Lead Opinion
Judge STRAUB dissents in part and concurs in part in a separate opinion.
In this appeal we consider the degree of factual detail needed in a complaint in order to present nonconclusory and plausible allegations that a pension plan administrator purchased and continued to hold certain mortgage-backed securities in violation of its fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq.
In an effort “to ensure that employees will not be left emptyhanded once employers have guaranteed them certain benefits,” ERISA imposes “a duty of care with respect to the management of existing trust funds, along with liability for breach of that duty, upon plan fiduciaries” who administer benefit-plan assets. Lockheed Corp. v. Spink,
Like many recent cases, this suit stems from the real-estate bubble and subsequent financial crisis that unfolded over the past decade. Plaintiffs-appellants Saint Vincent Catholic Medical Centers, Pension Benefit Guaranty Corp., and Queensbrook Insurance Ltd. (jointly, “Saint Vincent’s”) allege that defendant-appellee Morgan Stanley Investment Management Inc. (“Morgan Stanley”) — the fiduciary manager of the fixed-income portfolio of the Saint Vincent Catholic Medical Centers Retirement Plan (“the Plan”)— violated its fiduciary duties under ERISA. In particular, Saint Vincent’s alleges that Morgan Stanley disproportionately invested the portfolio’s assets in mortgage-backed securities, including the purportedly riskier subcategory of “nonagency” mortgage-backed securities, despite warning signs that these investments were unsound.
The United States District Court for the Southern District of New York (P. Kevin Castel, Judge) dismissed the suit under Rule 12(b)(6) of the Federal Rules of Civil Procedure, concluding that the Amended Complaint fails to allege facts supporting a plausible inference that Morgan Stanley knew, or should have known, that securities held in the Plan’s portfolio were imprudent investments. In particular, the District Court explained that the Amended Complaint relies too heavily on facts known only in hindsight, and that its general allegations about warning signs relating to indistinct classes of securities do not give rise to a plausible inference that Morgan Stanley violated its fiduciary duty.
We agree. Although Saint Vincent’s, as the fiduciary administrator of an ERISA-governed plan, was in a position to plead its claims with greater factual detail than is typically accessible to plaintiffs prior to discovery, and although it received two opportunities to amend its complaint, the Amended Complaint fails to plead sufficient, nonconclusory factual allegations to show that Morgan Stanley failed to meet its fiduciary responsibilities under ERISA. Accordingly, we affirm the District Court’s judgment dismissing the Amended Complaint.
BACKGROUND
When the Amended Complaint was filed
Saint Vincent’s hired Morgan Stanley to manage the Plan’s fixed-income portfolio (“the Portfolio”), which comprised about 35% of the Plan’s assets.
In Count One, Saint Vincent’s alleges that Morgan Stanley breached its fiduciary duties under ERISA by “deviating] from the specified strategy and directing] increasingly large amounts of the Plan’s assets into high-risk investments including non-agency mortgage securities, thereby exposing the Plan to excessive risk.” Id. ¶ 22. The Amended Complaint explains in a footnote that “[n]on-agency mortgage securities are securities tied to mortgages that are not guaranteed by Fannie Mae or Freddie Mac (the ‘agencies’) because the mortgages fail to meet the agencies’ underwriting standards and criteria.” Id. ¶ 22 n. 2. According to the Amended Complaint, Morgan Stanley’s investment decisions intentionally exceeded both the risk inherent in the Citigroup BIG and the “acceptable risk associated with the investment of a fixed-income portfolio.” Id. ¶ 31. In the same vein, Morgan Stanley allegedly “failed to properly diversify the fixed-income portfolio, achieving a disproportionate exposure to the risk of the mortgage securities markets.” Id. ¶ 32.
More particularly, the complaint alleges that during the fourth quarter of 2007, 12.6% of the Portfolio’s value consisted of
Although it does not allege any facts regarding the process by which Morgan Stanley selected these securities, the Amended Complaint states that Morgan Stanley “knew or should have known that this overexposure to high-risk, mortgage securities was imprudent,” id. ¶ 34, because “[throughout 2007 and 2008, there were warning signs that these securities were not appropriate for the fixed-income portfolio,” id. ¶ 35. Specifically, the Amended Complaint asserts that Morgan Stanley invested in “subprime mortgage securities issued by IndyMac, Bear Stearns, Washington Mutual and Countrywide, among others,” id. ¶ 36, and that these issuers suffered large, publicly disclosed losses in 2007 and 2008 due to the subprime mortgage crisis. It further alleges that analysts predicted in 2007 that Morgan Stanley’s parent company
In terms of damages, the Amended Complaint alleges that the Portfolio suffered significant losses in value as a result of Morgan Stanley’s failure to meet its fiduciary duties. Specifically, the Amended Complaint alleges that the Portfolio’s purported overconcentration in nonagency mortgage-backed securities caused it to underperform relative to the Citigroup BIG. During 2008, for example, the Portfolio lost 12% of its value, whereas the Citigroup BIG gained 7%. Id. ¶ 26. Moreover, “during the relevant period of time, damages to the Plan’s assets exceeded $25 million in the fixed-income portfolio managed by [Morgan Stanley].” Id. ¶ 27.
The Amended Complaint also includes two counts relating to Morgan Stanley’s alleged mismanagement of a separate insurance fund. When Saint Vincent’s facilities were still in operation, plaintiff-appellant Queensbrook Insurance Limited (“QIL”), then a wholly-owned subsidiary of Saint Vincent’s, provided malpractice insurance for Saint Vincent’s. To this end, QIL established the Queensbrook Insurance Limited Account (the “Insurance Fund”), which Morgan Stanley administered. The Amended Complaint alleges that Morgan Stanley mismanaged the Insurance Fund in essentially the same way that it mismanaged the Portfolio. On this basis, the Amended Complaint asserts common-law claims against Morgan Stanley for breach of fiduciary duty and breach of contract.
DISCUSSION
A. Relevant Terminology
Before addressing the merits, we review the meaning of several important, though somewhat technical, terms used in the Amended Complaint. In particular, Saint Vincent’s focuses on Morgan Stanley’s purchase of what Saint Vincent’s calls “ñoñ-agency mortgage securities.” Am. Compl. ¶ 22. As we will see, this term covers a wide range of securities.
Mortgage-backed securities are securities whose collateral is a fractional share in a group (or “pool”) of mortgages. To create this type of financial instrument, “[tjypically, an entity (such as a bank) will buy up a large number of mortgages from other banks, assemble those mortgages into pools, securitize the pools (i.e., split them into shares that can be sold off), and then sell them, usually as bonds, to banks or other investors.” Litwin v. Blackstone Grp., L.P.,
Agency mortgage-backed securities use, as collateral, mortgages that meet the requirements to be “backed or issued by the three government-sponsored entities (‘GSEs’) — Ginnie Mae, Fannie Mae and Freddie Mac.”
Nonagency mortgage-backed securities vary widely, reflecting the diversity in the types of “nonagency” mortgages- that are used as collateral for these securities. As explained below, nonagency mortgages include so-called “jumbo” mortgages, sub-prime mortgages, and “alt-A” mortgages. See, e.g., Thomas Zimmerman, Defining Nonagency MBS (“Zimmerman”), in The HANDBOOK OF MORTGAGE-BACKED SECURITIES 93 (Frank J. Fabozzi, ed., 6th ed. 2006); Lemke et al. § 3:4-3:7. Although each of these types of nonconforming mortgages fails to satisfy at least one GSE underwriting condition, they can also be quite distinct. See generally Zimmerman at 93-111 (explaining characteristics of nonagen-cy mortgage-backed securities). Most importantly for present purposes, these different types of nonagency mortgages often come with vastly different levels of prepayment risk and credit risk.
Jumbo mortgages, which historically are the most common type of nonagency mortgage, see Anchor Savings,
Subprime mortgages became the most common type of loan in the nonagency mortgage-backed securities market about a decade ago. See Zimmerman at 94-95. There is no precise definition of subprime mortgages, but “the term generally refers to mortgages on loans to borrowers who have significantly higher credit risks” than prime borrowers. Lemke et al. § 3:5. Subprime mortgages therefore tend to come with a higher degree of credit and default risk than other mortgages, see id., though the borrower’s lesser ability to pay also comes with a lower risk of prepayment, see Zimmerman at 108.
Alt-A mortgages are also not susceptible to a single definition but “generally are larger in size than subprime loans and have significantly higher credit quality.” Lemke et al. § 3.6.
B. Applicable Law
i.
“ERISA’s central purpose is to protect beneficiaries of employee benefits plans.” In re Citigroup ERISA Litig.,
First, fiduciaries must act “for the exclusive purpose of ... providing benefits to participants and their beneficiaries[ ] and defraying reasonable expenses of administering the plan.” Id. § 1104(a)(1)(A). Second, fiduciaries must use “the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” Id. § 1104(a)(1)(B). Third, fiduciaries must
The duty of prudence mandated by § 1104(a)(1)(B) “is measured according to the objective prudent person standard developed in the common law of trusts.” La Scala v. Scrufari,
Pursuant to ERISA implementing regulations, promulgated by the Secretary of Labor, a fiduciary’s compliance with the prudent-man standard requires that the fiduciary give “appropriate consideration” to whether an investment “is reasonably designed, as part of the portfolio ... to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment.” 29 C.F.R. § 2550.404a-1(b)(2)(i).
In the same way, the “duty to diversify is not measured by hard and fast rules or formulas.” In re Unisys,
ii.
As an appeal from a dismissal of the complaint under Rule 12(b)(6), this case requires us to apply the pleading standards articulated in Bell Atlantic Corp. v. Twombly,
First, although a complaint need not include detailed factual allegations, it must provide “more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. “A pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will not do.’ ” Id. (quoting Twombly,
Second, “[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Id. This “facial plausibility” prong requires the plaintiff to plead facts “allowing] the court to draw
As we will see, the nature of Saint Vincent’s allegations under ERISA calls for particular care in applying this two-pronged inquiry in order to ensure that the Amended Complaint alleges noncon-clusory factual content raising a plausible inference of misconduct and does not rely on “the vantage point of hindsight.” In re Citigroup,
The key issue in this suit is whether Morgan Stanley acted prudently, both with respect to the particular investments at issue, and with respect to the diversification of Portfolio assets. As the District Court correctly observed, however, the Amended Complaint contains no factual allegations referring directly to Morgan Stanley’s knowledge, methods, or investigations at the relevant times. See Saint Vincent’s,
Accordingly, a claim for a breach of fiduciary duty under ERISA may survive a motion to dismiss — even absent any well-pleaded factual allegations relating directly to the methods employed by the ERISA fiduciary — if the complaint “allege[s] facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.” In re Citigroup,
Rather, if the complaint relies on circumstantial factual allegations to show a breach of fiduciary duties under ERISA, those allegations must give rise to a “reasonable inference” that the defendant committed the alleged misconduct,
This understanding of the relevant pleading requirements is consistent with the basic purposes of both ERISA and Rules 8 and 12(b)(6) of the Federal Rules of Civil Procedure. As the Supreme Court has noted, “Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.” Iqbal,
On the other hand, an ERISA plan participant, beneficiary, or fiduciary with a meritorious claim will still be able to allege facts plausibly showing that an ERISA fiduciary should have been aware that the relevant investment decisions did not satisfy ERISA’s fiduciary standards. Although details about a fiduciary’s methods and actual knowledge tend to be “in the sole possession of [that fiduciary],”
Armed with this extensive data about a fiduciary’s investment decisions, a prospective plaintiff must show, through reasonable inferences from well-pleaded facts, that the fiduciary’s choices did not meet ERISA’s requirements. As noted, for a plaintiff relying on inferences from circumstantial allegations, this standard generally requires the plaintiff to allege facts, accepted as true, showing that a prudent fiduciary in like circumstances would have acted differently. We now review de novo whether the Amended Complaint satisfies this standard. See In re Citigroup,
i.
We begin with Saint Vincent’s argument that Morgan Stanley failed to use “the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” 29 U.S.C. § 1104(a)(1)(B). Saint Vincent’s alleges that Morgan Stanley “exposed the Plan to excessive risk due to an egregious over-concentration in high-risk mortgage securities,” Am. Compl. ¶ 60, and “failed to monitor the Plan’s investments to protect the Plan from economic harm,” id. ¶ 61. However, the facts alleged in the Amended Complaint fail to give rise to a reasonable inference that Morgan Stanley’s investment decisions were imprudent at the relevant times.
The Amended Complaint refers to “warning signs” that should have caused Morgan Stanley to reduce its exposure to these securities. Specifically, the Amended Complaint alleges that: (1) several of the issuers of mortgage-backed securities held in the Plan — IndyMac, Bear Stearns, Washington Mutual, and Countrywide— disclosed large losses during 2007 and 2008 owing to their own exposure to subprime mortgage-backed securities; (2) analysts predicted in 2007 that Morgan Stanley’s parent company would have to write down $6 billion on the value of its subprime mortgage-backed securities; and (3) in December 2007, Standard & Poor’s reduced its ratings on about $7 billion of Alt-A mortgage-backed securities, which are usually considered less risky than subprime mortgage-backed securities. None of these alleged “warning signs,” however, gives rise to a plausible inference that Morgan Stanley knew, or should have known, that the securities in the Portfolio were imprudent investments, or that Morgan Stanley breached its fiduciary duty by not selling those investments at whatever unspecified prices existed during the unspecified period in which it was imprudent to maintain those unspecified investments.
For instance, Saint Vincent’s alleges that the Portfolio contained an unspecified amount of subprime mortgage-backed securities issued by IndyMac, Bear Stearns, Washington Mutual, and Countrywide, and that three of these entities suffered substantial losses in 2007. Even if it is reasonable to infer that Morgan Stanley’s investments performed in line with the losses sustained by these issuers, the Amended Complaint still fails to allege facts plausibly showing that Morgan Stanley should have acted differently because the decline in the price of a security does not, by itself, give rise to a plausible inference that the security is no longer a good investment. See, e.g., Gearren v. The McGraw-Hill Cos.,
Of course, in some cases, it would be reasonable to infer from a decline in the price of a security, combined with other alleged facts, that the security no longer was a sound investment. In re Citigroup,
For instance, Saint Vincent’s alleged that around July 2007, “Bear Stearns announced that investments backed by risky mortgages had left two of its hedge funds virtually worthless.” Am. Compl. ¶40. Even if we inferred that the same were true of the Portfolio’s unspecified amount of unspecified subprime mortgage-backed securities, see id. ¶ 36, we fail to see how this inference would plausibly give rise to a second inference that Morgan Stanley violated its fiduciary duty by not selling “virtually worthless” investments. Perhaps selling the “virtually worthless” investments would have been imprudent because short-term investors may have caused the market to overcompensate for the risk of default. The complaint alleges no facts suggesting one conclusion or the other.
To be sure, a rapid decline in the price of a security would likely lead a prudent fiduciary to investigate whether it was still prudent to hold that investment. But the Amended Complaint does not allege that Morgan Stanley failed to conduct such an inquiry, nor does the decline in price necessarily give rise to that inference. See, e.g., In re Citigroup,
For these reasons, Saint Vincent’s bare allegations with respect to Morgan Stanley’s investments in subprime mortgage-backed securities do not give rise to a plausible inference that Morgan Stanley acted imprudently. The Amended Complaint only alleges large declines in the overall subprime market during 2007 and 2008. These price decreases do not, without further factual allegations, plausibly show that Morgan Stanley’s unspecified subprime investments were imprudent in “the circumstances then prevailing,” or
Similarly, the Amended Complaint fails to connect its allegation that Standard & Poor’s downgraded the credit ratings on $7 billion worth of Alt-A mortgages to its conclusion that Morgan Stanley breached its fiduciary duties. For instance, Saint Vincent’s does not allege that Standard & Poor’s “downgraded” any of the securities held in the Portfolio. Nor does the Amended Complaint allege that any such downgrade made those securities imprudent in light of the other investments in the Portfolio, or that this downgrade led to a violation of the requirement in the Plan Guidelines that the fixed-income portfolio maintain an average credit rating of AA or higher. See Investment Policy Statement (“Guidelines”),
As noted, such imprecise pleading is particularly inappropriate here, where the plaintiffs necessarily have access, without discovery, to plan documents and reports that provide specific information from which to fashion a suitable complaint. Cf., e.g., Renfro v. Unisys Corp.,
In sum, viewing the allegations in the Amended Complaint as a whole, and drawing every reasonable inference in favor of Saint Vincent’s, the Amended Complaint does not allege facts plausibly showing that Morgan Stanley knew, or should have known, at the relevant times, that the securities held in the fixed-income Portfolio were imprudent investments. Instead, the Amended Complaint alleges imprudence by association, reasoning that because the Portfolio contained nonagency mortgage-backed securities — of which subprime mortgage-backed securities are now the most infamous type — and because the
ii.
Saint Vincent’s also alleges that, even if particular investments were not imprudent, Morgan Stanley “failed to properly diversify the fixed income portfolio, achieving a disproportionate exposure to the risk of the mortgage securities markets.” Am. Compl. ¶ 32. As noted, see Part B.i., ante, ERISA requires a plan fiduciary to “diversify! ] 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.” 29 U.S.C. § 1104(a)(1)(C).
Saint Vincent’s does not support its diversification claim with factual allegations sufficient to elevate it from the realm of mere “legal conclusions.” Iqbal,
With respect to the first allegation, that 12.6% of the Portfolio was concentrated in nonagency mortgage-backed securities in late 2007 — a percentage that apparently dropped in 2008 — we agree with the District Court that this allegation is insufficient to raise a plausible inference that Morgan Stanley breached its duty to diversify the Portfolio. See Saint Vincent’s,
With respect to Saint Vincent’s allegation that the Portfolio’s share of mortgage-backed securities “generally exceeded that of the Citigroup BIG by approximately 10%,” id. ¶ 24, we agree with the District Court that this allegation is unenlightening without facts indicating the extent of the concentration of mortgage-backed securities in the benchmark index, and without any facts suggesting “whether and how this 10% variance from the Index is material to the Fund’s diversification,” Saint Vincent’s,
Finally, we reject Saint Vincent’s argument that the Amended Complaint plausibly alleges a failure to diversify based on the allegation that Morgan Stanley “invested] more than 60% of the Plan’s fixed-income assets in a single, propriety fund of [Morgan Stanley].” Am. Compl. ¶ 25. As the District Court explained, “this unidentified ‘proprietary fund’ is not itself alleged to be the basis for the Fund’s losses or its inadequately diverse portfolio, nor is there any allegation that the single, proprietary fund was not, itself, diversified.” Saint Vincent’s,
iii.
Nor does the Amended Complaint allege facts plausibly showing that Morgan Stanley violated its duty to act “in accordance with the documents and instruments governing the plan.” 29 U.S.C. § 1104(a)(1)(D). Saint Vincent’s alleges that Morgan Stanley breached this duty by deviating from the written investment Guidelines, which “specified that the ‘primary investment objective for the Pension Plan shall be preservation of principal with emphasis on long-term growth to meet the future retirement liability of the Plan.’” Am. Compl. ¶20. The Amended Complaint, however, does not contain factual allegations showing, even circumstantially, that Morgan Stanley failed to pursue this long-term growth objective — or that it pursued some other objective — even if its investment efforts were unsuccessful.
Indeed, the Guidelines include thirteen specific “investment manager restrictions,” which Morgan Stanley had to follow “unless written approval [was] received from the St. Vincent’s Hospital Investment Committee.” Joint App’x at 53. The Amended Complaint does not allege that Morgan Stanley violated any of these re
Any investment manager’s fixed income portfolio must have a weighted average credit rating of AA or better by Standard & Poor’s or Aa or better by Moody’s (together, the “Rating Services”). Bonds purchased must have a credit rating of investment grade or better by the Rating Services, except that a maximum of 10% of the market value of the portfolio may be invested in bonds rated below BBB- or Baa3 as long as all such bonds also have and maintain a minimum rating of B/Ba or BB/B or better by the Rating Services.
Id. at 48. Saint Vincent’s has not alleged any facts showing, even circumstantially, that Morgan Stanley ignored general Plan goals, nor has it alleged any facts that would give rise to a reasonable inference that Morgan Stanley violated the specific Guidelines terms designed to implement those goals.
We also reject Saint Vincent’s argument that Morgan Stanley failed to act in accordance with the Guidelines provision setting the Citigroup BIG as the benchmark for the Portfolio’s performance. See Am. Compl. ¶21. According to the Amended Complaint, Morgan Stanley “took on risk for the Plan well in excess of the risk inherent in the designated [Citigroup BIG] bond index.” Id. ¶ 31. However, as the District Court well noted, “the Complaint does not allege that Morgan Stanley was required to replicate the investments of the Index.” Saint Vincent’s,
In sum, the Amended Complaint fails to allege facts to support a plausible inference that Morgan Stanley did not comply with Plan documents.
D. State Law Claims
After dismissing these ERISA claims pursuant to Rule 12(b)(6), the District Court declined, pursuant to 28 U.S.C. § 1367(c),
We conclude that the District Court, consistent with its careful and well-reasoned analysis elsewhere in its decision, did not err, much less “abuse” its discretion, by declining to exercise supplemental jurisdiction over the remaining state-law claims. Indeed, Saint Vincent’s argues only that the state-law claims should be reinstated if we reverse the District Court’s judgment with respect to the federal claims. See Appellants’ Br. at 33. Consequently, we affirm the dismissal of the state-law claims.
CONCLUSION
To summarize, we hold:
1.A complaint alleging a breach of fiduciary duties under ERISA may survive a motion to dismiss based solely on circumstantial factual allegations — that is, absent any well-pleaded factual allegations relating directly to the methods employed by the ERISA fiduciary to investigate, select, and monitor investments— only when those allegations give rise to a “reasonable inference” that the defendant committed the alleged misconduct, Iqbal,556 U.S. at 678 ,129 S.Ct. 1937 (emphasis supplied), thus “permit[ting] the court to infer more than the mere possibility of misconduct,” id. at 679,129 S.Ct. 1937 (emphasis supplied).
2. Whether a particular complaint satisfies this standard is “context-specific.” Id. For a plaintiff alleging a breach of fiduciary duty under ERISA, this standard generally requires the plaintiff to allege facts that, if accepted as true, would show that a prudent fiduciary in like circumstances would have acted differently.
3. A plaintiff cannot solely “rely, after the fact, on the magnitude of the decrease in the [portfolio’s value],” In re Citigroup,662 F.3d at 140 , to show that the ERISA fiduciary’s investments were imprudent before, during, or after the decline itt value. In other words, a decline in a security’s market price does not, by itself, give rise to a reasonable inference that holding that security was or is imprudent.
4. Applying these standards to the present case, we hold that the District Court properly dismissed Saint Vincent’s claim of a breach of fiduciary duty under ERISA. In particular, the allegations in the Amended Complaint do not, individually or in combination, give rise to a reasonable inference that (1) Morgan Stanley’s investment decisions with respect to the fixed-income Portfolio were imprudent given the circumstances prevailing at the time of those decisions; (2) Morgan Stanley did not properly diversify the fixed-*728 income Portfolio; or (3) Morgan Stanley failed to act in accordance with Plan documents.
5. The District Court also did not err, must less “abuse” its discretion, by declining to exercise supplemental jurisdiction over the remaining state-law claims.
For these reasons, the judgment of the District Court is AFFIRMED.
Notes
. The plaintiffs originally filed suit on November 23, 2009. Saint Vincent’s filed this suit “on its own behalf and as fiduciary of the Saint Vincent Catholic Medical Centers Retirement Plan,” Am. Compl. ¶ intro., alleging that it is "the Plan's fiduciary and has authority to bring these claims pursuant to ERISA §§ 409 and 502(a)(2),” id. ¶ 6. The relevant provision of ERISA provides, in relevant part, that "a participant, beneficiary or fiduciary” may sue for a breach of fiduciary duty, see 29 U.S.C. § 1132(a)(2), and we have previously held that a plan sponsor cannot sue under this provision in its capacity “as an employer,” Tuvia Convalescent Ctr., Inc. v. Nat’l Union of Hosp. & Health Care Emps.,
. Saint Vincent Catholic Medical Centers petitioned for Chapter 11 bankruptcy relief on April 14, 2010. As a result of the financial difficulties of Saint Vincent Catholic Medical Centers, the Pension Benefit Guaranty Corporation ("PBGC”) — an independent agency of the federal government, "created under ERISA to guarantee payment of all nonforfeitable pension benefits despite termination of the relevant pension plan,” Alessi v. Raybestos-Manhattan, Inc.,
Also as a result of the financial difficulties of Saint Vincent Catholic Medical Centers, all of its facilities have been sold or closed. Most notably, St. Vincent’s Hospital Manhattan, which served New York City's Greenwich Village for more than one hundred and fifty years, closed in 2010. Anemona Hartocollis, Staff Says Goodbye to St. Vincent’s Hospital, N.Y. Times, May 1, 2010, at A15; see also Anemona Hartocollis, The Decline of St. Vincent’s Hospital, N.Y. Times, Feb. 3, 2010, at Al. The buildings and property of the former hospital are being converted into luxury apartments. See Joseph De Avila, St. Vincent’s Site Moves On, Wall St. J., Sept. 15, 2011, at A22.
. Fixed-income securities, or bonds, "are debt instruments that represent cash flows payable during a specified time period. They are essentially loans. The cash flows they represent are the interest payments on the loan and the loan redemption.” Moorad Choudhry, Fixed Income Securities and Derivatives Handbook: Analysis and Valuation 3 (2010). "The mortgage market is the largest sector of the fixed-income market and mortgage securities are among the most actively traded securities in the fixed-income market.” Thomas P. Lemke et al., Mortgage-Backed Securities § 4:1 (2012), available at Westlaw MortSec.
. In addition to requiring "one or more named fiduciaries who jointly or severally
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, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
29 U.S.C. § 1002(21)(A). As the Supreme Court has explained, this definition is framed "not in terms of formal trusteeship, but in functional terms of control and authority over the plan, ... thus expanding the universe of persons subject to fiduciary duties.” Mertens v. Hewitt Assocs.,
. The Amended Complaint does not allege the particular percentage of the Citigroup BIG concentrated in mortgage-backed securities.
. For ease of readability, we use the shorthand "Morgan Stanley” to refer to defendant-appellee Morgan Stanley Investment Management Inc., whose parent company, Morgan Stanley, is not a party to this suit.
.QIL apparently brought these claims as state-law claims because the Insurance Fund is not an employee benefit plan and therefore
. Ginnie Mae, Fannie Mae, and Freddie Mac are short-hand names, respectively, for the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation.
. As securities issued by a federal agency, “Ginnie Mae securities ... carry the full faith and credit of the United States.” Anchor Savings,
. "Credit risk” (or "default risk”) refers to the risk that a borrower will fail to make its debt payments. See Anand J. Bhattachaiya et al., An Overview of Mortgages and the Mortgage Market ("Bhattachaiya”), in The Handbook of Mortgage-Backed Securities 30 (discussing credit and default risk). With respect to the invested principal, agency-backed mortgages pose little or no risk of default because a GSE effectively guarantees the principal payments. Id.; see also note 9, ante. "Prepayment risk” refers to the risk that the borrower will pay off the mortgage ahead of schedule, most commonly by selling the property or refinancing the loan at a lower interest rate, thus disrupting the lender’s expected future cash flow. See Bhattachaiya at 27.
."The Federal Housing Finance Agency, or FHFA, was established in 2008 by the Housing and Economic Recovery Act ('HERA') to regulate Fannie Mae, Freddie Mac, and/or the Federal Home Loan Banks ('FHLBs').” Town of Babylon v. Fed. Hous. Fin. Agency,
. Section 1104(a)(1) provides, in relevant part, as follows:
(a) Prudent man standard of care
(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
(C) 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; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III of this chapter.
29 U.S.C. § 1104(a)(1) (emphasis supplied).
. In the District Court, Saint Vincent’s also argued that Morgan Stanley breached its duty of loyalty under § 1104(a)(1)(A), but it has abandoned that argument on appeal. See, e.g., Cruz v. Gomez,
. Pursuant to 29 C.F.R. § 2550.404a-l(b)(l)(i), the requirements of 29 U.S.C. § 1104(a)(1)(B) are satisfied if the fiduciary:
(i) Has given appropriate consideration to those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the plan’s investment portfolio with respect to which the fiduciary has investment duties; and
(ii) Has acted accordingly.
The regulations then provide, in relevant part, that
“appropriate consideration” shall include, but is not necessarily limited to, ... [a] determination by the fiduciary that the particular investment or investment course of action is reasonably designed, as part of the portfolio (or, where applicable, that portion of the plan portfolio with respect to which the fiduciary has investment duties), to fur*717 ther the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action....
29 C.F.R. § 2550.404a-l(b)(2)(i).
. Although Saint Vincent’s — the plaintiff— was the plan administrator, the complaint does not disclose any knowledge of Morgan Stanley’s operations as an investment manag
. In relevant part, 29 U.S.C. § 1021(a) provides that plan administrators must "cause to be furnished in accordance with section 1024(b) of this title to each participant covered under the plan and to each beneficiary who is receiving benefits under the plan ... (2) the information described in subsection (f) and sections 1024(b)(3) and 1025(a) and (c) of this title.”
. With respect to defined-benefit plans, ERISA provides that the administrator must provide a "plan funding notice ... to each plan participant and beneficiary,” 29 U.S.C. § 1021(f)(1), and that such notice "shall include” notice that the participant or beneficiary "may obtain a copy of the annual report of the plan filed under section 1024(a) of this title upon request, through the Internet website of the Department of Labor, or through an Intranet website maintained by the applicable plan sponsor (or plan administrator on behalf of the plan sponsor),” id. § 1021 (f)(2)(B)(ix).
.Under 29 U.S.C. § 1024(b)(4), for example, "[t]he administrator shall, upon written request of any participant or beneficiary, furnish a copy of the ... latest annual report.”
. We have recently explained that “a reasonable inference need not be 'as compelling as any opposing inference' one might draw from the same factual allegation." N.J. Carpenters Health Fund,
. For instance, the Amended Complaint does not allege that the ratings of the relevant securities fell below the ratings-agency benchmarks established by plan documents, see Part C.iii., post, nor does it allege facts plausibly showing that the securities were improvidently risky according to some other metric or method used by prudent investors at the time.
. Because Saint Vincent's relied heavily upon, and quoted from, portions of the Guidelines in its Amended Complaint, we are permitted to refer to other provisions of the Guidelines in evaluating Saint Vincent’s claims. See Chambers v. Time Warner, Inc.,
. For this reason, our holding is not in tension with our decision in Litwin v. Blackstone Group, L.P.,
. On appeal, Saint Vincent’s argues, for the first time, that it has alleged a viable failure-to-diversify claim because a document submitted for the first time by Morgan Stanley in its motion to dismiss shows that, as of December 31, 2008, the Portfolio contained a 49.6% concentration in mortgages, while the benchmark index contained a 38.9% concentration. See Joint App'x at 152. This new information, which was not relied on by the District Court, is not relevant to this appeal, which asks whether the complaint presents sufficient allegations to survive a motion to dismiss. See Garanti Finansal Kiralama A.S. v. Aqua Marine & Trading Inc.,
. Section 1367(c) provides, in relevant part, that "district courts may decline to exercise supplemental jurisdiction over a claim ... if ... the district court has dismissed all claims over which it has original jurisdiction.” 28 U.S.C. § 1367(c)(3).
Dissenting Opinion
dissenting in part:
In enacting the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001, et seq., Congress sought to ensure “the continued well-being and security of millions of employees and their dependents” by regulating employee benefit plans. See id. § 1001(a). To achieve this goal, Congress required the fiduciaries of ERISA benefit plans to act in accordance with stringent standards of conduct. See id. § 1001(b). “The fiduciary obligations of the trustees to the participants and beneficiaries of [an ERISA] plan are those of trustees of an express trust — the highest known to the law.” La Scala v. Scrufari,
Such standards are enforced in part by private litigation. See Braden v. Wal-Mart Stores, Inc.,
Against the backdrop of strong statutory protections and the Secretary’s judgment that “unnecessarily high pleading standards” should not be permitted to render such protections moot, the majority in effect embraces a heightened pleading standard which threatens to do exactly that. ERISA should not be gutted by the judicial imposition of a pleading standard with no basis in law. While I agree with the majority that the District Court was correct to dismiss Plaintiffs’ claims for breach of the fiduciary duty to diversify and breach of the duty to act in accordance with the documents and instruments governing the Plan, I would find that Plaintiffs have adequately stated a claim for a breach of the fiduciary duty of prudence. Accordingly, I respectfully dissent in part.
BACKGROUND
Plaintiffs in this action claim that their investment manager, Morgan Stanley Investment Management (“MSIM”)
According to Plaintiffs, they instructed MSIM to carry out a low-risk investment strategy with respect to their Plan assets. Specifically, Plaintiffs allegedly promulgated written investment guidelines, which specified that the Plan’s “primary investment objective” was the “preservation of principal with emphasis on long-term growth.” Am. Compl. ¶ 20. In addition, Plaintiffs designated as a performance benchmark what is now known as the Citigroup Broad Investment Grade Index
MSIM allegedly departed from the foregoing, conservative investment strategy by placing large amounts of the Portfolio’s assets into high-risk investments. For example, MSIM allegedly invested between 9% and 12.6% of the Portfolio in “non-agency mortgage securities” during the relevant time period. Id. ¶ 23. Such securities failed to meet the underwriting standards of Fannie Mae and Freddie Mac, and thus were not guaranteed. Id. ¶ 22 n. 2. By contrast, the Citigroup BIG had no exposure to non-agency mortgage securities. Id. ¶ 23.
According to Plaintiffs, these and other investments “directly exposed the Plan to the volatility of the subprime mortgage market,” at precisely the time borrower defaults “were skyrocketing and numerous subprime lenders were facing insolvency.” Id. ¶ 29. Plaintiffs claim that MSIM “continued to maintain the fixed-income portfolio’s allocation to ... mortgage securities” “[e]ven as ... many ... problems in the mortgage-backed securities market came to light.” Id. ¶ 43. For example, MSIM invested Plan assets in mortgage securities issued by IndyMac Bank, Bear Stearns, Washington Mutual, and Countrywide, each of which suffered severe losses due to mortgage failures. Id. ¶¶ 31, 36-41. Plaintiffs claim that damages resulting from imprudent investment of the Plan’s assets during the relevant time period exceed $25 million. Id. ¶ 27.
The District Court concluded that Plaintiffs’ Amended Complaint did not sufficiently allege MSIM’s imprudent management of the Plan. It found that the Amended Complaint lacked allegations that MSIM inadequately investigated the merits of its investments, and instead focused on “the poor results of the investments.” (JA 218.)
DISCUSSION
I. Applicable Law and Standard of Review
We test the sufficiency of a complaint by a familiar standard. But in affirming the dismissal of Plaintiffs’ Prudence Claim, the majority here effectively — and contrary to authority — deviates from it. To show why this is so, I briefly review what the Supreme Court has prescribed as the minimum required in order to state a claim upon which relief can be granted.
Rule 8 of the Federal Rules of Civil Procedure provides that a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). To meet this standard, and thus survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
“A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal,
We review de novo the dismissal of a complaint pursuant to Rule 12(b)(6), accepting all factual allegations as true and drawing all reasonable inferences in favor of the plaintiff. Caro v. Weintraub,
II. Plaintiffs’ Prudence Claim Is Adequately Stated
A. Applicable Law
To state a claim for breach of fiduciary duty under ERISA, a plaintiff must allege facts which, if true, would show that the defendant acted as a fiduciary, breached its fiduciary duty, and thereby caused a loss to the plan at issue. 29 U.S.C. § 1109(a); Pegram v. Herdrich,
An ERISA fiduciary must discharge its duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” 29 U.S.C. § 1104(a)(1)(B).
ERISA’s “prudent man” standard is an objective one; it focuses on the process of the fiduciary’s conduct preceding the challenged decision. See, e.g., Braden,
Where a “fiduciary was aware of a risk to the fund, he may be held liable for failing to investigate fully the means of protecting the fund from that risk.” Chao v. Merino,
B. Allegations Regarding MSIM’s Mismanagement of Plan Assets
Reasonable inferences drawn from Plaintiffs’ factual allegations render it at least plausible that the process by which MSIM selected and managed Plaintiffs’ investments was tainted by failure of effort or competence. Because Plaintiffs have alleged sufficient facts to state a claim for breach of the ERISA duty of prudence,
1. Analysis
The majority acknowledges that a complaint which contains “no factual allegations referring directly to MSIM’s knowledge, methods, or investigations at the relevant times,” Maj. Op. at 718, can survive a motion to dismiss so long as “the court, based on circumstantial factual allegations, may reasonably ‘infer from what is alleged that the process was flawed.’” Maj. Op. at 718 (quoting Braden,
According to Plaintiffs, MSIM’s mandate as the Plan’s fixed-income investment manager was to manage the Portfolio with a focus on preservation of principal, with an emphasis on long-term growth. The written investment guidelines further designated Citigroup BIG as the applicable investment benchmark; this allegedly “signaled to MSIM that, as an ERISA fiduciary, it was required to execute a low-risk, conservative investment strategy.” Am. Compl. ¶ 21.
MSIM allegedly “abandoned this conservative investment profile to speculate in high-risk, mortgage-backed investments,” id. ¶ 28, by making “high-risk investments ... at precisely the time when defaults of subprime mortgages were skyrocketing and numerous subprime lenders were facing insolvency.” Id. ¶ 29. Moreover, Plaintiffs allege that MSIM “failed to monitor the Plan’s investments to protect the Plan from economic harm.” Id. ¶ 61. According to Plaintiffs, “warning signs” appeared throughout 2007 and 2008, which signaled that the non-agency RMBS securities “were not appropriate for the fixed-income portfolio.” Id. ¶ 35. For example, in 2007, analysts predicted that Morgan Stanley — MSIM’s parent company — would write down $6 billion on the value of similar mortgage securities. In addition, MSIM invested Plan assets in subprime mortgage securities issued by, inter alia, IndyMac, Bear Stearns, and Countrywide. Reports filed by these entities in 2007 reflected (1) the rapid increase in delinquencies and non-performing home loans, id. at ¶ 38; (2) rising defaults “across all mortgage categories,” id. at If 41; (3) the fact that investments backed by risky mortgages had left two of Bear Stearns’s hedge funds “virtually worthless,” id. at ¶40; and (4) predictions that “before it turns around,” the housing downturn would be “the longest and deepest since the Great Depression.” Id. at ¶ 38.
In light of these warning signs, MSIM allegedly “knew or should have known” that exposing the Portfolio to such high-risk mortgage securities was imprudent. Id. at ¶ 34. Yet, Plaintiffs allege, MSIM continued to maintain the Portfolio’s allocation of these risky investments from the fourth quarter of 2007 through 2008. As a result, the Portfolio “significantly] under-perform[ed] relative to the Citigroup BIG benchmark”: in the fourth quarter of 2007, the Portfolio ended the quarter up 0.8%, whereas the Citigroup BIG ended the quarter up 5.7%; for 2008, the Portfolio was down 12%, while the Citigroup BIG was up 7%. Id. at ¶ 26.
While Plaintiffs’ Amended Complaint does not specifically detail the processes by which MSIM allegedly mismanaged the
2. MSIM’s Arguments Are Without Merit
MSIM’s attempt to portray each of Plaintiffs’ allegations as insufficient is unpersuasive.
First, MSIM contends that it is “irrelevant” whether, as Plaintiffs claim, the issuers of the mortgage securities in which MSIM invested “lost money” during the relevant time period. Appellee’s Br. at 20-21. According to MSIM, this is so because “the default risk of a mortgage-backed security depends not on the fi-nancials of the issuer, but on the characteristics of the underlying mortgages.” Appellee’s Br. at 20. Whether MSIM’s contention is correct is a factual question ill-suited for resolution at the pleading stage. In any event, where — as Plaintiffs allege — issuers of mortgage-backed securities announce massive losses due to defaults on the loans underlying such securities, it is at least plausible that such losses may say something about the overall risk of those types of securities.
Second, MSIM discounts Plaintiffs’ allegation that Morgan Stanley — MSIM’s parent company — was predicted by analysts to write down $6 billion worth of mortgage-backed securities similar to those in the Portfolio. MSIM faults Plaintiffs for failing to allege that MSIM “had knowledge of the predicted write-down or its bases, or that MSIM had any involvement with Morgan Stanley’s decision to invest in the relevant securities.” Appellee’s Br. at
Third, MSIM argues that, although Plaintiffs allege that Standard & Poor’s downgraded the credit ratings on $7 billion worth of AH>-A mortgage securities in December 2007, Plaintiffs fail to allege “that any securities held by the [Portfolio ] were downgraded.” Appellee’s Br. at 22. MSIM cites no authority requiring ERISA plaintiffs to plead such evidence' — and do so with such particularity — in order to survive a motion to dismiss. Plaintiffs have alleged facts which, if true, demonstrate the publicly-known volatility of the mortgage securities market. In light of Standard & Poor’s $7 billion downgrade, it is at least plausible that a reasonable fiduciary would have reevaluated its decision to invest in that sector. See, e.g., Armstrong v. LaSalle Bank Nat’l Ass’n,
Similarly, MSIM cites to several district court decisions — many of which do not arise in the ERISA context — for the proposition that industry-wide troubles are insufficient to demonstrate MSIM knew or should have known of the risk associated with the investments at issue. As discussed in part C, infra, “ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences.” Braden,
MSIM’s arguments, if correct, suggest that it might well have a compelling defense to offer during the later stages of this litigation. They do not, however, alter the conclusion that Plaintiffs have adequately stated a claim for breach of the duty of prudence imposed by ERISA. To the extent that the majority takes up MSIM’s invitation to assess the strength of Plaintiffs’ allegations, such analysis is premature at this juncture.
C. The Majority’s New Pleading Requirement
In evaluating whether Plaintiffs sufficiently allege that MSIM acted imprudently, the District Court and the majority purport to merely assess whether the Amended Complaint states a plausible claim of imprudence regarding the process by which MSIM made the challenged investment decisions. But in doing so, both
The majority holds that “a claim for a breach of fiduciary duty under ERISA may survive a motion to dismiss — even absent any well-pleaded factual allegations relating directly to the methods employed — if the complaint ‘alleges facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.’ ” Maj. Op. at 718 (quoting In re Citigroup,
The majority’s heightened pleading requirement finds no support in the only guideposts that matter at the pleading stage: Rule 8 and the standards articulated by the Supreme Court in Twombly and Iqbal. Rule 8 merely requires a complaint to contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). I fail to see how the “short and plain statement” standard requires plaintiffs to outline in their complaints a more prudent course of action that the fiduciary should have taken.
Instead, Rule 8 permits a plaintiff to pursue a claim based on allegations which only indirectly show plausibly unlawful behavior, so long as the facts pleaded give the defendant fair notice of the claim, and allow the court to draw the reasonable inference that the plaintiff is entitled to relief. Braden,
Moreover, the majority’s newly articulated pleading requirement ignores the practical reality that plan participants’ often lack access to relevant information and incentivizes fiduciaries to keep their actions concealed. While ERISA imposes certain disclosure requirements on plan administrators, there is no suggestion that these disclosures address how or why investment decisions were made. See Maj. Op. at 719-20. The consequence of the majority’s holding is that the federal courts will often dismiss claims by ERISA plaintiffs who have not yet had an opportunity to employ appropriate discovery to develop their case. This is not what Congress intended when it enacted ERISA and subjected plan fiduciaries to the highest duties known to law. See Donovan,
Furthermore, while ERISA plaintiffs may — as the majority suggests — generally have access to plan documents and reports that will provide them “the opportunity to
In light of the foregoing, I agree with the majority to the extent it holds that ERISA plaintiffs may state a claim for breach of the duty of prudence by alleging facts that “if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.” Maj. Op. at 718. But in my view, Plaintiffs have met this burden, and cannot be expected to further allege facts “showing that a prudent fiduciary in like circumstances would have acted differently.” Maj. Op. at 720.
CONCLUSION
For the reasons stated above, I would vacate the District Court’s dismissal of Plaintiffs’ Prudence Claim, and remand for further proceedings.
Because I agree that Plaintiffs’ remaining claims were properly dismissed, I join the majority in affirming the dismissal of those claims.
. While the majority refers to Defendant as "Morgan Stanley”, I use the term MSIM so as to distinguish the investment advisor branch of Morgan Stanley from its parent company.
. MSIM begins by arguing that “the [Amended Complaint] contains no allegátions that MSIM’s investment processes were deficient.” Appellee’s Br. at 18. As discussed, however, drawing reasonable inferences in Plaintiffs' favor renders plausible the claim that MSIM’s process was tainted.