In re REGIONS MORGAN KEEGAN ERISA LITIGATION.
Terry Hamby, et al., Plaintiffs,
v.
Morgan Asset Management, Inc., et al., Defendants.
United States District Court, W.D. Tennessee, Western Division.
*948 Lynn L. Sarko, Derek W. Loeser, Margie E. Wetherald, Sarah Kimberly, Keller Rohrback L.L.P., Seattle, WA, Interim Co-Lead Counsel, Counsel for Robert Harrison and Caesar Smith.
Ellen M. Doyle, William T. Payne, John Stember, Stephen M. Pincus, Joel R. Hurt, Pamina Ewing, Stember Feinstein Doyle & Payne, LLC, Pittsburgh, PA, Interim Co-Counsel-Lead Counsel, Counsel for Terry Hamby & Nancy Jackson, (Local Counsel Jon C. Goldfarb-Wiggins, Child, Quinn & Pantazis, LLC).
Jeffrey P. Harris, Elizabeth Hutton, Statman, Harris & Eyrich, LLC, Cincinnati, OH, Counsel for Robert Harrison and Caesar Smith.
Todd M. Schneider, Mark T. Johnson, Schneider Wallace Cottrell Brayten Konecky, LLP, San Francisco, CA, Counsel for Plaintiff Gary Shamblin.
John C. Goldfarb, Wiggins, Childs, Quinn & Pantazis, LLC, Birmingham, AL, Co-Counsel for Terry Hamby & Nancy Jackson.
W. Brantley Phillips, Matthew M. Curley, Michael L. Dagley, Bass Berry & Sims PLC, Nashville, TN, Counsel for Morgan Asset Management, Inc. & Morgan Keegan & Company, Inc.
Michael A. Brady, Shepherd B. Tate, Bass Berry & Sims PLC, Memphis, TN, Counsel for Morgan Asset Management, Inc. & Morgan Keegan & Company, Inc.
Tom Fitzgerald, Christopher J. Rillo, Thomas S. Gigot, Sara Zumwalt, Groom Law Group, Chartered, Washington, DC, Counsel for Regions Financial Corporation, Regions Bank, Ken Alderman, George W. Bryan, John Buchanan, Earnest W. Deavenport, Jr., David B. Edmonds, Irene Esteves, Christopher Glaub, O.B. Grayson Hall, Jr., Tim Laney, Susan W. Matlock, Claude Nielsen, C. Dowd Ritter, David Rupp, Jill Shelton, Lee K. Styslinger, III, Tom Thompson, David Turner, Barbara H. Watson, William C. Wells, II., Henry Dinken, John Daniel, W. Charles Mayer, III, Ronnie Jackson, Sharon Davis, Sherry Anthony, Martha Ingram, Alan Deer, Candace Bagby, Alton Yother, Tusa McNary, Kemmons Wilson, Jr., E.W. "Rusty" Stephenson, Michael Starnes, Bryan Jordan, Lea Stokes, Susan Martinez, James S.M. French.
Peter S. Fruin, Jeffrey A. Lee, William B. Wahlheim, Jr., Grace R. Murphy, Maynard Cooper & Gale, PC, Birmingham, AL, Counsel for Regions Bank & Reg.
ORDER GRANTING IN PART AND DENYING IN PART DEFEDANTS' MOTIONS TO DISMISS
SAMUEL H. MAYS, JR., District Judge.
Before the Court are Defendants' Motions to Dismiss Plaintiffs' Consolidated Supplemental Class Action Complaint for Violation of ERISA. Defendants Morgan Keegan & Company, Inc. ("Morgan Keegan") and Morgan Asset Management ("MAM") filed a Motion to Dismiss on April 10, 2009. Also on April 10, 2009, Regions Bank, Regions Financial Corporation ("Regions"), and 19 individuals, *949 ("Individual Regions Defendants"), filed a Motion to Dismiss ("Regions Motion").[1] Additional individual Defendants filed motions to dismiss on April 15, 2009,[2] April 22, 2009,[3] May 5, 2009,[4] May 26, 2009,[5] and July 1, 2009.[6] All Defendants have filed motions to dismiss and each of the motions incorporates and adopts the April 10, 2009 Regions Motion. Plaintiffs responded in opposition on June 11, 2009. Defendants filed replies to Plaintiffs' response on July 23, 2009 and August 14, 2009. For the following reasons, Defendants' motions are GRANTED IN PART and DENIED IN PART.
I. Jurisdiction
The Court has jurisdiction to adjudicate federal claims under 28 U.S.C. § 1331 and jurisdiction over ERISA claims under 29 U.S.C. § 1132.
II. Background
Plaintiffs are six current or former employee participants in Regions sponsored 401(k) retirement plans or their predecessors.[7] Plaintiffs bring this case under the Employee Retirеment Income Security Act of 1974 ("ERISA") based on losses to those Plans. Regions sponsored and administered the three Plans at issue. In April 2008, two of the Plans, the Regions Financial 401(k) Plan (the "Legacy Plan") and the AmSouth Bancorp Thrift Plan (the "AmSouth Plan"), were merged into the third Plan, the Regions Financial Corporation 401(k) Plan (the "Merged Plan").
Defendants are various fiduciaries and parties in interest to the Plans, including Regions, Regions Bank, Morgan Keegan, and MAM.[8] The Consolidated Supplemental Class Action Complaint for Violation of ERISA (the "Complaint")[9] identifies distinct groups of fiduciaries of the Plans and describes their fiduciary duties based on the Plan documents. The Complaint groups Defendants as follows:
Regions has at all applicable times been the Plan Sponsor of all three Plans with the power *950 to appoint and remove the Trustee and the Plan Administrator for each Plan. In that capacity, Regions exercises fiduciary discretion and authority. (Amended Complaint ¶¶ 96-99.) ("Compl.") Regions is the Trustee to the Plans, as that term is defined in 29 U.S.C. § 1103, and exercises fiduciary discretion and authority in that capacity. (Id. ¶¶ 100-01.)
The Compensation Committee Defendants are a committee comprised of Regions' Board of Directors with the authority to review the Plans, select and appoint administrators, trustees, named fiduciaries, actuaries, and investment managers. (Id. ¶¶ 102-04.)
The Legacy Plan Benefits Management Committee Defendants are named fiduciaries of the Legacy Plan, as that term is defined under ERISA, with the authority to manage and control the operation and administration of the Plan. (Id. ¶ 105.) They have the responsibility for communicating with participants in a Plan-wide and uniform manner and for selecting and monitoring the investment funds in the Legacy Plan. (Id. ¶¶ 106-07.)
The Legacy Plan Benefit Administration Committee Defendants are named fiduciaries for the investments made by the Legacy Plan. (Id. ¶ 109.)
The "Additional Defendants" to each Plan include those persons with authority to administer and construe the respective Plan, and appoint and remove members of the Compensation Committee. (Id. ¶¶ 49, 52, 56, 111-13, 117-19.)
The AmSouth Thrift Plan Benefits Committee Defendants are named fiduciaries to the Am-South Plan and have responsibility for selecting and monitoring the investment funds within the Plan. (Id. ¶¶ 114-16.)
The Regions 401(k) Plan Benefits Management Committee Defendants are the named fiduciaries and Plan Administrators to the Merged Plan with the authority and responsibility to manage and cоntrol the operation and administration of the Merged Plan. (Id. ¶¶ 120-24.)
The Regions 401(k) Plan Investment Committee Defendants have the responsibility delegated by the Regions 401(k) Benefits Management Committee to select and monitor the funds in the Merged Plan. (Id. ¶¶ 125-27.)
Plaintiffs allege that each of them is or was a participant in the Merged Plan, the Legacy Plan, and/or the AmSouth Plan. Each Plaintiff also alleges that he or she chose to invest in the Plans' Employees Stock Ownership Plan ("ESOP") Fund, in one or more of the Regions Morgan Keegan ("RMK") Select Funds, or in some combination of those Funds. (Id. ¶¶ 32-37.) Plaintiffs further allege that the Plans suffered losses because of investments made through the ESOP Funds and the RMK Select Funds. (Id. ¶¶ 497-99.) In their fifteen-count Complaint, Plaintiffs contend that various of the four corporate and 37 individual Defendants named in the Complaint are personally liable under ERISA § 409, 29 U.S.C. § 1109, and are obligated to restore the alleged investment losses or to disgorge any profits earned in *951 violation of ERISA requirements. (Compl. ¶ 26.)
Counts I-V, the "Company Stock Subclass Allegations," allege that Defendants violated ERISA by offering Regions stock as an investment alternative during the Company Stock Subclass Period, January 1, 2007 to present. Plaintiffs allege that, throughout this period, Defendants failеd to remove Regions stock as an investment alternative and divest the Plans of stock although they knew or should have known it was not a prudent investment. (Id. ¶ 152-231.) To support these claims, Plaintiffs cite seven instances of "improper and extremely risky business activities in which Regions engaged." (Plaintiffs' Response to Regions Defs.' Motion 5.) ("Pl.'s Resp. to Regions Defs.") First, Plaintiffs allege that Regions built a risky and undiversified portfolio of residential and commercial loans that were heavily concentrated in overinflated markets, thus exposing Regions to large losses. (Compl. ¶¶ 152-63.) Second, Plaintiffs allege that Regions failed to increase its loan loss reserves commensurate with its risky lending activities, which artificially inflated Regions' stock price and made it an imprudent investment alternative. (Compl. ¶¶ 164-176.) Third, the Complaint alleges that Regions' undiversified and large wager on subprime, mortgage-backed securities ("MBS") made Regions stock an extremely risky investment alternative. (Id. ¶¶ 184-189.) Fourth, Plaintiffs allege that Regions failed to employ prudent credit risk management in its home equity lending. (Id. ¶¶ 177-183.) Fifth, Plaintiffs allege that Regions violated Generally Accepted Accounting Principles ("GAAP") by failing to measure and report its goodwill properly until it was forced to take a $6 billion write-down in the Fourth Quarter 2008. (Id. ¶¶ 196-99.) Sixth, Plaintiffs allege that Regions' off-balance sheet lending activities of over $41 billion exposed the company to increased risk of loss, making Regions' stock an imprudent Plan investment. (Id. ¶¶ 190-95.) Seventh, Plaintiffs allege that Regions' auction rate securities ("ARS") activities made company stock an imprudent investment for the Plans. (Id. ¶¶ 200-02.)
Counts VI-X, the "Bond Fund Subclass Allegations," allege that Defendants violated ERISA by offering the RMK Select Bond Funds (the "Bond Funds") as investment alternatives throughout the Bond Fund Subclass Period, January 1, 2007 to the present. (Id. ¶¶ 232-68.) The Bond Fund Subclass includes "those Plan participants whose Plan accounts were invested in the various RMK Select Bond Funds, which were investment alternatives for the Legacy and Regions 401(k) Plans." (Id. ¶ 5.) Plaintiffs allege that during the Bond Fund Subclass Period, despite their stated low to moderate risk design, the Bond Funds held portfolios of high risk assets, including low level tranches of subprime MBS, that exposed the Bond Funds to huge losses and made it imprudent for Defendants to continue to offer the Bond Funds as Plan investment options. (Id. ¶ 224.) To support this allegation, Plaintiffs note that the RMK Select Intermediate Bond Fund declined in value from $9.94 to $0.39 a share from January 1, 2007 to February 19, 2009. (Id. ¶ 23.) Plaintiffs allege that Defendants knew or should have known of the Bond Funds' mismanagement.
Counts XI-XV, the "Excessive Fee Subclass Allegations," allege that Defendants violated ERISA by offering the RMK Select Funds to the Plans as an investment alternative. Plaintiffs allege that the RMK Select Funds charged excessive fees and were vehicles for Regions, MAM, and Morgan Keegan to engage in self-dealing at the expense of the Plans and in violation of ERISA's prohibited transaction rules. (Id. ¶¶ 269-314.) The Excessive Fee Sub-class *952 includes "those Plan participants whose Legacy and Regions 401(k) Plan accounts were invested in one or more of the RMK Select Funds." (Id. ¶ 5.) The subclass period extends from May 1, 2003, to the present. (Id.) Plaintiffs allege that the RMK Select Funds offered under the Plans were not selected exclusively for the benefit of the Plan participants, but because of the income, fees, and other benefits they would yield to Regions and its subsidiaries and affiliates. (Id. ¶ 88.)
III. Standard of Review
In addressing a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), the Court must construe the complaint in the light most favorable to the plaintiff and accept all well-pled factual allegations as true. League of United Latin Am. Citizens v. Bredesen,
IV. Analysis
A. Company Stock Subclass Allegations
In Counts I-V, Plaintiffs assert claims on behalf of all participants in the Plans whose accounts were invested in Regions common stock at any time between January 1, 2007 and the present. Thе core claims of this subclass are Count I, the Prudence Claim, and Count IV, the Disclosure Claim. The remaining claims, Counts II, III, and V, are derivative of the Prudence and Disclosure Claims and will be discussed below in Section IV, D.
1. Count I: The Company Stock Prudence Claim
Count I alleges that Defendants (except Morgan Keegan and MAM) breached their duties of loyalty and prudent care under ERISA §§ 404(a)(1)(A) and (B) by allowing Plan participants to invest in Regions common stock. (Compl. ¶ 334.); see 29 U.S.C. § 1104(a)(1).
Defendants allege that, because the Plans are Employee Stock Ownership Plans ("ESOPs"), they are exempt from various ERISA requirements and Defendants are entitled to a presumption that continuing to allow Plan participants to invest in Regions stock is consistent with ERISA's fiduciary duties. (Regions Defendants' Motion to Dismiss 9.) ("Regions *953 Defs.' Mot.") Defendants argue that the Plans qualify as ESOPs and eligible individual account plans ("EIAPs") under ERISA, and, therefore, that the Plans differ from traditional pension plans. (Id.)
In enacting ERISA, "the crucible of congressional concern was misuse and mismanagement of plan assets by plan administrators." Mass. Mut. Life Ins. Co. v. Russell,
Given this framework, Defendants argue that they are entitled to a legal presumption that an EIAP fiduciary who invests plan assets in employer securities acts prudently and consistently with ERISA. (Region Defs.' Mot. 10-11.) Defendants cite Kuper, which adopts the presumption articulated by the Third Circuit in Moench v. Robertson that a court should "presume that a fiduciary's decision to remain invested in employer securities was reasonable."
Plaintiffs respond that the presumption articulated in Kuper and Moench does not apply because the Plans are not ESOPs or EIAPs, but defined contribution plans in which "the decision to offer Regions common stock as an investment alternative is and has been discretionaryone made by the Plan fiduciaries." (Compl. ¶ 82.) Plaintiffs argue that, because the plans are not ESOPs and do not require company stock as a Plan investment, the Kuper presumption of prudence does not apply. (Pl.'s Resp. to Regions Defs. 16)
The Court cannot resolve this issue on a motion to dismiss. It is improper, on a motion to dismiss, for the Cоurt to apply evidentiary presumptions. See In re AEP ERISA Litig.,
2. Count IV: Company Stock Disclosure Claim
Count IV alleges that members of the Regions Benefits Management Committee and the AmSouth Benefits Committee (the "Committee Defendants") breached their ERISA disclosure duties by failing to provide complete and accurate information about Regions stock that prevented participants from making adequately informed decisions about their retirement savings. (Compl. ¶¶ 365-70.)
ERISA imposes specific and affirmative disclosure obligations relating to pension plans. Plan administrators must provide a Summary Plan Description ("SPD"), a summary annual report, a summary of material modifications, participant benefit statements, and, depending on the nature of the plan, a series of funding and funding-related notices. See 29 U.S.C. §§ 1021-31. Plaintiffs do not allege that any Defendant breached any of the statute's detailed and affirmative disclosure duties with respect to the Plans. Defendants argue that, because Plaintiffs' ERISA claim is not based оn an alleged failure to comply with ERISA's affirmative disclosure duties, Plaintiffs must rely on the common-law duty not to misrepresent, a duty implied from ERISA § 404(a)(1)(A)'s general fiduciary duty of loyalty. (Regions Defs.' Mot. 17.) To maintain a viable misrepresentation claim based on this common-law duty, "a plaintiff must show: (1) that the defendant was acting in a fiduciary capacity when it made the challenged representations; (2) that these constituted material misrepresentations; and (3) that the plaintiff relied on those misrepresentations to their [sic] detriment." James v. Pirelli Armstrong Tire Corp.,
A fiduciary has an obligation to convey complete and accurate information to its beneficiaries. James,
Defendants further argue that Count IV should fail because Plaintiffs fail to sufficiently allege that Defendants were acting in a fiduciary capacity when making the challenged representations. (Regions Defs.' Mot. 17.) Defendants assert that the representations Plaintiffs challenge were all made in Regions' filings with the Securities and Exchange Commission (SEC) or in general press releases, and thus were made in a corporate capacity, not an ERISA fiduciary capacity. (Id. 17-18.) The Complaint states, "the Benefits Management Committee disseminated the Plan documents and related materials which, among other things, incorporated by reference misleading filings which Regions made with the Securities and Exchange Commission ("SEC"), thus converting such materials into fiduciary communications." (Compl. 11106; see also Compl. ¶¶ 122, 221.) Defendants argue that courts within this circuit have held that incorporating SEC filings into ERISA documents does not convert those statements into fiduciary communications. See Shirk v. Fifth Third Bancorp, No. 05-cv-049,
*956 The Court finds the holding in Taylor v. KeyCorp persuasive.
Defendants' final arguments as to Count IV are that Plaintiffs did not properly allege that Plaintiffs relied on any of the representations in question and that Plaintiffs did not allege that Defendants possessed the information Plaintiffs claim should have been disclosed. (Region Defs.' Reply 12, 12 n. 17 (citing James,
B. Excessive Fee Subclass Allegations
Counts XI-XV of the Complaint assert claims on behalf of all participants in the Merged Plan or the Legacy Plan whose Plan accounts were invested in one or more of the RMK Select Funds at any time between May 1, 2003 and the present. These claims allege that the Plans' use of the RMK Select Funds as investment vehicles violated ERISA because those mutual funds were managed or advised by a corporate affiliate (Morgan Keegan or MAM) of the Plans' sponsoring employer (Regions) and trustee (Regions Bank), and allegedly imposed unlawful fee arrangements. The core claims of this subclass are Count XI, the Excessive Fee Prudence Claim, Count XV, the Prohibited Transaction Claim, and Count XIII, the Disclosure Claim. Counts XII and XIV are derivatives of those claims and will be discussed below in Section IV, D.
1. Count XI: The Excessive Fee Prudence Claim
In Count XI, Plaintiffs allege that Defendants (other than Morgan Keegan and MAM) breached ERISA's fiduciary duties of prudence and loyalty by selecting and continuing to offer the RMK Select Funds as Plan investment options. (Compl. ¶¶ 440-453.) Plaintiffs allege that Defendants' self-dealing and revenue sharing *957 corrupted the Plans' fund-selection process; the fiduciaries sold out the participants by choosing and offering proprietary funds to increase revenue to Defendants; the Plans had massive bargaining power that they failed to use to secure lower prices for participants; and all of the mutual fund options the Plans offer are abnormally expensive compared to the 401(k) market. (Compl. ¶¶ 269-309.)
Defendants argue that there is no merit to these allegations because ERISA's regulatory scheme specifically allows a plan sponsor to invest in affiliated mutual funds; that some other funds might have been less expensive is not a basis for Plaintiffs' claims to proceed; and the duty of prudence is a question of process and has nothing to do with the success or failure of investments. (Regions Defs.' Mot. 33-34.) In their reply, Defendants argue that the factual allegations are inadequate to support the excessive fee claims and that Plaintiffs fail to allege facts showing any defect in the process for selecting the investment options. (Regions Defs.' Reply 16-17.)
As discussed above, the general duty of prudence is "an unwavering duty to act both as a prudent person would act in a similar situation and with single-minded devotion to [ ] plan participants and beneficiaries." Gregg v. Transp. Workers of Am. Int'l,
Based on this standard, if fiduciaries imprudently evaluate, select, and monitor a plan's investment options, or do so for any purpose other than the best interest of the plan, they breach their fiduciary duties. See Shirk,
Defendants additionally argue that, because ERISA's scheme allows a plan sponsor to use affiliated mutual funds, the excessive fee prudence claim cannot stand.[11] This claim, however, is separate from the prohibited transaction claims discussed above. Count XI is an excessive fee claim, alleging that the fiduciaries breached their duty by investing imprudently in Regions' proprietary funds, which charged excessive fees, despite available, comparable alternatives, because Defendants acted not for the Plans' sole benefit, but out of Regions' selfinterest. (Compl. ¶¶ 440-53.) Whether Regions violated ERISA's fiduciary duties by imprudently investing Plan assets in the RMK Select Funds, which charged excessive fees, is a separate issue from whether Regions violated the prohibited transaction rules of ERISA. For the above reasons, Defendants' motions to DISMISS count XI are DENIED.
2. Count XIII: The Excessive Fee Disclosure Claim
In Count XIII, Plaintiffs claim that members of the Regions Benefit Management Committee ("RBMC") breached their ERISA disclosure duties by "failing to provide complete and accurate information" about the RMK Select Funds. (Compl. ¶ 470.) In opposition, Defendants reiterate their arguments about the Company Stock Disclosure Claims, asserting that Plaintiffs' Company Stock Disclosure Claims fail to allege any affirmative misrepresentations or failures to comply with ERISA's disclosure rules. For the reasons discussed above in Section IV, A, 2, that argument fails.
Under ERISA, a fiduciary has an obligation to convey complete and accurate information to its beneficiaries. James,
The Complaint alleges that Defendants engaged in prohibited transactions by selecting the RMK Select Funds to earn profit for Regions at the expense of Plaintiffs' retirement investment, which Plaintiffs allege was accomplished through revenue sharing and kickback arrangements. (Compl. 305-09.) The Complaint further alleges that Defendants failed to inform participants adequately: (1) of the risks of investing in the actively-managed RMK Seleсt Funds, (2) that the Funds charged substantially higher fees than "readily available and comparable fund options," and (3) that the Plans paid all fees and expenses related to the investment in the RMK Select Funds. (Id. ¶ 461 a-c.) Plaintiffs have pled facts sufficient to state a claim under Count XIII.[12] Therefore, *959 Defendants' motions to dismiss Count XIII are DENIED.
3. Count XV: The Prohibited Transaction Claim
Count XV of the Complaint alleges that use of the RMK Select Funds as investment options under the Merged and Legacy Plans violated the "prohibited transaction" rules in ERISA § 406, 29 U.S.C. § 1106. (Compl. ¶¶ 487-496.) The prohibited transaction rules in § 406 fall into two subsections: (1) § 406(a) prohibits a plan fiduciary from causing a plan to engage in any of five different kinds of transactions with a "party in interest"[13] to the plan, 29 U.S.C. § 1106(a)(1); (2) § 406(b) prohibits acts of self-dealing by a plan fiduciary and acts that implicate other conflicted interests in a transaction involving the plan or its assets. 29 U.S.C. § 1106(b). The purpose of these rules is "to prohibit transactions that would clearly injure the plan," and "to prevent employee benefit plans from engaging in transactions that would benefit parties in interest at the expense of plan participants and their beneficiaries." See Chao v. Hall Holding Co.,
There are, however, exceptions to these rules. ERISA § 408(b) prоvides that "[t]he prohibitions provided in [§ 406] shall not apply to any of" nineteen types of transactions. 29 U.S.C. § 1108(b). In addition to that list of statutory exemptions, ERISA § 408(a) grants the Secretary of Labor ("DOL") broad authority to create additional administrative exemptions for transactions the DOL finds non-abusive. 29 U.S.C. § 1108(a). Defendants argue that the prohibited transaction claim should be dismissed because the transactions were exempted under the DOL's Prohibited Transaction Exemption ("PTE") 77-3 and because Plaintiffs have not stated a claim under ERISA § 406(a)(1)(C) or ERISA § 406(a)(1)(D).
a. PTE 77-3
Defendants argue that DOL's PTE 77-3 exempts the Merged and Legacy Plans' purchase and sale of shares of the RMK Select Funds from ERISA's prohibited transaction rules. (Regions Defs.' Mot. 27.) PTE 77-3 provides an exemption for the acquisition or sale of shares of a registered open end mutual fund by an "in house" plan. The exemption applies if four conditions are met:
(a) The plan does not pay any investment management, investment advisory or similar fee to such investment adviser, principal underwriter or affiliated person. This condition does not preclude the payment of investment advisory fees by the investment company under the terms of its investment advisory agreement adopted in accordance with section 15 of the Investment Company Act of 1940.
(b) The plan does not pay a redemption fee in connection with the sale by the plan to the investment company of such shares unless (1) such redemption fee is paid only to the investment company, and (2) the existence of such redemption fee is disclosed in the investment company prospectus in effect both at the *960 time of the acquisition of such shares and at the time of such sale.
(c) In the case of transactions occurring more than 60 days after the granting of this exemption, the plan does not pay a sales commission in connection with such acquisition or sale.
(d) All other dealings between the plan and the investment company, the investment adviser or principal underwriter for the investment company, or any affiliated person of such investment adviser or principal underwriter, are on a basis no less favorable to the plan than such dealings are with other shareholders of the investment company.
42 Fed.Reg. 18734, 18735 (Apr. 8, 1977). It is undisputed that conditions (b) and (d) of PTE 77-3 are met, leaving only conditions (a) and (c) at issue. Defendants argue that the fees рaid them were not plan assets and, thus, that PTE 77-3 applies. (Regions Defs.' Mot. 29.) Plaintiffs respond that the Plans paid the investment advisory fees out of plan assets. (Pl.'s Resp. to Regions Defs. 47.)
Plaintiffs note that, although ERISA does not define plan assets, courts have repeatedly decided that the term is to be broadly construed. (Id. at 44) (citing Lowen v. Tower Asset Mgmt.,
Defendants respond that the cases Plaintiffs cite construing plan assets deal with assets other than mutual fund assets. (Regions Defs.' 14-15.) The Court notes, however, that the cases cited determining what constitutеs plan assets and when PTE 77-3 should apply address motions for summary judgment. See Kalda,
In Mehling v. New York Life Ins. Co., the court did dismiss a prohibited transaction claim based on the application of PTE 77-3.
The present case is more analogous to Shirk v. Fifth Third Bancorp, where plaintiffs alleged "that Defendants engaged in self-interested transactions, profited from the management of Plan assets to the detriment of the Plan, its participants, and beneficiaries, and entered into agreements under which the Plan paid unreasonable fees and expenses." No. 05-cv-049,
Plaintiffs have sufficiently pled facts to state a prohibited transaction claim, and the pleadings sufficiently challenge the application of PTE 77-3. (See Compl. ¶¶ 490-93.) In the present procedural posture, it would be inappropriate for the Court to determine whether PTE 77-3 should apply to exempt Defendants from this claim. Therefore, Defendants' motions to DISMISS the prohibited transaction claim as exempted by PTE 77-3 are DENIED.
b. Plaintiffs have stated a claim under ERISA § 406(a)(1)(C)
ERISA § 406(a)(1)(C) prohibits any fiduciary from "caus[ing] the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect ... furnishing of goods, services, or facilities between the plan and a party in interest." 29 U.S.C. § 1106(a)(1)(C). Plaintiffs allege that Defendants violated this section by causing the Plans to invest in the proprietary RMK Select Funds, through which the Plans paid Investment Advisory Fee[s] to MAM for the services it provided to the Plans. (Compl. ¶¶ 310-312.) Plaintiffs also allege that the Plans paid 12b-1 fees, an operational expense, and other related fees for purported services to Morgan Keegan. Id. Plaintiffs argue that these fees and transactions state a claim under § 406(a)(1)(C) because they constitute a "furnishing of ... services ... between the plan ... and part[ies] in interest," MAM and Morgan Keegan. See ERISA § 406(a)(1)(C).
Defendants argue first that Plaintiffs have not adequately stated a claim under § 406(a)(1)(C) because, "in the case of any brokerage, advertising and promotional services provided in exchange for mutual fund fees, Plaintiffs allegе, at most, that such services were provided for the mutual fund, not for the Plans." (Regions Defs.' Mot. 32.) Second, Defendants argue that the Complaint is "devoid of any specific allegation that identifies the `services' that were purportedly given to the Plans as `quid' for the revenue-sharing `quo.'" (Id.)
ERISA § 406(a)(1)(C) prohibits the direct or indirect furnishing of services between the plan and a party in interest. The Complaint alleges that Regions knew or should have known that investment in the RMK Select Funds would cause the Plans to pay for investment advisory services that MAM provided to the Plans and that these fees were unreasonably high. (Compl. ¶¶ 311-13.) Plaintiffs have stated a claim under § 406(a)(1)(C).
c. Plaintiffs have stated a claim under ERISA § 406(a)(1)(D)
ERISA § 406(a)(1)(D) bars any fiduciary "from caus[ing] the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect ... transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan." Defendants argue that this claim cannot stand because the transfer of the assets does not involve "assets of the plan." (Regions Defs.' Motion 31.) Defendants argue that the investment advisory fees, 12b-1 fees, and commissions taken from the Plans' shares in the RMK Select Funds were not paid out of plan assets. For the reasons discussed in this section, the Court cannot accept this argument.
The Complaint alleges that, as a result of the Plans' investment in the RMK Select Funds, Regions caused some of the Plans' assets to be transferred to parties in interest, MAM and Morgan Keegan, as 12b-1 fees, investment advisory fees, and commissions. (Compl. ¶¶ 310-14.) Plaintiffs *962 have pled facts sufficient to state a claim that Defendants violated ERISA § 406(a)(1)(D). For the foregoing reasons, Defendants' motions to DISMISS Count XV are DENIED.
C. Bond Fund Subclass Allegations
Counts VI-X assert claims on behalf of participants in the Merged Plan or Legacy Plan whose accounts were invested in the RMK Select High Income Bond Fund and the RMK Select Intermediate Bond Fund between January 1, 2007 and the present. These claims seek to impose liability under ERISA on various Defendants for alleged losses resulting from Plan-based investments in the RMK Select High Income Fund and the RMK Select Intermediate Bond Fund (together the "Bond Funds"). The core claims are Count VI, the Bond Fund Prudence Claim, and Count IX, the Bond Fund Disclosure Claim. The derivative claims, Counts VII, VIII, and X, are discussed below in Section IV, D.
1. Count VI: The Bond Fund Prudence Claim
In Count VI, Plaintiffs allege that Defendants breached their duties of loyalty and prudent care under ERISA § 404(a)(1)(A) and (C) by allowing the Bond Funds to remain on the Plans' menus of investment options after January 1, 2007. In opposition, Defendants raise the argument they raised against the prohibited transaction claim, asserting that there is nothing inherently wrong under ERISA with using affiliated mutual funds or sharing mutual fund revenue. (Regions Defs.' Mot. 37.) For the reasons stated above in Section IV, B, 3, the Court must reject Defendants' argument at this stage of the litigation. These allegations also raise issues separate from the prohibited transaction argument that the investment was improper because Morgan Keegan and Regions earned fees.
Defendants next argue that the Plans were structured to be ERISA § 404(c) Plans and that, under a "modern portfolio theory," they necessarily should include some assets with low risk/return characteristics and others with high risk/return characteristics. No such asset is "imprudent" when viewed in isolation. Thus, Defendants argue, it would be legal error under ERISA to consider the risk/return characteristic of one investment vehicle in isolation, rather than as part of the portfolio as a whole.[14] (Id. at 38.) Defendants also argue that it would be legal error under ERISA to judge an investment by hindsight, noting that "[t]he fiduciary duty of care requires prudence not prescience." (Id.) (quoting DeBruyne v. Equitable Life Assurance Soc'y,
The Complaint alleges that "Given that Morgan Keegan & Co. ran the Bond Funds and is an integral component of Regions Financial Corporation," Defendants knew or should have known that the Bond Funds violated their own investment guidelines when they assumed high levels of risk by investing primarily and imprudently in the subprime sector. (Compl. ¶¶ 259-62.) The Complaint alleges that Defendants failed to take action when they knew or should have known that investment *963 in the Bond Funds had become imprudent. (Compl. ¶ 392.) As named fiduciaries or de facto fiduciaries, the Bond Fund Prudence Defendants[15] were bound by the duties of loyalty, exclusive purpose, and prudence. (Id. ¶ 390.) Those Defendants were responsible for "selecting prudent investment options, eliminating imprudent options, determining how to invest employer contributions in the Plans ... evaluating the merits of the Plans' investments on an ongoing basis, and taking all the necessary steps to ensure that the Plans' assets were invested prudently." (Id. ¶ 391.) As a result of Defendants breach of their duties, the Plans suffered significant losses. (Id. ¶ 392-400.) Plaintiffs have adequately stated a claim in Count VI, and Defendants' motions to DISMISS this count are DENIED.
2. Count IX: The Bond Fund Disclosure Claim
Count IX alleges that the Bond Fund Communications Defendants breached their duty to inform participants by failing to provide complete and accurate information about the Bond Funds. (Compl. ¶ 424.) Defendants argue that the Complaint alleges neither facts supporting that theory nor an ERISA requirement that participants be made aware. (Regions Defs.' Mot. 39.) The Complaint states the specific information that Defendants failed to provide, (Id. ¶ 267-68.), the direct and indirect communications Defendants allegedly made to Plaintiffs, (Id. ¶ 264.), and the duty and responsibilities that Defendants allegedly breached. (Id. ¶ 263.); (see also Compl. ¶¶ 419-29.) Based on the Plaintiffs' pleadings, as well as the discussion about disclosure claims in Section IV, A, 2, the Court DENIES Defendants' motions to DISMISS Count IX.
D. The Monitoring, Co-Fiduciary Disclosure and Co-Fiduciary Liability Claims (Counts II, III, V, VII, VIII, X, XII, and XIV)
For each of the three sets of core prudence and disclosure claims (company stock, excessive fee, and bond fund), Plaintiffs also allege a corresponding set of "monitoring," "co-fiduciary disclosure," and "co-fiduciary liability" claims against Defendants alleged to have indirect responsibility for the underlying breaches of duty. Plaintiffs allege that these Defendants have indirect responsibility (1) because they allegedly failed to monitor adequately the alleged fiduciaries (Counts II, VII, and XII) (collectively the "Monitoring Claims"); (2) because they allegedly failed to provide needed materials or information to the fiduciaries (Counts III and VIII) (collectively the "Co-Fiduciary Disclosure Claims"); or (3) because they allegedly knew of breaches of duty by others but failed to take adequate steps to prevent or to remedy those breaches (Counts V, X, and XIV) (the "Co-Fiduciary Liability Claims"). Because Counts I, IV, VI, IX, XI, XIII, and XV have been sufficiently pled, the related claims in Counts II, III, V, VII, VIII, X, XII, and XIV should not be dismissed. As Defendants note, those claims turn on the underlying fiduciary breaches. Because Defendants' motions to dismiss the underlying claims are DNIED, the motions to dismiss the Monitoring, Co-Fiduciary Disclosure, and Co-Fiduciary Liability claims are also DENIED.
E. Individual Defendants
Defendants argue that all claims against C. Dowd Ritter, David Turner, Jill Shelton, Chris Glaub, Sherry Anthony, and *964 Barbara Watson fail because the Complaint nowhere alleges facts sufficient to establish that those Defendants functioned as ERISA fiduciaries with respect to the actions and inactions at issue in the underlying prudence, disclosure and prohibited transactiоn claims in Counts I, IV, VI, IX, XI, XIII, and XV of the Complaint. (Regions Defs.' Mot. 39-40.)
Fiduciary status is "a fact-intensive inquiry, making the resolution of that issue inappropriate for a motion to dismiss." In re AEP Litig.,
F. ERISA § 404(c) does not Bar Recovery Here or Require that all Claims be Dismissed.
Defendants argue that, because the participants in the Plans exercised investment control over their own Plan accounts, ERISA § 404(c) bars recovery and that the Court may dismiss the Complaint on this basis alone. (Regions Defs.' Mot. 44.) ERISA § 404(c) exempts plan fiduciaries from liability for losses to individual accounts that result from participants' own investment decisions. See 29 U.S.C. § 1104(c). Defendants' argument is unpersuasive.
Defendants raise § 404(c) as an affirmative defense. "Regardless of the merits of this [аrgument] ... it is inapplicable at this early stage of the litigation." In re Ferro Corp. ERISA Litig.,
G. Allegations against MAM and Morgan Keegan
Morgan Keegan and MAM (the "Morgan Defendants") have filed a separate Motion to Dismiss addressing the four counts in Plaintiffs' Complaint against them: Counts V, VI, VIII and XV.
1. Count V: Co-Fiduciary Liability
Both parties agree that Count V is insufficient as to the Morgan Defendants and should be dismissed. Count V contains catch-all allegations of "co-fiduciary liability against all Defendants." (Compl. ¶ 377.) Plaintiffs' Response to the Morgan Defendants' Motion to Dismiss acknowledges that "Plaintiffs do not oppose Morgan Keegan's and MAM's motion to dismiss them only from Count V because the Morgan Defendants are not alleged to have been involved in thе ERISA violations with regard to Regions company stock." (Plaintiffs' Response to Motion to *965 Dismiss of Morgan Keegan & Company, Inc. and Morgan Asset Management 2 n. 1.) ("Pls.' Resp. to Morgan Defs.") Therefore, Count V is DISMISSED as to the Morgan Defendants.
2. Count VI: Failure to Prudently and Loyally Manage the Legacy and Merged Plans and the Plans' Assets
In Count VI, Plaintiffs allege that the Morgan Defendants and others failed to manage the assets of the retirement plans at issue "with the care, skill, diligence, and prudence required by ERISA." (Compl. ¶ 391.) More specifically, Plaintiffs allege that the proprietary investment funds offered in the Plans "were imprudent investments ... due to [their] excessive investment in high-risk assets that was [sic ] inappropriate for a fixed income bond fund and which, to a greater extent than was disclosed, exposed them to huge losses." (Id. 11392.) This alleged mismanagement amounted to a breach of fiduciary duty that makes the Morgan Defendants liable for the investment losses incurred by Plan participants.
First, the Morgan Defendants argue that this claim should be dismissed because it assumes that they are plan fiduciaries, which they are not. (Morgan Keegan & Co., Inc. and Morgan Asset Management Inc.'s Memorandum in Support of Motion to Dismiss 12.) ("Morgan Defs.' Motion") Plаintiffs prominently allege that the Morgan Defendants are nonfiduciary parties in interest that knowingly participated in violations of ERISA §§ 406 and 502(a)(3), 29 U.S.C. §§ 1106 and 1132(a)(3). See (Compl. ¶¶ 21, 44-45, 86, 311-313, 488-92.) Plaintiffs may seek equitable relief from nonfiduciary parties in interest that knowingly participate in ERISA violations. See Harris Trust & Sav. Bank v. Salomon Smith Barney, Inc.,
The Morgan Defendants' motion argues that language "alleg[ing] fiduciary breach against" them and others and the absence of the terms "nonfiduciary" and "parties in interest" are fatal to Count VI. (Morgan Defs.' Motion 4-5.) Plaintiffs respond that, in describing the Morgan Defendants' status as parties, the Complaint identifies them solely as nonfiduciary parties in interest. (See Compl. ¶¶ 44-45.) Believing these allegations to be clear, the Complaint does not re-allege their status as nonfiduciaries in Counts VI and VIII, but groups them with various fiduciary defendants. (Pls.' Resp. to Morgan Defs. 3 n. 2.) Plaintiffs further argue that, should the Court find any ambiguity as to the basis for the Morgan Defendants' liability, Plaintiffs will seek leave to amend the Complaint. (Id.) It is sufficiently clear from the Complaint that the Morgan Defendants are not fiduciaries, but nonfiduciary parties in interest. (See Compl. ¶¶ 21, 44-45, 86, 311-313, 488-92.) Therefore, there is no merit in the Morgan Defendants' arguments thаt Count VI should be dismissed as to them because they are not fiduciaries, see Harris Trust,
Second, the Morgan Defendants argue that Count VI should be dismissed as to them because nothing in Plaintiffs' allegations indicates that they "ever had any responsibility, discretion or controleither ministerial or otherwisefor the retirement plan assets at issue." (Morgan Defs.' Motion 12.) That is not the test. In Harris Trust, the Supreme Court explained that ERISA § 502(a)(3) authorizes suits to obtain "appropriate equitable relief" from nonfiduciary parties in interest.
Although Harris Trust addressed violations of the prohibited transactions rule in ERISA § 406(a), its holding on liability applies equally to other prohibited transactions, including violations of ERISA § 502(a)(3). See McDannold v. Star Bank, N.A.,
The Sixth Circuit has stated that Harris Trust "confirms earlier authority within [the] Circuit that permitted an action for disgorgement of profits against an ERISA nonfiduciary." McDannold,
Therefore, the relevant question is whether Plaintiffs have adequately pled that the Morgan Defendants knowingly participated in violations of ERISA's fiduciary obligations to invest plan assets prudently and loyally. The Morgan Defendants argue that Plaintiffs have not included any facts in the Complaint to allow the Court "to draw the reasonable inference that [the Morgan Defendants] are liable for the misconduct alleged." (Morgan Defs.' Reply 6-7 (quoting Iqbal,
Finally, the Morgan Defendants allege that Count VI is insufficient to the extent Plaintiffs are attempting to pursue claims that the Morgan Defendants mismanaged the investment funds by failing to adhere to restrictions in federal securities laws and regulations. The Complaint adequately alleges ERISA violations. The Morgan Defendants' potential liability based on the violation of federal securities law "cannot shield [them] from suit over [the] alleged failure to perform [their] quite separate and independent ERISA obligations." In re WorldCom Inc. ERISA Litig.,
3. Count VIII: Breach of Fiduciary Duty to Disclose Necessary Information to Co-Fiduciaries
In Count VIII, Plaintiffs assert that the Morgan Defendants knowingly participated in the Plan fiduciaries' failures to disclose necessary information about Bond Fund investments to Plan co-fiduciaries. As in Count VI, Plaintiffs seek relief against the Morgan Defendants under ERISA § 502(a)(3) for their knowing participation in this violation of ERISA. (Compl. §§ 412-18.)
The Morgan Defendants first argue that this Count should be dismissed because it is premised on the Morgan Defendants' being ERISA fiduciaries. (Morgan Defs.' Motion 14.) For the reasons discussed as to Count VI, Section IV, G, 2, that argument is not well taken. The Morgan Defendants also argue that Count VIII fails because "nothing in ERISA mandates anything remotely like the disclosure obligations that are suggested by [Plaintiffs'] allegations." Id. As discussed above, the appropriate standard here is whether Plaintiffs have alleged that the Morgan Defendants knowingly participated in a fiduciary's breach of its duty. McDannold,
4. Count XV: Prohibited Transactions Regarding Revenue Sharing and Other Kickback Payments
Count XV alleges that the Morgan Defendants and others violated ERISA's ban on certain "prohibited transactions" because of the parties' purported fee sharing arrangements. (Compl. ¶¶ 487-496.) Plaintiffs allege that the Morgan Defendants knowingly participated in several prohibited transactions by charging certain fees and costs to the Plans for their investment in the RMK Select Funds and by engaging in revenue-sharing and other kickback payment schemes with Regions and other plan fiduciaries at the sole expense of the Plans. (Id. ¶¶ 489-90.) The Morgan Defendants argue that this claim should fail because they are not fiduciaries and because the transactions are exempt under DOL PTE 77-3. For the reasons stated above, their argument is unpersuasive. The motion to dismiss Count XV is DENIED.
V. Conclusion
For the foregoing reasons, the Morgan Defendants' motion to dismiss Count V against Morgan Keegan and MAM is *968 GRANTED. All other motions to DISMISS are DENIED.
NOTES
Notes
[1] The "Individual Regions Defendants" included in this Motion to Dismiss are: Ken Alderman, George W. Bryan, John Buchanan, Earnest W. Deavenport, Jr., David B. Edmonds, Irene Esteves, Christopher Glaub, O.B. Grayson Hall, Jr., Tim Laney, Susan W. Matlock, Claude Nielsen, C. Dowd Ritter, David Rupp, Jill Shelton, Lee K. Styslinger, III, Tom Thompson, David Turner, Barbara H. Watson, and William C. Wells, II.
[2] The individuals who filed on April 15, 2009 are: Martha R. Ingram, Harry Dinken, W. Charles Mayer, III, Ronnie Jackson, Sharon Davis, Sherry Anthony, and John Daniel.
[3] Alan Deer, Candice W. Bagby, Alton E. Yother, and Tusa McNary filed a joint motion on April 22, 2009, Kemmons Wilson, Jr. filed an individual motion on the same day.
[4] Bryan Jordan, Lea Stokes, Susan Martinez, and James S.M. French filed on May 5, 2009.
[5] Rusty Stephenson filed this motion.
[6] Michael S. Starnes filed this motion.
[7] The six Plaintiffs are Terry Hamby, Nancy Jackson, Robert H. Harrison, Ceasar L. Smith, Barbara Williams, and Gary Shamblin.
[8] Regions Financial Corporation ("Regions") is a full-service provider of consumer and commercial banking, trust, securities brokerage, mortgage and insurance products and services. (Compl. ¶ 38.) Regions is the parent company of Defendant Regions Bank, a state-chartered commercial bank, Morgan Keegan & Company, a regional brokerage and investment management firm that offers a variety of financial services and products including a family of Regions Morgan Keegan mutual funds, and Morgan Asset Management, which provides investment advisory services. (Compl. ¶ 43-45.)
[9] Citations are to the Amended Consolidated Supplemental Class Action Complaint for Violation of ERISA filed January 4, 2010. (Dkt. No. 170.)
[10] "An agency's construction of a statutory scheme that it is entrusted to administer is entitled to a degree of deference." Gallagher v. Croghan Colonial Bank,
[11] This issue is discussed below in Section IV, B, 3.
[12] Defendants also argue that this claim merely states "Plaintiffs' own qualitative views about what makes a fee "excessive." (Regions Defs.' Mot. 35.) The Court disagrees and finds that the language of the Complaint is adequate to withstand a motion to dismiss.
[13] A "party in interest" is defined to include any fiduciary, counsel, or employee of a plan; a person providing services to the plan; an employer whose employees are covered by the plan; and certain affiliates of that employer. 29 U.S.C. § 1002(14).
[14] Again, all of the cases Defendants cite address motions during later stages of litigation. None grants a motion to dismiss based on this argument. See Laborers Nat'l Pension Fund v. N. Trust Quantitative Advisors, Inc.,
[15] The Bond Fund Prudence Defendants are Morgan Keegan, MAM, and the Legacy and Regions 401(k) Prudence Defendants.