inherently inchoate value. These questions are quite different from one another, and former participants may have the right to assure that the Plan or its fiduciaries distribute to them, rather than giving to others or retaining for the Plan itself, benefits that in fairness and good conscience are due to them.
Id. at *n.2.
The plaintiffs in each of the four cases appealed, and we consolidated their appeals to decide the single issue of whether the plaintiffs have statutory and constitutional standing. Subsequently, the parties
LaLonde v. Textron Inc., 418 F. Supp. 2d 16 (D.R.I. 2006); In re Admin. Comm. ERISA Litig., No. C03-3302 PJH, 2005 WL 3454126 (N.D. Cal. Dec. 16, 2005). The decision in Graden was later reversed by the Third Circuit, 496 F.3d 291, 303 (3d Cir. 2007), cert. denied, 128 S. Ct. 1473 (2008).
II
Arguing from the language of ERISA, the plaintiffs cоntend that the district court erred because “participants’ benefits in a ‘defined contribution’ plan are vested in all contributions and earnings and any other plan assets allocated to their individual accounts.” Because “the Plans’ assets (including recovery from loss) are considered the benefits of the Plans’ participants,” when each plaintiff took the distribution of his or her account, the account “had lost value due to Defendants’ actions, [and therefore] each has a colorable claim to the appropriate increase in his or her vested benefit,” giving each standing to assert that claim.
The defendants contend that because the plaintiffs have already been paid their full contributions, they do not have a “colorable claim to vested benefits,” citing Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117-18 (1989). They argue that benefits are defined in the present as “the amount contributed to the participant‘s account” as well as “any income, expenses, gains and losses which may be allocated to such participant‘s account.”
Here, plaintiffs have already received the entirety of the net contributions to their accounts, and thus have no claim (much less a “colorable” one) that they are owed some or all of those contributions. Upon termination of their employment, plаintiffs received lump sum distributions of their respective contributions net of expenses, etc. that is, all benefits then vested. They make no claim that these amounts were miscalculated or misstated. For this reason, plaintiffs err in arguing that “[i]t is the claim to that amount that must be colorable[,] not the amount itself.” Plaintiffs have no colorable claim to any amount of vested benefits.
We begin with the relevant texts, noting that
Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.
any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employeеs of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.
After the district court entered its judgments in these cases, denying the plaintiffs standing, the Supreme Court decided LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct. 1020 (2008), in which the Court took Firestone a step further and held that ERISA authorized a cashed-out former employee to sue his former employer and the defined contribution plan for breach of fiduciary obligation that caused a loss in his individual plan account, to claim “any profit which would have accrued tо the [plan] if there had been no breach of trust.” Id. at 1024 n.4 (internal quotation marks omitted). While plaintiff LaRue had argued in the district court that he only wanted “the plan to properly reflect that which would be his interest in the
Misconduct by the administrators of a defined benefit plan will not affect an individual‘s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan.
128 S. Ct. at 1025 (emphasis added). But in a defined contribution plan, the Court pointed out, the benefit is the participant‘s interest in an individual account, and the “misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.” Id. at 1025. The Court noted that the diminishment of plan assets payable through individual accounts was “the kind of harm[ ] that concerned the draftsmen of
[A]lthough § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant‘s individual account.
We believe that the holding in LaRue controls the outcome here.
Thus, while Firestone held that former employees who maintained active retirement accounts with funds invested in them would qualify as “participants” under ERISA, LaRue took the short additional step to conclude that even a former employee who cashed out his vested benefits in a plan would remain a “participant,” so long as (1) the fiduciaries are “chargeable with . . . any profit which would have accrued to the [plan] if there had been no breach of trust,” LaRue, 128 S. Ct. at 1024 n.4 (omission in original) (internal quotation marks omitted), and (2) the participant has a claim that the profits would have increased the benefit to which he would have been entitled had the breach not occurred, id. at 1025. See also id. at 1026 n.6; Harzewski v. Guidant Corp., 489 F.3d 799, 804-05 (7th Cir. 2007); Graden v. Conexant Sys., Inc., 496 F.3d 291, 296-97 (3d Cir. 2007), cert. denied, 128 S. Ct. 1473 (2008); Bridges v. Am. Elec. Power Co., 498 F.3d 442, 445 (6th Cir. 2007). As the court in Graden stated, “[i]f the plaintiff colorably claims that under the plan and ERISA he was entitled to more than he received on the day he cashed out, then he presses a claim for vested benefits and must be accorded participant standing.” 496 F.3d at 300.
As in LaRue and the courts of appeals’ opinions cited, the plaintiffs’ claims here are based on allegations that breaches of fiduciary duties diminished the values of their individual accounts and that the plans entitled them to more than they receivеd on the days they cashed out of them. Had the fiduciaries acted in accordance with their duties, the plaintiffs claim, their accounts would have held more money on the days they cashed out. Thus, because plan documents and ERISA entitled them to more money on the days they cashed out, their claims are for additional benefits, and not for damages as the district court held.
The defendants’ argument that the plaintiffs took full distributions of the contents of their accounts at the time they cashed out is persuasively answered by the discussion in Harzewski:
Suppose [the defendant] had stolen half the money in a plan participant‘s retirement account and a suit by the participant
resulted in a judgment for that amount; the suit wоuld have established the retiree‘s eligibility for the larger benefit. There is no difference if instead of stealing the money from the account, [the defendant] by imprudent management caused the account to be half as valuable as it would have been under prudent management.
489 F.3d at 804. Taking the Seventh Circuit‘s analogy in Harzewski a step further, imagine that instead of stealing half the money in a plan participant‘s retirement account, a defendant fiduciary steals all of the money in the account. The retiree would not cease to be a “participant” merely because the account balance equaled zero as a result of the defendant‘s improper conduct. Likewise, when the account balance is reduced because of a fiduciary‘s mismanagement, causing the balance to reach zero before a retiree receives his full benefits due, the account holder remains a “participant.” Thus, a retiree‘s eligibility to obtain plan benefits does not end when his account balance becomes zero, as the defendants suggest. “The benefit in a defined-contribution pension plan is, to repeat, just whatever is in the retirement account when the employee retires or whatever would have been there had the plan honored the employee‘s entitlement, which includes an entitlement to prudent management.” Id. at 804-05.
In short, we conclude thаt participants in defined contribution plans controlled by ERISA have colorable claims against the fiduciaries of their plans when they allege that their individual accounts in the plans were diminished by fraud or fiduciary breaches and that the amounts by which their accounts were diminished constitute part of the participants’ benefits under the plans. The plaintiffs’ claims in this case are for such additional benefits, not damages, and they therefore have standing to sue under
III
Because we conclude that the plaintiffs have “statutory standing” to bring their claims, we must also now decide whether they have constitutional standing, as required by Article III of the U.S. Constitution, for it is conсeivable that a person is a member of the class given authority by a statute to bring suit but nonetheless has not, for example, sustained injury that would be redressable by a favorable decision
Article III standing is a fundamental, jurisdictional requirement that defines and limits a court‘s power to resolve cases or controversies. See Steel Co. v. Citizens for a Better Env‘t, 523 U.S. 83, 102 (1998); Emery v. Roanoke City Sch. Bd., 432 F.3d 294, 298 (4th Cir. 2005). And “the irreducible constitutional minimum of standing” consists of injury-in-fact, causation, and redressability. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992); White Tail Park, Inc. v. Stroube, 413 F.3d 451, 458 (4th Cir. 2005).
In this case, the first two elements are not at issue: If the plaintiffs’ allegations are true, they suffered injury in that their retirement accounts were worth less than they would have been absent the breach of duty, and this injury was caused, as the plaintiffs have alleged, by the fiduciaries’ misconduct. The defendants contend, however, that the plaintiffs have not satisfied the third element of constitutional standing — that their injury be redressable by a favorable decision in this litigation.
Defendants contend that even if the plaintiffs can prove the merits of their case, it is wholly speculative whether any recovery by the plan would pass through to the plaintiffs’ individual accounts. Yet, for an injury to meet the redressability standard, “it must be ‘likely,’ as opposed to merely ‘speculative,’ that the injury will be ‘redressed by a favorablе decision.‘” Lujan, 504 U.S. at 561 (emphasis added) (quoting Simon v. Eastern Ky. Welfare Rights Org., 426 U.S. 26, 38, 43 (1976)). The defendants rest their argument that redress for the plaintiffs’ injury is speculative on two points.
First, they assert that whether the plaintiffs recover any money in these cases is “entirely dependent on the discretionary actions of third parties (retirement plan fiduciaries)” and that therefore Article III standing cannot be met, citing ASARCO, Inc. v. Kadish, 490 U.S. 605 (1989). In ASARCO, the plurality concluded that the redressability requirement had not been met because even if the plaintiff association prevailed, “[w]hether the association‘s claims of economic injury would be redressed by a favorable decision [depended] on the unfet-
In these cases before us, the plaintiffs have made the plan fiduciaries parties to the actions, suing all of the fiduciaries that controlled the investment decisions of the plans’ funds. As applicable to their respective plans, the plaintiffs sued the plan sponsors, the plan administrators, the plan trustees, and members of advisory investment committees, and they alleged that these fiduciaries knew that the mutual funds in which they were investing allowed market timing activity and that this activity favored the market timers at the expense of long-term investors, such as the plaintiffs. They asserted that because of imprudent investment decisions by the fiduciaries, their individual accounts in the respective plans were diminished.
Unlike the circumstances in ASARCO and the other similar cases cited by the defendants, the fiduciaries are in fact before the court in these cases and can respond to court оrders to redress wrongs.
The defendants’ second point in support of their redressability argument is that “[p]laintiffs have failed to adduce any facts showing that the plan fiduciaries are likely to distribute any award in this action to former employees, nor have they demonstrated that the district court would have the authority to order the plan fiduciaries to do so in this case.” They point out that recovery by the plans for fiduciary misconduct would become plan assets over which the fiduciaries would have full discretion, and that their discretion must be exercised “solely in the interest of the participants and beneficiaries” and “for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.”
This traditional argument based on Russell, however, rests on ERISA jurisprudence governing defined benefit plans, in which the plan was paramount and once a participant was paid the defined benefit, only the plan or those with current plan accounts had an interest in recovering losses caused by fraud or other misconduct. As the Supreme Court pointed out in LaRue, the early ERISA cases, including Russell, were decided as they were because the plaintiffs in those cases were participants in defined benefit plans so that when the plan was injured, it did not necessarily affect a participant‘s defined benefit. Once the plaintiff received the defined benefit, he could receive no more. As the LaRue Court explained, “A ‘defined benefit plan’ . . . generally promises the participant a fixed level of retirement income, which is typically based on the employee‘s years of service and compensation,” LaRue, 128 S. Ct. at 1022 n.1, and a plaintiff who received a defined benefit could receive no more even if the plan had been defrauded, id. at 1024-25. The LaRue Court pointed out, however, that since Russell, things have changed, and today “[d]efined contribution plans dominate the retirement plan scene.” Id. at 1025 (emphasis added). “[A] ‘defined contribution plan’ or ‘individual account plan’ promises the participant the value of an individual account at retirement, which is largely a function of the amounts contributed to that account and the investment performance of those contributions.” LaRue, 128 S. Ct. at 1022 n.1 (emphasis added). As a consequence, any fraud that diminishes the value of a participant‘s individual account is a harm for which the participant may sue under
[A]lthough § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant‘s individual account.
Id. at 1026 (emphasis added). Thus, the defendants’ argument that only the entire plan has an interest in the recovery is defeated by the
Of course, a participant suing to recover benefits on behalf of a defined contribution plan for breаch of a fiduciary duty is still not entitled to have monetary relief paid directly to him. See LaRue, 128 S. Ct. at 1026. The recovery is obtained by the plan — even if it is for injury only to a particular individual account — because the aggregation of individual accounts defines the assets of the plan. See
The defendants’ argument that restoration of individual accounts would be speculative following any recovery in these cases thus fails to recognize that in a defined contribution plan, it is the plan assets in the individual accounts that are restored — less, of course, fees and expenses incurred. Accordingly, the redressability problem that arises in defined benefit plans does not exist with respect to defined contribution plans.4
Finally, we should note that while the LaRue Court only decided statutory standing in its opinion, it did not ignore constitutional stand-
In sum, if we take the plaintiffs’ cases as they come to us and therefore accept for now the allegations of the complaints as true — that thе defendants breached fiduciary obligations imposed by
REVERSED AND REMANDED