Randy Kopp (“Kopp”), an employee of Ideare, Inc. (“Ideare”) and a participant in the Ideare Management Plan (“Plan”),
I
Kopp filed a complaint alleging the Ideare Defendants breached their fiduciary duties to the plan participants. The district court dismissed Kopp’s original complaint without prejudice for failure to state a claim, but granted Kopp’s motion to file an amended complaint. Kopp’s amended complaint claimed seven bases for relief. Counts I and IV alleged the
The Plan is an Eligible Individual Account Plan (“EIAP”) under ERISA. This action concerns the Fund, held as a retirement investment in the Plan. Participants could contribute to the Plan and direct their contributions to one or more of the Plan’s investment options. The Plan Administrator and the Benefits Committee were the fiduciaries of the Plan. The Plan documents included the Summary Plan Descriptions and the Trust Agreement. The Plan specified that, barring prohibition by ERISA § 406 or 407, Ideare stock would be an investment option until it was “removed by plan amendment” and that the Company stock fund “shall be invested principally in Company Shares.” The Plan documents stated:
The selection and timing of your investment choices are solely your responsibility and investment returns are not guaranteed by the Company. In other words, since you select how your account balance is invested among the available options, you are responsible for losses which are the direct and necessary result of your investment instructions.
(emphasis added).
In November 2006 Verizon Communication, Inc. (“Verizon”) spun off its directory operations in a tax-free distribution of stock in Ideare. Under a tax sharing agreement between Verizon and Ideare, Ideare was precluded from restructuring debt, issuing equity, merging with another company, or consolidating or disposing of a significant portion of Idearc’s assets for a period of two years after the tax-free exchange in order to retain the tax-free status of the spin-off from Verizon.
According to public documents and information gathered from confidential witnesses, Kopp alleged because the Ideare Defendants wanted to preserve the tax-free status of the spin-off, the Ideare Officer Defendants reported that Ideare was generating sufficient cash flow and liquidity to manage its staggering debt, even though they knew the volume of past due receivables had mushroomed and Ideare had eliminated a great deal of collection staff, greatly decreasing its ability to collect from overdue accounts.
Throughout the Class Period, the Ideare Defendants were aware that Idearc’s bad debt expense was rapidly increasing. Id. ¶ 189. As of June 2008, Idearc’s bad debt had “increased by $16 million, or 50.0%, compared to $32 million for the three months ended June 30, 2007.” Id. As of October 30, 2008, Ideare announced further growth in its provision rate for bad debt, leading to a stock price decline of 36%. Id. ¶ 196. That month, Ideare faced a possible de-listing from the NYSE for its low stock price over a 30-day period and resorted to borrowing $247 million from a revolving credit facility. Id. ¶ 194-195. Ideare began considering a reverse stock split or other options to maintain its listing. Id. On November 17, 2008, Ideare closed the fund that allowed plan participants to invest new money in Ideare stock. Id. ¶4. In December 2008 the Benefits Committee voted to liquidate all holdings in Ideare stock, but subsequently cancelled the scheduled liquidation. Id. ¶ 117.
On March 12, 2009, after the two-year period following the Verizon spin-off was complete, Ideare disclosed that it was in danger of defaulting on its loans. Id. ¶ 203. In the event of default, the lenders could “declare the total secured debt outstanding to be due and payable and upon acceleration, the Company’s unsecured notes would also become due and payable.” Id. Ideare further disclosed, “If the Company is unable to achieve a ‘pre-packaged,’ ‘pre-negotiated,’ or similar plan of reorganization, it would likely be necessary that the Company file for reorganization under federal bankruptcy laws.” Id. Within two weeks, Ideare filed for bankruptcy, rendering all Ideare stock in the Fund worthless. Id. ¶ 207.
The district court dismissed the amended complaint with prejudice, holding Counts I, II, and IV failed to state a claim under Federal Rule of Civil Procedure 12(b)(6). The district court held Kopp’s
II
We review de novo a district court’s dismissal under Federal Rules of Civil Procedure 12(b)(6), Atchafalaya Basinkeeper v. Chustz,
Ill
The question before us is narrow: did the amended complaint plead factual matter that, if taken as true, states a claim for breach of fiduciary duty under ERISA.
An EIAP is a type of retirement savings plan governed by ERISA. 29 U.S.C. § 1107(d)(3)(A). ERISA defines an EIAP as “an individual account plan which is (i) a profit-sharing, stock bonus, thrift, or savings plan; (ii) an employee stock ownership plan; or (iii) a money purchase plan which was in existence on September 2, 1974, and which on such date invested primarily in qualifying employer securities.” Id. Because an EIAP is a defined “contribution plan,” as opposed to a “defined benefit” plan, the participants are not entitled to a particular level of benefits, but rather to whatever benefits their investments yield.
ERISA’s primary purpose is to protect beneficiaries of employee retirement plans. Pilot Life Ins. Co. v. Dedeaux,
Section 1104(a)(1)(C) requires plan fiduciaries to act prudently by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. Accordingly, plan investments in employer securities are generally limited to no more than 10 percent of plan assets. 29 U.S.C. § 1107(a)(2). However, § 1104(a)(2) expressly exempts EIAPs, like the plan at issue here, from the obligation to diversify. Section 1104(a)(2) does not, however, exempt EIAP fiduciaries from the first prong of the prudent man standard, which requires a fiduciary to act with care, skill, prudence, and diligence in any investment the fiduciary chooses. Donovan v. Cunningham,
ERISA permits employers to act both as trustees and fiduciaries of a plan.
Under ERISA ... a fiduciary may have financial interests adverse to beneficiaries. Employers, for example, can be ERISA fiduciaries and still take actions to the disadvantage of employee beneficiaries, when they act as employers {e.g., firing a beneficiary for reasons unrelated to the ERISA plan), or even as plan sponsors {e.g., modifying the terms of a plan as allowed by ERISA to provide less generous benefits).
Pegram v. Herdrich,
[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets ... or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
29 U.S.C. § 1002(21)(A).
Accordingly, ERISA does not hold plan fiduciaries of a “pension plan which provides for individual accounts and permits a participant or beneficiary to exercise control over the assets in his account,” like the Plan here, liable for losses which result from a participant’s exercise of that control. 29 U.S.C. § 1104(c)(1)(A)(ii). This is referred to as the “safe harbor” provision of ERISA § 404(c). Because the safe harbor provision is an affirmative defense that is not appropriate for consideration at the motion to dismiss stage where, as here, the plaintiffs did not raise it in the complaint, we do not consider the applicability of the safe harbor provision to Kopp’s claims. See Pfeil v. State St. Bank & Trust Co.,
A
We turn first to consider whether the district court correctly dismissed Counts I and IV of the amended complaint, claiming the Ideare Defendants breached their fiduciary duties by allowing plan participants to buy and hold Ideare stock when it was no longer prudent to do so. The district court dismissed Counts I and IV on two separate and independent grounds. First, the district court held the Ideare Defendants had no fiduciary duty to stop offering Ideare stock as an investment option under the Plan because the Plan mandated the Ideare Defendants invest in Ideare stock. Second, the district court held the amended complaint failed to allege sufficient. facts to overcome the “presumption of prudence” we adopted in Kirschbaum v. Reliant Energy Inc.,
A brief sketch of the origin of the “presumption of prudence” is in order. Recognizing that Congress has chosen to encourage Plan investment in employer stock, in Moench v. Robertson, the Third Circuit held the fiduciary of an ESOP who invests in employer stock is entitled to a presumption that it acted consistently with ERISA.
The plaintiff may attempt to rebut the presumption through evidence that “owing to circumstances not known to the settlor and not anticipated by him the making of such investment would defeat or substantially impair the accomplishment of the purposes of the trust.” Id. (alteration omitted) (quoting Restatement (Second) of Trusts § 227 cmt. g). To rebut the presumption, “the plaintiff must show that the ERISA fiduciary could not have believed reasonably that continued adherence to the ESOP’s direction was in keeping with the settlor’s expectations of how a prudent trustee would operate.” Id. The Moench court explained the rebuttal standard in detail:
In considering whether the presumption that an ESOP fiduciary who has invested in employer securities has acted consistently with ERISA has been rebutted, courts should be cognizant that as the financial state of the company deteriorates, ESOP fiduciaries who double as directors of the corporation often begin to serve two masters. And the more uncertain the loyalties of the fiduciary, the less discretion it has to act. Indeed, “ ‘[w]hen a fiduciary has dual loyalties, the prudent person standard requires that he make a careful and impartial investigation of all investment decisions.’ ” Martin v. Feilen, 965 F.2d [660] at 670 [(8th Cir.1992)] (citation omitted). As the Feilen court stated in the context of a closely held corporation:
[T]his case graphically illustrates the risk of liability that ESOP fiduciaries bear when they act with dual loyalties without obtaining the impartial guidance of a disinterested outside advisor to the plan. Because the potential for disloyal self-dealing and the risk to the beneficiaries from undiversified investing are inherently great when insiders act for a closely held corporation’s ESOP, courts should look elosely at whether fiduciaries investigated alternative actions and relied on outside advisors before implementing a challenged transaction.
Id. at 670-71. And, if the fiduciary cannot show that he or she impartially investigated the options, courts should be willing to find an abuse of discretion.
Moench,
The Moench court then applied the presumption to the summary judgment evidence offered by the plaintiffs. Id. The court held the plaintiffs’ evidence showing that there was a precipitous decline in the price of the employer’s stock and the Benefits Committee had knowledge of the impending collapse of the stock and its members’ own conflicted status may be sufficient to rebut the presumption. Id. The summary judgment evidence suggested circumstances had changed “to such an extent that the Committee properly could effectuate the purposes of the trust only by deviating from the trust’s direction or by contracting out investment decisions to an impartial outsider.” Id. The court held, however, that the record was incomplete and remanded the matter to the district court to allow further development of the record. Id.
In Kirschbaum we elected to adopt the Moench presumption of prudence when reviewing the plaintiffs’ summary judgment evidence of breach of fiduciary duty for continuing to purchase employer shares in an EIAP Plan that was invested almost entirely in the employer’s common stock. Kirschbaum,
One cannot say that whenever plan fiduciaries are aware of circumstances that may impair the value of company stock, they have a fiduciary duty to depart from ESOP or EIAP plan provisions. Instead, there ought to be persuasive and analytically rigorous facts demonstrating that reasonable fiduciaries would have considered themselves bound to divest.
Id. at 256. We held that in contrast to the company-wide failure in Moench, the plaintiffs’ evidence of round-trip trading and an initial 40% drop in stock value was insufficient to rebut the presumption. Id. at 255-56 (“There is no indication that REI’s viability as a going concern was ever threatened, nor that REI’s stock was in danger of becoming essentially worthless. This is a far cry from the downward spiral in Moench, and much less grave than facts other courts routinely conclude are insufficient to rebut the Moench presumption.”). We concluded, “Mere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the Moench presumption.” Id. (quoting Wright v. Or. Metallurgical Corp.,
Other circuits have also adopted the Moench presumption of prudence for reviewing ESOP fiduciaries’ decisions to invest in employer stock. In Kuper v. Iovenko, the Sixth Circuit applied the presumption of prudence in denying the plaintiffs’ claim that the defendants breached their fiduciary duty by failing to liquidate ESOP funds during a trust-to-trust transfer.
Moench, Kuper, Kirschbaum, and Quan all applied the presumption in the context of a factual record. Moench,
[W]e reject plaintiffs’ argument that the Moench presumption should not apply at the pleading stage. The “presumption” is not an evidentiary presumption; it is a standard of review applied to a decision made by an ERISA fiduciary. Where plaintiffs do not allege facts sufficient to establish that a plan fiduciary has abused his discretion, there is no reason not to grant a motion to dismiss.
Citigroup,
Our holding [that the presumption of prudence does not apply at the motion to dismiss stage] derives from the plain language of Kuper itself where we explained that an ESOP plaintiff could rebut this presumption of reasonableness by showing that a prudent fiduciary acting under similar circumstances would have made a different investment decision. The presumption of reasonableness in Kuper was [thus] cast as an evidentiary presumption, and not a pleading requirement.
Courts are required to accept the well-pleaded factual allegations of a complaint as true and determine whether those allegations state a plausible claim for relief. It follows that courts should not make factual determinations of their own or weigh evidence when considering a motion to dismiss. Precisely because the presumption of reasonableness is an evidentiary standard and concerns questions of fact, applying the presumption at the pleadings stage, and determining whether it was sufficiently rebutted,would be inconsistent with the Rule 12(b)(6) standard.
Pfeil,
We join the Second, Third, Seventh, and Eleventh Circuits in holding the presumption of prudence applies at the motion to dismiss stage. Unlike the Sixth Circuit, we adopted a Moench rebuttal standard akin to the rebuttal standard adopted by the Second Circuit, requiring plaintiffs to show that the defendants knew or should have known the viability of the company was threatened or the employer’s stock was in danger of becoming worthless to rebut the presumption of prudence. Kirschbaum,
Accordingly, we must determine whether the facts Kopp alleged in the amended complaint suffice to overcome the presumption of prudence. Under Kirschbaum, if Kopp alleged facts that would show the Ideare Defendants knew or should have known the viability of Ideare was threatened or Ideare’s stock was in danger of becoming worthless, Kopp alleged sufficient facts to overcome the presumption of prudence at the motion to dismiss stage. See Kirschbaum,
While individuals with access to inside information may not trade on that information, ceasing making new investments in stock because of access to inside information is not barred by insider trading laws. 17 C.F.R. § 240.10b-5; see Chiarella v. United States,
Considering both public and nonpublic information in the complaint, Kopp alleged the Ideare Defendants knew or should have known that Idearc’s declining customer base, loosened credit policies, growing uncollectible receivables, and reduced account collection workforce were causing serious financial difficulties for Ideare that the Ideare Defendants had no reason to believe could be resolved in the foreseeable future. Ideare Defendants allegedly knew or should have known of rising debts, especially bad debts, throughout the class period. Kopp alleged that as of August 2007, the Ideare Defendants were aware due to mounting uncollectible receivables Ideare faced an impending liquidity crisis that would prevent Ideare from meeting its obligations as they came due. Furthermore, Kopp alleged the Ideare Defendants were aware of the strictures of the tax-free spin-off, which constrained restructuring options, and thus knew they lacked the financing flexibility to deal with mounting debt. Kopp also alleged the Ideare Defendants were aware that Idearc’s stock was drastically overvalued due to purposeful misstatements in accounting disclosures. For example, Kopp alleges the Ideare Defendants were aware Idearc’s financial statements falsely recorded millions of dollars of uncollectible receivables as collectible and recorded revenue the company generated from fictitiously billing customers who already can-celled their accounts. By June of 2008,
Nonetheless, the presumption of prudence protects the decisions of fiduciaries to invest in employer stock unless the fiduciaries were aware that the viability of the employer was threatened or the employer’s stock was in real danger of becoming essentially worthless. Kirschbaum,
Turning to the question of whether the Ideare Defendants had a duty to liquidate the Fund’s holdings in Ideare stock, Kopp did not allege sufficient public information to overcome the presumption that the Ideare Defendants acted prudently by choosing not to liquidate Ideare stock. Much of the information Kopp relied on to show the Ideare Defendants were aware of threats to Idearc’s viability is nonpublic information. For example, Kopp does not allege the public was aware that Ideare had falsely recorded millions of dollars of uncollectible accounts receivable as collectible or that Ideare recorded revenue from fictitious invoices to current, former, and even nonexistent customers. Moreover, Kopp alleges the Ideare Defendants did not disclose that Ideare had eliminated a substantial portion of its collections staff or that Ideare had loosened its credit policies to attract new customers who were more apt to default on their payments.
Therefore, dismissal of Counts I and IV was proper.
B
We proceed to consider whether the district court correctly dismissed Kopp’s claim for inaccurate disclosures and nondisclosures (Count II). The district court held the amended complaint did not state a claim for violating the duty of candor by “omitting material information, making allegedly incorrect statements about Idearc’s financial stability, or failing to correct these alleged misstatements in the filings” because Idearc’s Summary Plan Description (“SPD”) did not incorporate Idearc’s public filings. The district court also held Kopp did not show the Ideare Defendants had a duty to affirmatively disclose company information or that the Ideare Defendants breached their fiduciary duties through non-disclosure. The district court held Kopp did not allege special circumstances or an inquiry by one of the Plan beneficiaries which would give rise to an affirmative duty to disclose company information under ERISA.
Kopp does not challenge the district court’s holding that the SPD did not incorporate the public disclosures, but alleges this does not preclude a holding that the Ideare Defendants are liable for nondisclosure. Kopp asserts ERISA’s fiduciary duty of loyalty imposes on the Ideare Defendants obligations to disclose information over and above the statute’s express disclosure requirements. Kopp contends ERISA’s duty of loyalty and the common law of trusts impose an obligation on the Ideare Defendants to disclose material facts affecting beneficiaries.
We have held a plan administrator violated ERISA’s duty of loyalty by withholding information where the administrator withheld information about the plan benefits or the plan participants’ rights under the plan when a plan participant requested such information. Kujanek,
C
Based on its dismissal of Kopp’s claims for breach of fiduciary duty for investment in Ideare stock and for inaccurate disclosures and nondisclosures, the district court dismissed each of Kopp’s remaining claims, Counts III, V, VI, and VII, as derivative. The district court held to prevail on the derivative claims the Ideare Defendants would have had to prevail on an underlying allegation of breach of fiduciary duties. Kopp contends the district court erred by characterizing the remaining claims as derivative and thus erred by dismissing these claims even if the investment and disclosure claims should be dismissed. We proceed to analyze whether the district court erred by dismissing the remaining claims as derivative.
1
Counts III and VII allege the Ideare Defendants breached their fiduciary duty of loyalty by failing to avoid conflicts of interest while managing the Plan. Specifically, Kopp alleges the Ideare Defendants’ personal wealth was impermissibly tied to Idearc’s financial performance.
“ERISA’s duty of loyalty is the highest known to the law.” Bussian v. RJR Nabisco, Inc.,
Kopp correctly points out that some courts have held a complaint states a claim for breach of the duty of loyalty where the compensation of defendant fiduciaries was tied to the value of company stock or where fiduciaries traded on their personal accounts with inside information they did not share with plan participants. See, e.g., In re ADC Telcomms., Inc., ERISA Litig., No. MASTER FILE, 03-2989 ADM/FLN,
Here Kopp does not allege the Ideare Defendants’ compensation was impermissibly tied to the price of Idearc’s stock, but that their compensation was impermissibly tied to Idearc’s financial performance. Kopp cites no provision of ERISA or case that supports his contention that such a compensation scheme violates ERISA’s duty to avoid conflicts of interest. Accordingly, dismissal of Counts III and VII was proper.
Count V alleges the Ideare Defendants breached their fiduciary duty to appoint, inform, and monitor plan fiduciaries. Kopp alleges four breaches of fiduciary duty under this count: (i) the Ideare Defendants failed to monitor the Benefits Committee members to ensure they met their primary obligations; (ii) the Ideare Defendants failed to provide crucial information about the threat of Idearc’s viability to the Benefits Committee members to ensure they were sufficiently well-informed to meet their primary fiduciary duties; (iii) seeing that the Benefits Committee members did not seek counsel regarding Idearc’s financial troubles, the Director Defendants and the HR Committee failed to replace the Committee members; and (iv) the Ideare Defendants breached their duty to appoint Benefits Committee members with the requisite knowledge or background to oversee Plan investments.
Because a claim for breach of fiduciary duty to appoint, inform, and monitor plan fiduciaries is a derivative claim, In re Dell, Inc. ERISA Litig.,
3
Count VI alleges the Ideare Defendants breached a co-fiduciary duty. An ERISA co-fiduciary liability arises when a fiduciary’s actions meets one of the following criteria:
(1) if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach;
(2) if, by his failure to comply with section 1104(a)(1) of this title in the administration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to commit a breach; or
(3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.
29 U.S.C. § 1105(a). Count VI alleges each of the Ideare Defendants were aware of breaches of fiduciary duty by other Defendants but failed to make efforts to remedy those breaches. Count VI further alleges the Ideare Defendants concealed the breaches of their co-fiduciaries.
Because this is a derivative claim, Izzarelli v. Rexene Prods. Co.,
IV
For these reasons, we AFFIRM the judgment of the district court.
Notes
. The Ideare Savings Plan for Management Employees, the Ideare Savings and Security Plan for New York and New England Associates, and the Ideare Savings and Security Plan for Mid-Atlantic Associates all merged into the Plan, so we refer to the plans collectively as the "Plan.”
. Because we review here a decision granting Idearc's motion to dismiss, we accept as true all factual allegations contained in the amended complaint. See, e.g., Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit,
. Kopp alleged that as a result of Defendant Coticchio eliminating outstanding receivable collectors during the budget cut, uncollectible receivables increased from $80-$ 100 million in February 2007 to $250-270 million in July 2008. Complaint ¶ 52-53.
. Defendant Coticchio held the position of Treasurer from the inception of the Class Period until November 26, 2007.
. ERISA recognizes two basic types of retirement plans: "defined contribution plans” and "defined benefit plans.” Under ERISA, a defined contribution plan (also known as an "individual account plan”) is "a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account, and any income, expenses, gains and losses.” 29 U.S.C. § 1002(34).... Any plan that does not meet the definition of defined contribution plan is a defined benefit plan. 29 U.S.C. § 1002(35).
Hirt v. Equitable Ret. Plan for Employees, Managers, & Agents,
. Even where the safe harbor provision does apply, the safe harbor defense does not relieve fiduciaries of the responsibility to screen investments. Id.; Tibble v. Edison Int'l,
. We likewise do not reach the issue of whether, if the Ideare Defendants had no discretion to alter Fund investment in Ideare stock, because the dictates of ERISA trump plan language, 29 U.S.C. § 1104(a)(1)(D), the Ideare Defendants had a fiduciary duty to disobey Plan language. In Kirschbaum, we likewise did not resolve whether, where plan language mandates investment in employer stock, a fiduciary can have a duty to stop offering employer stock as an investment option.
. We do not express an opinion as to whether the Ideare Defendants violated securities laws. If there were violations of the securities laws, the remedy for those violations would be under securities laws and not under ERISA.
. While the March 12, 2009 fiduciary communication, released about three weeks prior to the end of the Class Period, does raise the specter of bankruptcy, it is mentioned as one of several refinancing options under consideration.
. In the amended complaint Kopp also alleges the Ideare Defendants breached their duty to avoid conflicts of interest by failing to timely hire independent fiduciaries who could make independent judgments about Plan investments. Kopp waived this issue by failing to adequately brief it on appeal. Sanders v.