In re Tyco Litigation MDL-02-1335 12/02/04
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
In re Tyco International. Ltd. Multidistrict Litigation (MDL 1335) MDL DOCKET NO. 02-1335-PB ERISA Action Case N o . 02-1357-PB Opinion No. 2004 DNH 177
MEMORANDOM AND ORDER
The named plaintiffs in this class action are participants
in retirement plans (“Plans”) sponsored by Tyco International
(US) Inc. (“Tyco U S ” ) . Plaintiffs invoke the Employee Retirement
Income Security Act (“ERISA”) in asserting breach of fiduciary
duty claims against Tyco U S , its parent corporation, Tyco
International Ltd. (“Tyco International”), the committee that
administered the Plans, and several former officers and directors
of Tyco US and its parent corporation. The claims concern the
Tyco Stock Fund, which holds Tyco International stock and is one
of the Plans’ investment options. Plaintiffs charge in Count I
that defendants made material misstatements and omissions to
participants concerning Tyco International’s financial condition
and the risk characteristics of the fund. They allege in Count II that defendants were negligent in allowing participants to
invest in the fund.
Defendants attack the complaint’s sufficiency on several
grounds. They first argue that only the committee that
administered the Plans was a fiduciary. Second, they assert that
plaintiffs’ claims are barred by Section 404(c) of ERISA, which
precludes certain breach of fiduciary claims for losses that were
caused by a participant’s own investment decisions. Next, they
contend that Count I fails because it does not allege any
actionable misstatements or omissions and Count II is deficient
because it does not sufficiently allege that defendants acted
imprudently. Finally, they contend that the complaint must be
dismissed because ERISA does not authorize Plan participants to
recover monetary relief for fiduciary breaches.
I. BACKGROUND
Tyco US sponsors the seven retirement plans that are at
issue in this case. All seven plans are “individual account
plans.” 29 U.S.C. § 1002(34). Accordingly, each participant is
assigned an individual account and the participant’s benefits are
-2- “based solely upon the amount contributed to the account, and any
income, expenses, gains or losses, and any forfeitures of
accounts of other participants which may be allocated to such
participant’s account.” Id. Participants are permitted to
contribute to their accounts and Tyco US is required to make
matching contributions in amounts equal to a specified percentage
of a participant’s regular compensation. Participants may choose
from among several different investment options and may transfer
funds from one investment to another at any time.
The Tyco Stock Fund is one of several investment options
that are available under the Plans. The fund holds shares in
Tyco International stock. Because it is a “unitized fund,” a
trustee designated by Tyco US holds title to the stock and
participants are assigned units in the fund. The trustee
acquires stock by purchasing it on the open market. Participants
are not permitted to invest more than 25% of their Plan assets in
the fund.
The Tyco US Retirement Committee (“Committee”) is both the
administrator and a “named fiduciary” for all seven Plans. The
Board of Directors of Tyco US is responsible for appointing and
-3- removing members of the Committee. The Plans describe the
respective powers and duties of the Board and the Committee by
stating that
[t]he Board of Directors of the Plan Sponsor and the Committee shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under this Plan and the Trust Agreement. In general, the Board of Directors of the Plan Sponsor shall have the sole responsibility for the appointment of the Retirement Committee. The Committee shall have the sole responsibility for the general administration of the Plan and for carrying out its provisions.
See, e.g., Plan II ¶ 8.1. Each Plan also states that
[t]he Board of Directors of the Plan Sponsor and the Committee and any other person who, by reason of his involvement in and under this Plan, shall be deemed to be a fiduciary within the meaning of Title I , Section 3(21) of ERISA, shall discharge their Plan-related duties and responsibilities solely in the interests of the participants and their beneficiaries and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.
See, e.g., Plan II Art. XIII.
Plaintiffs claim that the price of Tyco International’s
stock was grossly inflated during the class period as a result of
undisclosed looting and pervasive accounting fraud by its senior
-4- management. As a result, class members who held units in the
Tyco Stock Fund during the class period allegedly suffered
substantial losses when the company’s true financial condition
was exposed.
II. STANDARD OF REVIEW
“[A] complaint should be dismissed [pursuant to Fed. R. Civ.
P. 12(b)(a)]. . . ‘only if it is clear that no relief could be
granted under any set of facts that could be proved consistent
with the allegations.’” Gorski v . N.H. Dep’t of Corr., 290 F.3d
466, 473 (1st Cir. 2002) (quoting Hishon v . King & Spalding, 467
U.S. 6 9 , 73 (1984)). Accordingly, I must accept the complaint’s
factual allegations as true and draw all reasonable inferences
from those alleged facts in favor of the plaintiffs. Id.
Although the complaint is governed by the liberal pleading
standards of Fed. R. Civ. P. 8 ( a ) , it nevertheless “must set
forth factual allegations, either direct or inferential,
respecting each material element necessary to sustain recovery
under some actionable legal theory.” United States ex rel.
Karvelas v . Melrose-Wakefield Hosp., 360 F.3d 2 2 0 , 240 (1st Cir.
2004).
-5- III. ANALYSIS1
A. Fiduciary Status
Defendants first argue that only the Committee and its
members can be held liable for a breach of fiduciary duty because
the Committee is the only entity that was named as a fiduciary
under the Plans.
Retirement plans regulated under ERISA must have one or more
named fiduciaries. 29 U.S.C. § 1102(a). In addition, Section
3(21)(a) of ERISA provides that
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 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 respon-
1 Defendants contend that the named plaintiffs lack standing to assert claims on behalf of participants in Plans I , V I , and VII because none of the named plaintiffs was a participant in these Plans. The short answer to this argument is that it should be raised in an objection to a motion for class certification rather than in a motion to dismiss. Plaintiffs plainly have standing to seek relief for their own injuries. Whether they also should be permitted to represent a class that includes participants in related plans implicates prudential concerns that must be analyzed under Fed. R. Civ. P. 2 3 . See Fallick v . Nationwide Mut. Ins. Co., 162 F.3d 4 1 0 , 422 (6th Cir. 1998).
-6- sibility to do s o , or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
29 U.S.C. § 1002(21). Several aspects of Section 3(21)(a)
require emphasis. First, the section provides a functional
rather than formal test of fiduciary status. Accordingly, a
person may owe fiduciary duties to a participant even though the
plan documents do not designate the person as a fiduciary.
Second, a person will be deemed to be a fiduciary only if he
either: (1) has or exercises discretion in administering the plan
or managing its assets; or (2) provides investment advice
concerning plan assets in exchange for compensation. Finally, as
the First Circuit has recognized, “[f]iduciary status is not an
all or nothing proposition; the statutory language indicates that
a person is a plan fiduciary only ‘to the extent’ that he
possesses or exercises the requisite discretion and control.”
Beddall v . State S t . Bank & Trust Co., 137 F.3d 1 2 , 18 (1st Cir.
1998).
Plaintiffs argue that defendants other than the Committee
are liable because they qualify as fiduciaries under Section
3(21)(a). Defendants respond by contending that they cannot be
considered fiduciaries under this section either because they did
-7- not exercise discretion or they were not administering the Plans
when they allegedly committed the acts on which plaintiffs’
claims are based. I address this argument with respect to each
group of defendants in turn.
1. Bent and Heffernan
Robert Bent and Kelly Heffernan were employees of Tyco U S .
Plaintiffs have sued them in their respective capacities as the
Clerk and an authorized signatory of the Committee.
I agree with defendants that the complaint does not
sufficiently allege that either Bent or Heffernan owed fiduciary
duties to the plaintiffs. While the Committee plainly is a named
fiduciary, the complaint does not allege that either Bent or
Heffernan were members of the Committee. Nor is it reasonable to
assume that they were members simply because they allegedly
performed services on behalf of the Committee. Finally, I cannot
accept plaintiffs’ argument that Bent and Heffernan acted in a
fiduciary capacity because they signed SEC filings on behalf of
the Committee. The complaint does not claim that either
defendant exercised discretionary control over the administration
of the Plans when they signed the documents in question.
-8- Ministerial actions of this sort do not give rise to fiduciary
responsibilities. See Beddall, 137 F.3d at 2 0 . Accordingly, I
dismiss all claims against Bent and Heffernan.
2. Tyco US
Plaintiffs offer three arguments to support their claims
against Tyco U S . First, they contend that it was a fiduciary
because the Plans assign it discretionary authority with respect
to matters of Plan administration. Next, they argue that it was
a fiduciary because it actually exercised such authority.
Finally, they contend that it is vicariously liable for the
fiduciary breaches of its employees who served on the Committee
based on the doctrine of respondeat superior.
a. Plan Documents
The Plans identify Tyco US as the Plan Sponsor and state
that “the Plan Sponsor hereunder shall have and exercise all
rights, powers, and duties thereof with respect to the Plan and
the assets of the Plan.” See, e.g., Plan II ¶ 10.2. Plaintiffs
claim that this passage makes Tyco US a fiduciary because it
gives the company discretionary authority with respect to matters
of Plan administration.
-9- Plaintiffs’ argument is based on a misreading of the above-
quoted passage. Paragraph 10.2 merely recognizes that Tyco US
has the powers and duties of a Plan Sponsor. The only power that
the Plans specifically assign to Tyco US in that capacity is the
power to amend the Plans. See Plan II ¶ 10.1. A Plan sponsor
generally does not act in a fiduciary capacity when it exercises
such power. See Lockheed Corp. v . Spink, 517 U.S. 8 8 2 , 889-90
(1996). Accordingly, the complaint does not sufficiently allege
that the Plan documents assign Tyco US discretionary authority
with respect to matters of Plan administration.
b. Exercise of Discretionary Authority
Plaintiffs alternatively claim that Tyco US was a fiduciary
because it actually exercised discretionary authority in
administering the Plans. Plaintiffs base this argument on
actions that Tyco US allegedly took while operating the Tyco
Benefits Center. Several Plan documents advise participants to
contact the Center if they have questions concerning the Plans.
The documents also designate the Center as the point of contact
for participants who wish to reallocate investments, modify
contributions, or obtain distributions. Plaintiffs charge that
Tyco US necessarily engaged in discretionary acts of Plan
-10- administration when, acting through the Center, it assisted
participants with such matters. I disagree.
A Plan Sponsor does not become a fiduciary merely because it
performs ministerial duties with respect to matters of Plan
administration. See Beddall, 137 F.3d at 2 0 . Responding to
routine requests for information and processing requests to
reallocate investments, change contributions, or make
distributions, ordinarily does not involve the kind of discretion
that is required to give rise to fiduciary responsibilities.
Plaintiffs thus do not identify any conduct by Tyco US that
supports the view that it engaged in discretionary acts of Plan
administration.
c. Respondeat Superior
Plaintiffs alternatively invoke the doctrine of respondeat
superior in claiming that Tyco US is vicariously liable for the
fiduciary breaches of its employees who served on the Committee.
The First Circuit has not identified the circumstances under
which an employer will be held vicariously liable for the
fiduciary breaches of its employees, and the few courts that have
addressed the question have taken divergent paths in doing s o .
The Fifth Circuit has suggested that an employer will be
-11- vicariously liable for its employee’s actions only if it
“actively and knowingly” participated in an employee’s fiduciary
breaches. See Am. Fed’n of Unions Local 102 Health & Welfare
Fund v . Equitable Life Assur. Soc. of the U.S., 841 F.2d 6 5 8 , 665
(5th Cir. 1988). The Sixth Circuit has concluded that an
employer can be held liable for an employee’s breaches of
fiduciary duty even if it was unaware of its employee’s
misconduct. See Hamilton v . Carell, 243 F.3d 9 9 2 , 1002 (6th Cir.
2001)(dictum); see also Nat’l Football Scouting, Inc. v . Cont’l
Assur. Co., 931 F.2d 646, 649 (10th Cir. 1991) (assuming that
respondeat superior doctrine applies to ERISA claims). In
contrast, the Ninth Circuit has declined to hold an employer who
sponsors an ERISA plan liable for breaches of fiduciary duty
committed by employees who served on the Committee that
administered the Plan. See Gelardi v . Pertec Computer Corp., 761
F.2d 1323, 1325 (9th Cir. 1985). District courts that have
addressed the issue are similarly split. Compare In re Reliant
Energy ERISA Litig., 336 F. Supp. 2d. 646, 657-58 (S.D. Tex.
2004) (applying respondeat superior), Howell v . Motorola, Inc.,
337 F. Supp. 2d 1079, 1093-94 (N.D. Ill. 2004) and Kling v .
Fidelity Mgmt. Trust Co., 323 F. Supp. 2d. 1 3 2 , 146-47 (D. Mass.
-12- 2004) with Crowley ex rel. Corning Inc. Inv. Plan v . Corning,
Inc., 234 F. Supp. 2d. 2 2 2 , 228-29 (W.D.N.Y. 2002) (rejecting
respondeat superior) and Tool v . Nat’l Employee Benefit Servs,
Inc., 957 F. Supp. 1114, 1117 (N.D. Cal. 1996).
I am not able to resolve defendants’ challenge to
plaintiffs’ respondeat superior claim on the present record.
While I do not doubt that an employer can be held vicariously
liable for the fiduciary breaches of its employees under certain
circumstances, I cannot determine how the doctrine applies in
this case without knowing more about the underlying facts.
Accordingly, I decline to dismiss plaintiffs’ claims against Tyco
US to the extent that they are based on a respondeat superior
theory.
3. Tyco US Board Members
Plaintiffs argue that the Board of Directors of Tyco US owed
fiduciary duties to the Plans and their participants because it
acted in a fiduciary capacity when it appointed and retained
members of the Committee. I agree.
When an entity is given the power to appoint and retain a
plan administrator, it is subject to a fiduciary duty to use
-13- reasonable care in exercising that power. See Am. Fed’n of
Unions Local 1 0 2 , 841 F.2d at 665; Leigh v . Engle, 727 F.2d 113,
135 (7th Cir. 1984); In re Reliant Energy ERISA Litig., 336 F.
Supp. 2d. at 656; In re Enron Corp. Sec., Derivative, & “ERISA”
Litig., 284 F. Supp. 2d 5 1 1 , 552 (S.D. Tex. 2003). Whether the
directors of Tyco US breached this duty is a question of fact
that must be resolved at a later date.
4. Tyco International
Plaintiffs offer three arguments to support their contention
that Tyco International was a fiduciary. First, they claim that
Tyco International assumed fiduciary duties by disseminating
documents that it was required to either file with the SEC or
make available to Plan participants in order to comply with
federal securities laws. Second, they argue that it was a
fiduciary because it is the alter ego of Tyco U S . Third, they
allege that it is vicariously liable for Kozlowski’s fiduciary
breaches under the doctrine of respondeat superior.
a. SEC Documents
Plaintiffs claim that Tyco acted in a fiduciary capacity
when it disseminated SEC Form S-8s and Section 10(a) prospectuses
that incorporated by reference other allegedly misleading SEC
-14- documents.2 Defendants respond by arguing that Tyco was acting
in a corporate capacity rather than a fiduciary capacity when it
disseminated the documents. To understand this issue, one must
know more about the relevant documents.
The Securities Act of 1933 (“Securities Act”) requires
issuers of certain securities to file registration statements.
See 15 U.S.C. § 77e. Form S-8 is the statement that covers
“securities to be offered to employees pursuant to employee
benefit plans.” 17 C.F.R. § 239.16(b)(a). The form is used to
register: (1) securities that an employer issues to its own
employees or employees of a parent or subsidiary; and (2)
interests in plans that offer such securities. See id. A
registrant is required to incorporate certain prior SEC filings
2 Plaintiffs also allege that Tyco International acted in a fiduciary capacity when it filed SEC Form 11-Ks on behalf of the Committee. A Form 11-K is an annual report “with respect to employee stock purchase, savings and similar plans, investments in which constitute securities regulated under the Securities Act of 1933.” Form 11-K at 1 . The form is signed by the plan’s administrator and must be filed with the SEC. See id. at 2 . Plaintiffs do not allege that Tyco International prepared or signed the Form 11-Ks. Instead, they merely assert that Tyco International filed the forms with the SEC on behalf of the Committee. Such conduct does not involve the exercise of discretion. Thus, Tyco International was not acting in a fiduciary capacity when it filed the Form 11-Ks on behalf of the Committee.
-15- by reference in a Form S-8. See Form S-8 at 8 . A Form S-8 must
be signed by the registrant, designated officers of the
registrant, and at least a majority of its directors. See id. at
10 n.1. The Plan is also required to sign the form if the
security consists of interests in the Plan. See id. Plaintiffs
charge that Tyco International prepared, signed, and filed the
Form S-8s at issue in this case.3
Section 10(a) of the Securities Act requires issuers of
certain securities to prepare prospectuses. See 15 U.S.C. §
77J(a). Special rules apply if a Form S-8 is used to register
the securities. For example, a prospectus need not be filed with
the SEC and the registrant may rely on Plan documents such as an
SPD to serve as the prospectus. See SEC Release N o . 280924 *5-6
(June 6, 1990). A Section 10(a) prospectus must incorporate by
reference the same SEC filings that must be incorporated by
reference in a Form S-8. See 17 C.F.R. § 230.428. The
3 Plaintiffs also argue that Tyco International’s former directors and several of its officers are liable because they signed the Form S-8s and were involved in the preparation of other SEC filings. This argument fails for the same reason that it is unavailing against Tyco International: the former directors and officers were not administering the Plans when they signed the forms.
-16- prospectuses at issue consisted of SPDs and Plan Information
Statements.
Whether Tyco International acted in a fiduciary capacity
when it disseminated Form S-8s and Section 10(a) prospectuses
depends upon whether it engaged in plan “management” or
“administration” when it disseminated the documents. The Supreme
Court addressed a somewhat similar question in Varity Corp. v .
Howe, 516 U.S. 489, 502 (1996). There, the Court considered,
among other things, whether deceptive statements that an employer
and plan administrator made to its employees concerning the
security of their benefits could support a breach of fiduciary
duty claim. In upholding the district court’s determination that
the defendant could be held liable for a breach of fiduciary
duty, the Court reasoned that the defendant was administering the
plan when it made the statements because: (1) the provision of
detailed information concerning the security of plan benefits is
a plan-related activity; (2) the statements at issue were made by
agents of the employer who were authorized to communicate to
participants in a fiduciary capacity; and (3) the participants
reasonably could have believed under the circumstances that the
employer was acting in a fiduciary capacity when its agents made
-17- the statements. Id. at 502-03.
Plaintiffs argue that Varity requires a similar conclusion
here because the Form S-8s and Section 10(a) prospectuses, like
the employer’s statements in Varity, provided participants with
detailed information concerning the security of their benefits.
This argument misreads Varity. As I have explained, Varity holds
only that such statements may qualify as acts of plan
administration if they are made by a person who is authorized to
act in a fiduciary capacity. This was not the case here because
Tyco International was acting solely as an issuer of stock rather
than a fiduciary when it disseminated the documents.
There are also good reasons why the court’s reasoning in
Varity should not be extended to the present case. First, it
would be difficult to reconcile such a result within the language
of Section 3(21)(a), which rests a finding of fiduciary status in
this type of case on a determination that the defendant actively
participated in the administration of the Plan. Second, there is
little evidence in the legislative history of either the
Securities Act, which is the source of the disclosure
requirements, or ERISA to support the view that an issuer of
stock necessarily assumes fiduciary responsibilities in complying
-18- with its obligations under the securities laws if it chooses to
allow its employees to invest in its stock as a part of an
individual account plan. Although plaintiffs plainly had a right
to expect that Tyco International would refrain from making
material misstatements in its SEC filings, that expectation must
be enforced under the securities laws rather than ERISA.
Accordingly, I reject plaintiffs’ argument that Tyco
International was engaged in discretionary acts of Plan
administration when it disseminated the Form S-8s and Section 10(a) prospectuses.4
b. Alter Ego Liability
Plaintiffs next argue that Tyco International is vicariously
liable for the fiduciary breaches of Tyco US because it is the
4 Plaintiffs specifically cite statements that Tyco allegedly made in a prospectus update that it prepared in response to the merger of Mallinkrodt, Inc. and a subsidiary of Tyco International. The prospectus update explained to participants in the prior Mallinkrodt plan that the plan’s option to invest in the Mallinkrodt Fund would be replaced by the option to invest in the Tyco Stock Fund following the merger. Plaintiffs attach special significance to this document because it states that Tyco International will be responsible for disseminating the prospectus update to participants. This argument is unavailing because, as I have explained, Tyco International did not engage in discretionary acts of Plan administration when it disseminated the prospectuses.
-19- alter ego of its subsidiary.
Although the First Circuit has yet to apply the alter ego
doctrine to a breach of fiduciary duty claim, it has identified
the conditions under which a parent corporation may be held
vicariously liable for its subsidiary’s obligation pursuant to
an ERISA-regulated plan to pay its retirees’ health insurance
premiums. In United Elect., Radio & Mach. Workers v . 163
Pleasant S t . Corp., 960 F.2d 1080 (1st Cir. 1992), the court
explained that “litigants who insist that the corporate veil be
brushed aside must prove three things: lack of corporate
independence, fraudulent intent, and manifest injustice.”5 Id.
at 1093.
5 The court held in a later opinion that proof of a wrongful anti-union motive was not always required to prove an ERISA alter ego claim if the corporations in question shared common ownership but were not in a parent-subsidiary relationship. See Mass. Carpenters Cent. Collection Agency v Belmont Concrete Corp., 139 F.3d 3 0 4 , 308 (1st Cir. 1992). In reaching this decision, however, the court stated that “we leave to another day the issue of what role anti-union animus would play in an ERISA suit for contributions to an employee benefit fund where liability is sought to be imposed on a parent company for the acts of its subsidiary on a veil piercing theory.” Id. at 308 n.8. Thus, United Electrical remains good law and continues to be relied on by the circuit as a correct description of the federal common law veil piercing test. See, e.g., InterGen N.V. v . Grina, 344 F.3d 1 3 4 , 148-49 (1st Cir. 2003).
-20- Construing the complaint in light of First Circuit
precedent, it is evident that plaintiffs have not pled
sufficient facts to state a claim that Tyco International is the
alter ego of Tyco U S . Plaintiffs do not allege a lack of
corporate independence between Tyco International and its
subsidiary except in conclusory terms. They do not assert that
Tyco International acted with fraudulent intent when it adopted
its corporate structure. Nor do they assert that Tyco US lacks
sufficient assets to pay any judgment that might be entered
against i t . Instead, plaintiffs base their argument entirely on
allegations that several officers of Tyco US also served as
officers of either Tyco International or one of its other
subsidiaries. Such allegations are not sufficient to state a
viable alter ego claim. See InterGen, 344 F.3d at 149 (“[c]ommon
ownership and common management, without more, are insufficient
to override corporate separateness and pave the way for alter ego
liability”).
5. Kozlowski’s Statements
Plaintiffs assert that Tyco International is liable on a
respondeat superior theory for misstatements and omissions that
Dennis Kozlowski, its former chief executive officer, allegedly
-21- made to participants. I have reserved judgment as to when an
ERISA breach of fiduciary claim may be maintained using a
respondeat superior theory. Accordingly, I decline to dismiss
plaintiffs’ claims against Tyco International to the extent that
they are based on Kozlowski’s alleged misstatements.6
B. Section 404(c) Defense
Section 404(c) of ERISA provides fiduciaries with an
affirmative defense to liability for injuries that are caused by
a participant’s exercise of control over assets in an individual
account plan. See 29 U.S.C. § 1104(c)(1). Defendants argue that
section 404(c) bars plaintiffs’ claims because their losses were
the result of their own poor investment decisions rather than
defendants’ misconduct.
A section 404(c) defense has four elements: (1) the plan at
issue must provide for individual accounts; (2) the plan must
permit a participant to exercise control over the assets in his
account; (3) the participant must actually exercise control over
the assets; and (4) the loss or fiduciary breach on which the
6 I also decline to dismiss plaintiffs’ claims against Kozlowski. Whether he was acting in a fiduciary capacity when he made the statements that plaintiffs attribute to him presents a question of fact that must be resolved at a later date.
-22- claim is based must result from the participant’s exercise of
control. See id.
Regulations issued by the Department of Labor elaborate on
the defense. See 29 C.F.R. § 2550.404c-1. These regulations
state that the defense is unavailable if the fiduciary either
exercised “improper influence” over the participant or concealed
“material non-public facts” that it could have disclosed without
violating federal or state law. See 29 U.S.C. § 2550.404c-
1(c)(2).
Although a defendant may raise an affirmative defense in a
Rule 12(b)(6) motion, the court may not grant the motion unless
the facts on which the defense is based are clear on the face of
the complaint. See Blackstone Realty, LLC v . FDIC, 244 F.3d 193,
197 (1st Cir. 2001). Defendants cannot satisfy this standard
here because I cannot determine from the complaint whether
defendants exercised improper influence over the participants or
concealed material nonpublic information from them. Accordingly,
I decline to dismiss the complaint pursuant to Section 404(c).
C. Count I
Plaintiffs charge in Count I that defendants breached their
fiduciary duties by negligently making material misstatements and
-23- omissions concerning the Tyco Stock Fund. They base their claim
in large part on statements concerning Tyco International’s
financial condition that the company made in its SEC filings.
Plaintiffs contend that these filings are attributable to the
Committee because the Committee incorporated the filings by
reference into Form S-8s, Form 11-Ks, Section 10(a) prospectuses,
and SPDs. Plaintiffs also rely on statements that Kozlowski
allegedly made to participants concerning Tyco International’s
financial condition and certain statements concerning the risk
characteristics of the Tyco Stock Fund that defendants allegedly
made in several different Plan documents. Defendants challenge
Count I by arguing that the alleged misstatements and omissions
are not actionable under ERISA.7
7 Defendants also argue that plaintiffs have attempted to attribute statements made by one defendant to other defendants who played no role in making or disseminating the statements. 29 U.S.C. § 1105 allows a fiduciary to be held liable for the misconduct of a co-fiduciary in certain circumstances but plaintiffs have not relied on this provision. Nevertheless, as I have explained, it is conceivable that Tyco US could be held liable for the Committee’s fiduciary breaches and Tyco International could be held liable for Kozlowski’s fiduciary breaches on a respondeat superior theory. Further, I have determined that the directors of Tyco US may be held liable for the Committee’s fiduciary breaches under certain circumstances if they failed to properly oversee appointees to the Committee. Whether a particular misstatement or omission should be
-24- I cannot evaluate defendants’ argument on the present
record. Although the Supreme Court has determined that a
fiduciary can be held liable if it intentionally makes material
misstatements to participants in an effort to profit at their
expense, see Varity Corp., 516 U.S. at 5 0 2 , neither the Supreme
Court nor the First Circuit has yet determined whether a breach
of fiduciary duty claim can be premised on negligent
misrepresentations. Although other courts have recognized such
claims in certain circumstances, see, e.g., Mathews v . Chevron
Corp., 362 F.3d 1172, 1183 (9th Cir. 2004); Krohn v . Huron Mem.
Hosp., 173 F.3d 5 4 2 , 547 (6th Cir. 1999), I am reluctant to
express a view on this issue without the benefit of an
evidentiary record.
I am also uncertain as to whether defendants can be held
liable for a failure to disclose material information. The First
Circuit has suggested that a fiduciary may have a duty to
disclose material information if he has reason to know that the
failure to disclose the information would be harmful and either a
attributed to a particular defendant under one of these theories is a question that can be resolved more reliably after the evidentiary record has been developed.
-25- participant has specifically requested the information or the
information concerns the plan as a whole. See Watson v .
Deaconess Waltham Hosp., 298 F.3d 1 0 2 , 114-15 (1st Cir. 2002). I
cannot determine whether the First Circuit’s reasoning is
applicable in this case because the parties have not attempted to
address the issue by applying the criteria that the First Circuit
suggests are dispositive. Accordingly, I decline to dismiss
Count I .
D. Count II
Plaintiffs claim in Count II that defendants are liable
because they negligently allowed participants to invest in the
Tyco Stock Fund even though they knew or reasonably should have
known that it was an unreasonably risky investment. Defendants
challenge Count II on two grounds. First, they argue that they
cannot be charged with a breach of fiduciary duty for allowing
participants to invest in the Tyco Stock Fund because the Plans
did not give them the discretion to prevent such investments.
Second, they argue that the complaint does not sufficiently
allege that defendants acted imprudently.8
8 Defendants also claim that only the Committee can be held liable for the conduct on which the claim is based. I agree that
-26- 1. Discretion to permit investments
Defendants contend that they could not have prevented
participants from investing in the Tyco Stock Fund because the
Plans required the Committee to offer the Fund as an investment
option. Defendants base this argument on the Plan’s definition
of the term “investment fund,” which states that “[t]he term
‘investment fund’ shall include a fund established by the trustee
at the direction of the Committee, which shall be invested
primarily in common shares of . . . Tyco International, Ltd. and
short-term interest income vehicles.” Plan II ¶ 1.23. In making
this argument, however, defendants overlook the Plan provision
that specifically describes the Committee’s powers and
responsibilities. That provision states that the Committee has
the power “to select appropriate investment vehicles, which may
the complaint does not sufficiently allege that either Tyco International or Kozlowski were responsible for allowing participants to invest in the Tyco Stock Fund. However, as I have explained, Tyco US could be held vicariously liable for the Committee’s actions on a respondeat superior theory. Similarly, the directors of Tyco US could be liable for the Committee’s actions if they breached their fiduciary duties with respect to the appointment and retention of Committee members. Accordingly, I dismiss Count II insofar as it asserts claims against Tyco International and Kozlowski but otherwise deny defendants’ motions to dismiss this count.
-27- include the Tyco Stock Fund . . . .” Plan II ¶ 8.4(J) (emphasis
added). When these two provisions are read together, it is
apparent that while the Tyco Stock Fund is an “investment fund,”
the Committee retains the power to determine whether participants
should be permitted to invest in the fund. Thus, I reject
defendants’ contention that the Plans required that the Committee
give participants the opportunity to invest in the fund.
2. Negligence
The complaint charges that defendants should have prevented
participants from investing in the Tyco Stock Fund because they
either knew or reasonably should have known that it was an
imprudent investment. Plaintiffs support this claim by relying
on multiple references in the public record during the class
period in which commentators raised questions concerning Tyco
International’s accounting practices. They also base their claim
in part on allegations that defendants either knew or should have
known of the undisclosed looting and accounting fraud that
allegedly was occurring at the company. According to plaintiffs,
this combination of public and nonpublic information should have
caused the defendants to realize that the Tyco Stock Fund was an
imprudent investment.
-28- Defendants argue that the evidence cited in the complaint
will not support an imprudent investment claim. In making this
argument they cite to case law that applies a presumption of
reasonableness to a plan administrator’s decision to invest in
employer securities.9 See, e.g., Moench v . Robertson, 62 F.3d
553, 571 (3d Cir. 1995); see also, Lalonde v . Textron, Inc., 369
F.3d 1 , 3-4 (1st Cir. 2004). They also argue that plaintiffs
cannot base their claim on nonpublic information because
defendants could not authorize trading on the basis of such
information without violating insider trading laws. I reject
these arguments because the complaint is sufficient even if the
presumption of reasonableness applies and plaintiffs are forced
to support their claim solely with publicly available
information.
9 Plaintiffs argue that the presumption of reasonableness applies only to Employee Stock Ownership Plans (“ESOPs”). Because the Tyco Stock Fund is not an ESOP, they argue that the presumption does not apply. Defendants respond by arguing that the presumption applies to all “eligible individual account plans,” see 29 U.S.C. § 1107(d)(3)(A), because all such plans are exempt from ERISA’s diversification requirement. See 29 U.S.C. § 1104(a)(2); see also Wright v . O r . Metallurgical Corp., 222 F. Supp. 2d 1224, 1233 (D. O r . 2002). Because I would not dismiss Count II even if the presumption applies, I decline to resolve this dispute at the present time.
-29- E. Available Relief
Defendants next argue that plaintiffs’ claims must be
dismissed because they seek a form of relief that is not
available under ERISA.
ERISA authorizes participants to sue fiduciaries on behalf
of a plan to recover losses to the plan that are caused by a
breach of fiduciary duty. See 29 U.S.C. §§ 1109 (a) and
1132(a)(2); see also Mass. Mut. Life Ins. C o . v . Russell, 473
U.S. 1 3 4 , 140 (1985). Although defendants argue that the
complaint seeks to recover for losses suffered by participants
rather than by the Plans, the complaint plainly seeks to recover
on behalf of both the Plans and their participants. Because the
complaint seeks a form of relief that is available under ERISA, I
decline to dismiss the complaint on this basis. Whether
plaintiffs will be able to prove that the Plans suffered
cognizable losses and whether ERISA also permits plaintiffs to
recover for losses that were suffered only by participants are
questions for another day.
IV. CONCLUSION
For the reasons set forth in this Memorandum and Order I
-30- grant defendants’ motions to dismiss all claims against Bent,
Heffernan, the former directors of Tyco International and the
former officers of Tyco International other than Kozlowski. I
also dismiss Count II insofar as it asserts claims against Tyco
International and Kozlowski. Defendants’ motions to dismiss
(doc. nos. 8 , 9, 1 0 , 1 2 , 1 3 , and 14) are denied in all other
respects without prejudice to their right to renew their
arguments in properly supported motions for summary judgment
after discovery has been completed.
SO ORDERED.
Paul Barbadoro United States District Judge December 2 , 2004
cc: Counsel of Record
-31-