x dkt 0370 dir defs memo p&as... · case 1:09-md-02017-lak document 370 filed 11/23/10 page 1...

Case 1:09-md-02017-LAK Document 370 Filed 11/23/10 of 29

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

------------------------------------X

IN RE LEHMAN BROTHERS SECURITIES AND ERISA LITIGATION

This Document Applies To: In re Lehman Brothers ERISA Litigation, 08 Civ. 5598 (LAK) ------------------------------------X

Civil Action 09 MD 2017 (LAK)

DIRECTOR DEFENDANTS' MEMORANDUM OF LAW IN SUPPORT OF THEIR MOTION TO

DISMISS PLAINTIFFS' SECOND CONSOLIDATED AMENDED COMPLAINT

Andrew J. Levander ( [email protected]) Kathleen N. Massey ([email protected]) Adam J. Wasserman ( [email protected]) DECHERTLLP 1095 A venue of the Americas New York, NY 10036-6797 (212) 698-3500

Attorneys for All Director Defendants Other Than RichardS. Fuld, Jr.

Thomas K. Johnson II .( thomas.j [email protected]) J. Ian Downes ([email protected]) DECHERTLLP Cira Centre 2929 Arch Street Philadelphia, P A 19104 (215) 994-4000

Of Counsel

November 23,2010

Patricia M. Hynes (patricia.hynes@allenovery .com) Todd S. Fishman ( todd.fishman@allenovery .com) ALLEN & OVERY LLP 1221 Avenue ofthe Americas New York, NY 10020 Tel: (212) 610-6300 Fax: (212) 610-6399

Attorneys for Defendant RichardS. Fuld, Jr.


TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT ................................................................................................... 1

STATEMENT OF FACTS ............................................................................................................ 2

ARGUMENT ................................................................................................................................. 6

POINT I - THE DIRECTOR DEFENDANTS WERE NOT ERISA FIDUCIARIES WITH RESPECT TO ANY OF THE CONDUCT AT ISSUE IN THE SCAC .......... 8

A. The Director Defendants Were Not ERISA Fiduciaries By Virtue Of Control And Authority Over The Plan ................................................................... 9

B. The Director Defendants Were Not Functional Fiduciaries By Virtue Of LBHI' s SEC Filings And/Or Public Announcements ......................................... 11

POINT II- PLAINTIFFS' ALLEGATIONS FAIL TO STATE COGNIZABLE CLAIMS REGARDLESS OF THE DIRECTOR DEFENDANTS' ERISA FIDUCIARY STATUS .................................................................................................................... 12

A. Count I Should Be Dismissed Against the Director Defendants Because Plaintiffs Have Not Alleged Facts Sufficient To Establish A Breach Of The Duty Of Pntdence ......................................................................................... 13

1. The Director Defendants Did Not Breach a Duty of Prudence in Connection with the Plan's Investments in the Lehman Stock Fund ...... 13

2. The Director Defendants Did Not Breach a Duty of Disclosure ............. 15

B. Count II Of The SCAC Should Be Dismissed Against The Director Defendants Because Plaintiffs Have Failed To Plead Adequately Any Conflict Of Interest Or How Such Alleged Conflicts Affected Any Decisions Relating To The Plan .......................................................................... 17

C. Count III Should Be Dismissed Against The Director Defendants Because Plaintiffs Have Failed To Plead A Valid Claim For Breach Of The Duty To Monitor ........................................................................................................... 18

1. Plaintiffs' Duty to Monitor Claim Is Derivative of Their Meritless Claim for Breach of the Duty of Prudence .............................................. 19

2. Plaintiffs Do Not Validly Allege That the Director Defendants Failed to Prudently Exercise Their Appointment Power Under the Plan .......................................................................................................... 20

3. Plaintiffs' Assertion That the Director Defendants Were Required to Disclose Non-Public Information Concerning Lehman's Alleged "Business Problems" to the Benefit Committee Defendants Fails to State a Claim ............................................................................................ 22

CONCLUSION ............................................................................................................................ 25


TABLE OF AUTHORITIES

CASES

Ashcroft v. Iqbal, --·u.s.--, 129 s.ct 1937 (2009) ................................................................................................ 7

Beddall v. State Street Bank & Trust Co., 137 F.3d 12 (1st Cir. 1998) ........................................................................................................ 8

Bell Atlantic C01p. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955 (2007) ........................................................................................ 7

Edgar v. Avaya, Inc., 503 F.3d 340 (3d Cir. 2007) ................................................................................................. 7, 23

Fisher v. JP Morgan Chase & Co., 703 F. Supp. 2d 374 (S.D.N.Y. 2010) ............................................................................ 7, 10, 13

Gearren v. The McGraw-Hill Companies, Inc., 690 F. Supp. 2d 254 (S.D.N.Y. 2010) ...................................................................... 7, 12, 16, 23

In re American Express Co. ERISA Litig., No. 08 Civ. 10834, 2010 WL 4371434 (S.D.N.Y. Nov. 2, 2010) ........................... 9, 12, 14, 24

In re Avon Products, Inc. Sec. Litig., No. 05 Civ. 6803, 2009 WL 848083 (S.D.N.Y. Mar. 3, 2009) ............................................... !!

In re Bank of America Corp. Sec., Derivative, & ERISA Litig., No. 09 MD 2058, 2010 WL 3448197 (S.D.N.Y. Aug. 27, 2010) .......................... 10, 11, 13, 19

In re Bausch & Lomb, Inc. ERISA Litig., No. 06-CV-6297, 2008 WL 5234281 (W.D.N.Y. Dec. 12, 2008) .................................... .16, 19

In re Citigroup ERISA Litig., No. 07 Civ. 9790,2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009) ........................ .11, 15, 23,24

In re Dynegy, Inc. ERISA Litig., 309 F. Supp. 2d 861 (S.D. Tex. 2004) ............................................................................... 17, 22

In re Lehman Bros. Securities and ERISA Litig., 683 F. Supp. 2d 294 (S.D.N.Y. 2010) .......................................................................... 1,passim

In re McKesson HBOC, Inc. ERISA Litig., 391 F. Supp. 2d 812 (N.D. Cal. 2005) ............................................................................... 17, 18

In re Polaroid ERISA Litig., 362 F. Supp. 2d 461 (S.D.N.Y. 2005) ...................................................................................... 17

11


In re SLM Corp. ERISA Litig., No. 08 Civ. 4334,2010 WL 3910566 (S.D.N.Y. Sept. 24, 2010) .................................... .11, 18

In reWash. Mut .. Inc. Sec., Derivative & ERISA Litig., No. 2:08-MD-1919, 2009 WL 3246994 (W.D. Wa. Oct. 5, 2009) ............................. .11, 21,22

In re WorldCom, Inc., 263 F.Supp.2d 745 (S.D.N.Y. 2003) ........................................................................... .17, 18, 22

Lanfear v. Home Depot, Inc., --F. Supp. 2d --,2010 WL 2427413 (N.D. Ga. June 7, 2010) ......................................... .14, 18

Pegram v. Herdrich, 530 U.S. 211, 120 S.Ct. 2143 (2000) ......................................................................................... 8

Pugh v. Tribune Co., 521 F.3d 686 (7th Cir. 2008) ................................................................................................... 19

Quan v. Computer Sciences Corp., -- F.3d --,No. 09-56190, 2010 WL 3784702 (9th Cir. Sept. 30, 2010) .................................. .24

Rothman v. Gregor, 220 F .3d 81 (2d Cir. 2000) ......................................................................................................... 3

Sasso v. Cervoni, 985 F.2d 49 (2d Cir. 1993) ....................................................................................................... 10

Teagardener v. Republic-Franklin, Inc. Pension Plan, 909 F.2d 947 (6th Cir. 1990) ..................................................................................................... 3

Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065 (1996) ...................................................................................... .11

OTHER AUTHORITlES

Fed. R. Civ. P. 8 ............................................................................................................................... 8

Fed. R. Civ. P. 9(b) .......................................................................................................................... 8

111


PRELIMINARY STATEMENT

After having their second attempt at a class action complaint dismissed in its entirety for

failing to state a valid claim for breach of fiduciary duty under ERISA, Plaintiffs are hoping that

the third time is a charm. It is not. While Plaintiffs have added nearly 50 pages to their

pleadings, so that the Second Consolidated Amended Complaint ("SCAC") now weighs in at a

hefty 15 5 pages, length is no substitute for substance. 1 Quite simply, Plaintiffs have failed yet

again to set forth allegations sufficient to sustain their claims against the members of Lehman

Brothers Holdings Inc.'s Board ofDirectors (the "Director Defendants").2

In its Memorandum Opinion dismissing Plaintiffs' first Consolidated Amended

Complaint in February 2010 (the "February 2010 Op.", published as In re'Lehman Bros.

Securities and ERISA Litig., 683 F. Supp. 2d 294 (S.D.N.Y. 2010))/ this Court found that the

Director Defendants are not ERISA fiduciaries with respect to the Lehman Brothers Savings

Plan (the "Plan") for purposes of Plaintiffs' claims. Absolutely nothing in the SCAC changes

this conclusion. Moreover, as is explained fully in the memorandum of law submitted by the

members of the Lehman Brothers Holdings Inc. ("LBHI") Employee Benefit Plans Committee

(the "Benefit Committee"), who are also named as defendants in this case (the "Benefit

2

3

A copy of the Second Consolidated Amended Complaint is attached as Exhibit A to the accompanying Declaration of Adam J. Wasserman (the "Wasserman Declaration").

The Director Defendants are Michael L. Ainslie, John F. Akers, Roger S. Berlind, Thomas H. Cruikshank, Marsha Johnson Evans, Richard S. Fuld, Jr., Sir Christopher Gent, Jerry A. Grundhofer, Roland A. Hernandez, Henry Kaufman and John D. Macomber. The Director Defendants, other than Mr. Fuld, are referred to as the "Outside Director Defendants."

A copy ofthe Court's February 2010 Opinion is attached as Exhibit B to the Wassennan Declaration.


Committee Defendants"), even ifthe Director Defendants were ERISA fiduciaries (which they

are not), Plaintiffs' "stock drop" action still cannot stand as a matter oflaw.4

Plaintiffs' SCAC simply offers more of the same irrelevant, conclusory and flawed

allegations that the Court found to be legally insufficient when it granted Defendants' initial

motion to dismiss. Absolutely nothing in the SCAC has transformed the Director Defendants

into ERISA fiduciaries for the purpose of this case. The SCAC further fails to plead successfully

that the Director Defendants breached any ERISA fiduciary duties of prudence, of loyalty or to

monitor. Accordingly, there is no reason for the Court to reverse its prior decision and the

SCAC should again be dismissed against the Director Defendants with prejudice.

STATEMENT OF FACTS5

The essential facts of this case, as they relate to the Director Defendants, remain

unchanged from the Plaintiffs' first Consolidated Amended Complaint.6 As the Court noted in

its February 2010 decision, and as Plaintiffs admit in the SCAC, LBHI's Board ofDirectors'

only role with respect to the Plan was the appointment of the members of the Benefit Committee

or the delegation of that appointment authority. See Feb. 2010 Op. at 8-9; see also SCAC ~~ 3 7,

4

5

6

The Director Defendants incorporate, in all relevant parts, the Benefit Committee Defendants' Memorandum of Law in support of their Motion to Dismiss the SCAC (hereinafter the "Benefit Comm. Defs.' Mem. of Law").

The Benefit Committee Defendants' Memorandum of Law provides a summary of the tmprecedented events leading up to LBHI' s bankruptcy filing in September 2008, as well as a comprehensive explanation of the terms and operation of the Plan. The Director Defendants adopt and incorporate herein by reference the Benefit Committee Defendants' descriptions of those facts and circumstances. Therefore, the summary of facts contained in this section is limited to the alleged facts as they pertain to the Director Defendants.

A copy of the Plaintiffs' initial Consolidated Amended Complaint is attached to the Wasserman Declaration as Exhibit C.

2


43; Plan, Art. X§ 10.1 (attached as Exhibit D to the Wasserman Declaration).7 In this case, the

Board in fact delegated the task of appointing members of the Benefit Committee to the Board's

Compensation Committee. Feb. 2010 Op. at 9; see also SCAC 'lf43.8 Thus, the only role ofthe

Director Defendants collectively was the appointment of the Board's Compensation Committee.

See Feb. 2010 Op. at 9. In turn, the only role of the Compensation Committee defendants was

the appointment ofthe Benefit Committee. See id.

As this Court previously recognized, the Director Defendants had no authority or

discretion to manage the Plan and its investments. See Feb. 2010 Op. at 8-9. Rather, as the Plan

specifically states: "The complete authority and discretion to control and manage the operation

and administration of the Plan shall be placed in the Employee Benefit Plans Committee of the

Company." SCAC 'lf37 (quoting Plan, Art. X§ 10.1).

Nothing in the SCAC alters the fundamental nature of the Plan or the fact that it provides

absolutely no role for the Director Defendants in connection with its administration beyond the

appointment of the Compensation and/or Benefit Committees. Rather, Plaintiffs "new"

allegations in the SCAC, especially as they relate to the Director Defendants' supposed fiduciary

status, do little more than restate assertions that were made in their first CAC or their

memorandum of law opposing the prior motion to dismiss and that were considered and rejected

by the Comi in granting Defendants' first motion to dismiss.

7

8

The Court may consider on a motion to dismiss, inter alia, any "public disclosure documents" required to be filed with the SEC, "any statements or documents incorporated in [the complaint] by reference" and documents on which plaintiffs relied in bringing suit. Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000); see also Teagardener v. Republic-Franklin, Inc. Pension Plan, 909 F.2d 947, 949 (6th Cir. 1990) (ERISA plan documents incorporated in complaint by reference may be considered on motion to dismiss).

The Compensation Committee was allegedly composed of Defendants Akers, Evans, Gent and Macomber. See SCAC '11'1124-34.

3


Plaintiffs' primary amendments to their complaint with respect to the Director

Defendants consist of the addition of legal conclusions concerning the breadth of the Director

Defendants' alleged duty to monitor the performance of the Compensation and Benefit

Committees. For instance, paragraphs 98-100 and 106-108 ofthe SCAC, which comprise a

significant portion of the "Defendants' Fiduciary Status" section of the SCAC, contain lengthy,

conclusory allegations concerning the alleged obligations placed on the Director Defendants and

the Compensation Committee Defendants as a result of the fiduciary "duty to monitor" alleged

by Plaintiffs. These assertions are nothing more than a recitation of Plaintiffs' belief concerning

the proper legal scope ofERISA's general fiduciary duty to monitor. However, not only are

these allegations unsupported by the law or any factual allegations regarding any specific actions

or omissions by the Director Defendants that Plaintiffs contend violated this alleged duty, but

they are also in no way new.

In their first CAC, Plaintiffs asserted that the Director Defendants were required to

"review, understand and approve the conduct of the hands-on fiduciaries" and ensure that those

fiduciaries "have adequate information." See CAC ~ 352; see also~~ 353-356. Plaintiffs'

expansion of this single paragraph into multiple long-winded paragraphs scattered throughout the

SCAC (see, e.g., SCAC ~~ 98-100, 106-108, 437-439) does not alter the fact that Plaintiffs'

contention has already been made, considered and rejected by the Court.9

9 Indeed, several of these new allegations simply repeat legal arguments previously made by Plaintiffs in their briefs in opposition to the motion to dismiss the first CAC. Compare Plaintiffs' Mem. of Law in Opposition to Defs.' Motion to Dismiss the Consolidated Amended Complaint, dated April28, 2009, at 44 ("The Complaint alleges that the Director Defendants should have informed their appointees of the undue risks posed by Lehman Stock") (attached as Exhibit E to the Wasserman Declaration) with SCAC ~ 48 ("Because of their positions as directors of the Company, the Compensation Committee Defendants had access to material, non-public information concerning Lehman ... which they had an obligation to share with the other Plan fiduciaries .... ").

4


The only truly new factual allegations in the SCAC that generally relate to the Director

Defendants are allegations concerning the membership of celiain of those Defendants on various

committees of the Lehman Board. Specifically, in addition to asseliing that celiain Director

Defendants were members of the Board's Compensation Committee during some or all of the

class period, Plaintiffs have added allegations concerning the membership of the Director

Defendants on celiain other internal committees of the Board, specifically the Audit Committee,

the Finance and Risk Committee, the Nominating and Corporate Governance Committee, and the

Executive Committee. SCAC ~~ 24-34, 46.10 The SCAC also adds a handful of vague,

generalized allegations concerning the responsibilities of each of these committees. See id. ~~

40-42. However, other than Plaintiffs' contention that the Compensation Committee appointed

members of the Plan Committee, there are no allegations that suggest that any Director

Defendant's membership on any Board committee had any bearing whatsoever on the

administration of the Plan. See id. Thus, although the SCAC continues to include claims for

breaches ofERISA's duties of prudence and disclosure against the Director Defendants,

Plaintiffs have failed to add any factual allegations that suppoli the conclusion that any of the

10 In making these allegations, Plaintiffs appear to confuse the Board's Executive Committee with the Executive Committee ofLBHI. See, e.g., SCAC ~ 39 (stating that Defendant Macomber was a member of "the Company's Executive Committee"). The Board's Executive Committee and the Company's Executive Committee are separate and distinct entities and, aside from Defendant Fuld, none of the Director Defendants were members of the LBHI' s Executive Committee. Compare Definitive Proxy Solicitation Material, dated February 26,2007, Schedule 14A, at 8 (attached as Exhibit F to the Wasserman Declaration) (stating that Mr. Macomber was member of the Executive Committee of the Board of Directors) with id. at 14 (identifying President and Chief Operating Officer Joseph M. Gregory as a member of"the Firm's Executive Committee"). Indeed, with the exception of Mr. Fuld, all of the Director Defendants were outside directors and did not engage in the day-to-day activities of the corporation or paliicipate in day-to-day management decisions.

5


Director Defendants possessed any discretionary authority with respect to the Plan's investment

decisions or communications with participants.11

To quote the old adage: "the more things change the more they stay the same." The

specific claims now asserted by Plaintiffs are effectively identical to those that were at issue

when the Court dismissed this case in February 2010 -namely that the Director Defendants

allegedly breached three ERISA fiduciary duties: the duty of prudence (Count I), the duty to

avoid conflicts of interest (Count II), and the duty to monitor (Count III). As will be discussed,

each of these claims fails because nothing in Plaintiffs' 50 new pages of allegations has altered

the Plan or transformed the Director Defendants into ERISA fiduciaries for the purpose of this

action. And, even if the Director Defendants were ERISA fiduciaries (which they were not),

each of these counts still should be dismissed as a matter of law. Because Plaintiffs have not,

and cannot, cure the deficiencies that led the Court to dismiss their claims against the Director

Defendants in the first place, the SCAC should again be dismissed with prejudice.

ARGUMENT

The Supreme Court and courts addressing ERISA stock drop actions have set a strict bar

for the pleading of such claims. In Bell Atlantic Corp. v. Twombly, the Supreme Court clarified

11 Plaintiffs offer lengthy and repetitive asse11ions that appear intended to support their contention that the Director Defendants should have foreseen the dramatic, unprecedented events that befell Lehman Brothers. For instance, Plaintiffs have included numerous allegations concerning the collapse of Bear Steams, LBHI's alleged highly leveraged financial position and so-called "Repo 1 05" transactions by LBHI. See id. ~~ 162-200. Despite their length and detail, these allegations are entirely irrelevant to the claims against the Director Defendants given, as will be discussed, their indisputable lack of fiduciary responsibility under the Plan. Moreover, the SCAC's irrelevant allegations that the Outside Director Defendants knew or should have known about Repo 105 transactions at Lehman, SCAC ~ 162, should be rejected since they are contradicted by the Examiner's Report- the very source of Plaintiffs' Repo 105 allegations in the first place. See Examiner's Report (relevant excerpts attached as Exhibit G to the Wasserman Decl.) at 7-8 ("Lehman did not disclose its use- or the magnitude of its use- ofRepo 105 ... to its own Board of Directors"); see also id. at 945.

6


that in order to survive a motion to dismiss, a plaintiff must plead "enough facts to state a claim

to reliefthat is plausible on its face." 550 U.S. 544, 570, 127 S. Ct. 1955 (2007). "[A] plaintiffs

obligation to provide the 'grmmds' of his 'entitlement to relief requires more than labels and

conclusions, and a formulaic recitation of a cause of action will not do." !d. at 555. Rather,

"factual allegations must be enough to raise a right to relief above the speculative level." !d.; see

also Ashcroft v. Iqbal,-- U.S.--, 129 S.Ct. 1937, 1949 (2009) ("A claim has facial plausibility

when the plaintiff pleads factual content that allows the court to draw the reasonable inference

that the defendant is liable for the misconduct alleged"). Moreover, allegations that are merely

conclusions "are not entitled to the assumption of truth." Iqbal, 129 S.Ct. at 1950.

Numerous courts in this district and elsewhere have dismissed stock drop claims where a

complaint fails to meet the standards of Twombly and Iqbal. See, e.g., Edgar v. Avaya, Inc., 503

F.3d 340, 349 (3d Cir. 2007) (affirming grant of motion to dismiss in ERISA stock drop action

on basis that there is "no reason to allow [a] case to proceed to discovery when, even if the

allegations are proven true, [the plaintiff] cannot establish that defendants abused their

discretion"); Gearren v. The McGraw-Hill Companies, Inc., 690 F. Supp. 2d 254,270 (S.D.N.Y.

2010) (dismissing ERISA stock drop complaint and noting that "[a]t least post-Iqbal, it is not

enough simply to make a conclusory allegation that the defendants breached their fiduciary

duties"); Fisher v. JP Morgan Chase & Co., 703 F. Supp. 2d 374, 382 (S.D.N.Y. 2010)

(applying Iqbal to motion for judgment on the pleadings in stock drop case and concluding that

plaintiffs had not "sufficiently alleged that the director defendants and other individual

defendants had discretion over the decision to offer the JP Morgan Chase stock as an investment

option").

7


Viewed in light of the Twombly and Iqbal standard, none of the additional allegations

made by Plaintiffs are sufficient to undermine the Court's decision that the claims against the

Director Defendants should be dismissed. Stripped of its conclusory allegations, the SCAC does

not reasonably support the conclusion that the Director Defendants took any action in an ERISA

fiduciary capacity that violated any obligations under ERISA. As this Court has previously

found, none of the Director Defendants were ERISA fiduciaries with respect to the alleged

actions or omissions that form the basis for the SCAC. See Point I. In any event, regardless of

the Director Defendants' fiduciary status, Plaintiffs' specific counts still fail to state any

cognizable claim against them. See Point II. Accordingly, the Court should again dismiss this

action against the Director Defendants with prejudice. 12

POINT I

THE DIRECTOR DEFENDANTS WERE NOT ERISA FIDUCIARIES WITH RESPECT TO ANY OF THE CONDUCT AT ISSUE IN THE SCAC

As the Court stated in dismissing Plaintiffs' first CAC, ERISA "does not impose [its]

fiduciary obligations on everyone." Feb. 2010 Op. at 7. Rather, "[f]iduciaries are those (1) so

named in the plan, or (2) who exercise fiduciary functions." !d. Accordingly, in every case

alleging a breach of fiduciary duty, "the threshold question is ... whether the [defendant] was

acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject

to the complaint." Pegram v. Herdrich, 530 U.S. 211, 226, 120 S.Ct. 2143 (2000); see also

Beddall v. State Street Bank & Trust Co., 137 F.3d 12, 18 (1st Cir. 1998).

12 Moreover, as explained by the Benefit Committee Defendants, the SCAC should also be dismissed against the Director Defendants under Rule 8 because it is impossible for the individually named defendants to ascertain which of hundreds of allegations relate or apply to him or her personally. See Benefit Comm. Defs.' Mem. of Law at 11-12. Additionally, as further noted in the Benefit Committee Defendants' Memorandum of Law, certain of the Plaintiffs' allegations sound in fraud and must satisfy the heightened pleading requirements of Rule 9(b ), which they do not do. See id. at 11 n.6.

8


The Court previously dismissed the CAC against the Director Defendants because their

very limited and attenuated roles under the Plan (which, as the SCAC's continues to concede,

were restricted to appointing members of the Compensation and/or Benefit Committees) did not

extend to the matters at issue in the pleading. See Feb. 10 Op. at 8-10. Many months and 50

pages of additional allegations later, there is absolutely nothing in the SCAC that alters the

correctness of that conclusion. The Director Defendants are not ERISA fiduciaries for the

purpose of this case given that Plaintiffs: (A) have failed to allege facts demonstrating that the

Director Defendants exercised control over the Plan (see Feb. 2010 Op. at 8-9); and (B) cannot

transform the Director Defendants into fimctional fiduciaries as a result of LBHI' s SEC filings

(see Feb. 2010 Op. at 10)Y

A. The Director Defendants Were Not ERISA Fiduciaries By Virtue Of Control And Authority Over The Plan

Like the first CAC, the SCAC fails adequately to allege that the Director Defendants

were ERISA fiduciaries by virtue of their control and authority over the Plan. As this Court

previously stated: "Persons who are fiduciaries by virtue of the exercise of control and authority

over a plan are subject to fiduciary duties only 'to the extent' they have or have exercised such

power." Feb. 2010 Op. at 9; see also In re American Express Co. ERISA Litig., No. 08 Civ.

10834, 2010 WL 4371434, at *8 (S.D.N.Y. Nov. 2, 2010) ("An action for a breach ofERISA

fiduciary duty requires that the defendant was acting as a fiduciary (that is, was performing a

13 In its February 201 0 Opinion, the Court noted that "Plaintiffs' theory as to the Director Defendants, none of whom is named a fiduciary by the Plan, is that they are fiduciaries because they had control and authority over it." Feb. 2010 Op. at 8 (emphasis added). Contrary to this clear (and correct) ruling by the Court, Plaintiffs have added to the SCAC an assertion that the Director Defendants were named fiduciaries. SCAC ~ 36. This completely conclusory allegation should be rejected as it is plainly inconsistent with: (1) the Plan's language, (2) ERISA's fundamental fiduciary principles, and (3) the Court's February 2010 Opinion in this case.

9


fiduciary function) when taking the action subject to complaint") (internal quotations omitted);

Fisher v. JP Morgan Chase & Co., 703 F. Supp. 2d 374, 381-82 (S.D.N.Y. 2010) (same).

Here, however, the Plan states in no uncertain terms that "[t]he complete authority and

discretion to control and manage the operation and administration of the Plan shall be placed in

the Employee Benefit Plans Committee ofthe Company." Plan, Art. X§ 10.1. This authority

and discretion extends to all issues relating to the Lehman Stock Fund. /d., Art. IX§ 9.2(a).

Ironically, one of the changes made by Plaintiffs in the SCAC is the addition of a specific

citation to§ 10.1 of the Plan, which expressly limits the Director Defendants' authority with

respect to the Plan to the appointment of the Benefit Plans Committee (or the delegation of that

authority). See SCAC ,-r 37.

Like the first CAC, the SCAC contains no factual allegations that support Plaintiffs'

claim that the Director Defendants possessed any discretionary authority with respect to the

selection of the Plan's investment options. Plaintiffs continue to allege and further elaborate

upon the fact that the Board of Directors appointed the Compensation Committee, which in turn

appointed the Benefit Committee. See SCAC ,-r,-r 37, 45, 98. However, as this Court has

previously held, such allegations are irrelevant to the breach of fiduciary duties alleged in this

case relating to the Plan's offering of Lehman stock as an investment option. See Feb. 2010 Op.

at 9. Other new allegations, such that the Director Defendants served on various other Board

committees that have nothing to do with the Plan, fare no better. 14 Accordingly, the Director

Defendants cannot be deemed ERISA fiduciaries based on the concept of control over the Plan.

14 Plaintiffs also note that Defendant Fuld served as Lehman's CEO. See SCAC ,-r 24. This fact is irrelevant to Mr. Fuld's alleged status as a Plan fiduciary. The Second Circuit has squarely held that "an individual is not liable for corporate ERISA obligations solely by virtue of his role as an officer, shareholder, or manager." Sasso v. Cervoni, 985 F.2d 49, 50 (2d Cir. 1993); accord In re Bank of America Corp. Sec., Derivative, & ERISA Litig.,

10


B. The Director Defendants Were Not Functional Fiduciaries By Virtue OfLBHI's SEC Filings And/Or Public Announcements

The Court has already rejected Plaintiffs' argument that the Director Defendants could be

deemed "functional fiduciaries because they made or approved inaccurate statements in

Lehman's SEC filings, which were incorporated into the Plan documents." Feb. 2010 Op. at 10.

Plaintiffs have failed to present any new facts to rebut this Court's prior conclusion that the

Director Defendants' "limited Plan responsibilities did not include communicating with

participants." !d. Moreover, as this Court has recognized: "emerging case law makes clear that

those who prepare SEC filings do not become ERISA fiduciaries through those acts." February

2010 Op. at 10 (internal quotation omitted).15 This trend concerning corporate communications

has continued in the months since the Court's February 2010 decision. See, e.g., In re SLM Corp.

ERISA Litig., No. 08 Civ. 4334,2010 WL 3910566, at *10 (S.D.N.Y. Sept. 24, 2010) ("[l]t is

well settled that those who prepare SEC filings do not become ERISA fiduciaries through those

acts and, consequently, do not violate ERISA if the filings contain misrepresentations") (internal

quotation omitted); In re Bank of America Corp. Sec., Derivative and ERISA Litig., 2010 WL

3448197, at * 15 (de facto fiduciary status not plausibly alleged where senior bank executive

15

No. 09 MD 2058, 2010 WL 3448197, at *15 (S.D.N.Y. Aug. 27, 2010) (finding that CEO was not a de facto ERISA fiduciary by virtue of "ma[king] certain statements in his role as CEO"); In reWash. Mut., Inc. Sec., Derivative & ERISA Litig., No. 2:08-MD-1919, 2009 WL 3246994, at* 12 (W.D. Wa. Oct. 5, 2009) (finding that "[a]n executive title alone does not impose a de facto fiduciary status on an individual and it is insufficient to allege that [defendant] was a fiduciary merely because he was the Chief Executive Officer").

See In re Citigroup ERISA Litig., No. 07 Civ. 9790, 2009 WL 2762708, at *23 (S.D.N.Y. Aug. 31, 2009); In re Avon Products, Inc. Sec. Litig., No. 05 Civ. 6803, 2009 WL 848083, at *13 (S.D.N.Y. Mar. 3, 2009); see also Varity Corp. v. Howe, 516 U.S. 489, 504-05, 116 S.Ct. 1065 (1996) (statements are only made in a fiduciary capacity where they are "intentionally connected" to the benefits provided under an ERISA plan) (emphasis in original).

11


"made certain statements" in his corporate capacity that "reflected his views on the financial

condition ofBoA"); In re American Express Co. ERISA Litig., 2010 WL 4371434, at *13 ("SEC

filings do not violate ERISA disclosure obligations when the SEC filings and public

announcements were not made in the defendants' capacity as ERISA fiduciaries"); Gearren v.

The ~McGraw-Hill Companies, Inc., 690 F. Supp. 2d at 272-73 ("[T]he Defendants who prepared

the SEC documents did so in a corporate, rather than fiduciary, capacity and therefore did not

incur liability through their preparation. And the Defendants who incorporated the SEC

documents by reference into the Summruy Plan Descriptions did not intentionally connect the

content of those SEC filings to statements about plan benefits").

Thus, the Director Defendants' alleged signing of certain SEC filings, and Mr. Fuld's

alleged statements about Lehman's financial condition, did not transform the Director

Defendants into functional fiduciaries for the purposes of ERISA.

* * *

The initial focus in assessing an ERISA claim is whether the complaint"adequately

alleges that the defendants are fiduciaries." Feb. 2010 Op. at 8 (internal citation omitted).

Despite its almost 50 extra pages, the SCAC, like the first CAC, fails to allege facts establishing

that the Director Defendants were ERISA fiduciaries for the purpose of Plaintiffs' claims.

Accordingly, the SCAC should again be dismissed as against the Director Defendants for this

reason alone.

POINT II

PLAINTIFFS' ALLEGATIONS FAIL TO STATE COGNIZABLE CLAIMS REGARDLESS OF THE DIRECTOR DEFENDANTS' ERISA FIDUCIARY STATUS

As has been discussed, Plaintiffs' case against the Director Defendants' should be

dismissed because the Director Defendants are not ERISA fiduciaries. Yet, regardless ofthe

12


Director Defendants' fiduciary status, the SCAC still fails to state a claim against them for:

(A) breaching a duty of prudence, (B) breaching a duty ofloyalty, or (C) breaching a purported

duty to monitor.

A. Count I Should Be Dismissed Against The Director Defendants Because Plaintiffs Have Not Alleged Facts Sufficient To Establish a Breach Of the Duty Of Prudence

1. The Director Defendants Did Not Breach a Duty of Prudence in Connection with the Plan's Investments in the Lehman Stock Fund

Count I of the SCAC asserts that Defendants breached ERISA's duty of prudence by

failing to take certain unspecified "meaningful steps to protect the Plan from the inevitable losses

that they knew or should have known would ensue" from the Plan's investments in the Lehman

Stock Fund. SCAC ~ 473. Plaintiffs concede that this claim extends only to those Defendants

that "exercise discretionary authority or control over management of [the] plan or disposition of

[the] plan's assets .... " !d. ~ 469. However, nowhere in the SCAC's nearly 500 paragraphs do

Plaintiffs offer any allegations supporting the conclusion that the Director Defendants possessed

any such discretionary authority.

Numerous courts have dismissed similar claims where the complaint failed to plead facts

that, if true, would be sufficient to establish that a defendant exercised discretionary authority

over a plan's investment alternatives. See, e.g., In re Bank of America Corp. Securities,

Derivative, and ERISA Litig., 2010 WL 344819, at *14 ("The Complaint does not contain factual

allegations regarding any actions taken by the board to add support to the conclusory assertion

that the board was a fiduciary with respect to the management of the Plans' assets or the

administration of the Plans. Therefore, the Complaint does not allege that the individuals

comprising the board of directors were plan fiduciaries with respect to the management of the

Plans' assets."); Fisher v. JP Morgan Chase & Co., 703 F.Supp.2d at 382 ("[N]or have the

plaintiffs sufficiently alleged that the director defendants and other individual defendants had

13


discretion over the decision to offer the JP Morgan Chase stock as an investment option to plan

participants"); see also In re American Express Co. ERISA Litig., 2010 WL 4371434, at *10

(dismissing prudence claim because, inter alia, "the Committee defendants likewise exercised no

discretionary authority with regard to the establishment or maintenance of the Company Stock

Fund"); Lanfear v. Home Depot, Inc.,-- F. Supp. 2d --, 2010 WL 2427413, at *9 (N.D. Ga. June

7, 2010) (stating that "Count I cannot proceed against the Administrative Committee and its

members .... [because] the Administrative Committee had no authority with respect to the Plan's

investments; this authority was delegated only to the Investment Committee"). Accordingly,

Plaintiffs' duty of prudence claim must be dismissed for this reason alone.

In addition, the facts and circumstances pled in the SCAC fail to support a claim for

breach ofERlSA's fiduciary duty of prudence against any of the Defendants. Indeed, among

other things, the SCAC's allegations remain insufficient to defeat the Moench presumption in

favor of plan fiduciaries. See, e.g., Benefit Comm. Defs.' Mem. of Law, at 4-5,27-33. 16 Hence,

16 Moreover, based on the SCAC's own allegations, the Director Defendants could not have had knowledge of LBHI' s imminent collapse given that the run on the bank that ultimately resulted in LBHI' s failure only began a few days before the firm was forced to file for bankruptcy. This lack of knowledge is also fatal to the Plaintiffs' duty of prudence claim. See Benefit Comm. Defs.' Mem. of Law, at 12-22. Indeed, the SCAC alleges that on September 9, Lehman's talks with the Korean Development Bank had faltered and, that same day, Lehman's stock price dropped 45%. See SCAC ,-r 376. On September 11, JPMorgan Chase (Lehman's clearing agent) renewed its demands for an additional $5 billion in collateral. See id. ,-r 383. And, by September 12, counterparties to numerous transactions with Lehman were withdrawing their business. See id. ,-r 388 ("[c]ustomers were leaving Lehman in droves, so much so that the Company 'couldn't properly process the requests"'). Moreover, as this Court has recognized, "it bears mention that the Wall Street Journal reported on September 15, 2008 that it was Treasury Secretary Henry Paulson's Friday night revelation that the government would not bail out Lehman that 'sparked' the events culminating in its bankruptcy." Feb. 2010 Op. at 14, n. 54 (quoting Deborah Solomon, et al., "Ultimatum By Paulson Sparked Frantic End," WALL STREET JOURNAL, Sept. 15, 2008, at AI).

14


Plaintiffs' prudence claim relating to the Plan's permitting its members to invest in LBHI stock

is without merit.

2. The Director Defendants Did Not Breach a Duty of Disclosure

Plaintiffs' SCAC, like the prior iteration of their complaint, fails adequately to allege that

the Director Defendants breached a duty of disclosure. As was the case in the first CAC,

Plaintiffs' disclosure claim includes two components: (1) that the Director Defendants breached

an ERISA fiduciary duty by failing adequately to communicate generalized information to Plan

Participants regarding the alleged risks of investing in the Lehman Stock Fund; and (2) that the

Director Defendants breached an ERISA fiduciary duty by allegedly making false and

misleading statements in LBHI's SEC filings. See SCAC ~~ 471-475. The allegations in the

SCAC fail to state a claim on either basis.

Plaintiffs' contention that the Defendants had a generalized obligation to provide Plan

participants with non-public information about "Lehman's financial condition and prospects"

fails as a matter oflaw. As is discussed in the Benefit Committee Defendants' motion, ERISA

does not require fiduciaries to provide participants with "investment advice" or to disclose non

public information concerning an employer's business. See Benefit Comm. Defs.' Mem. of Law

at 23-25. Moreover, regardless ofthe scope of any fiduciary duty of disclosure under ERISA,

Plaintiffs' claim against the Director Defendants fails because the Director Defendants were not

fiduciaries with respect to communications with Plan participants concerning their investment

decisions. With the exception of their power to appoint members of the Compensation

Committee, which then appointed the members of the Benefit Committee that was ultimately in

charge of administering the Plan, the Director Defendants possessed no responsibility with

respect to the Plan. Accordingly, even if ERISA did impose an affirmative duty to disclose upon

fiduciaries generally as Plaintiffs suggest (which it does not), the obligation to comply with such

15


duty would not lie with the Director Defendants. See, e.g., In re Citigrottp ERISA Litig., 2009

WL 2762708, at *23 ("[l]t is clear from the Plan Agreements that Citigroup and Prince had no

responsibility to communicate with Plan participants. Thus, even if Citigroup and Prince

'regularly' provided Plan pm1icipants with misleading information about Citigroup's financial

condition, those communications were not subject to ERISA's duty to speak truthfully"); In re

Bausch & Lomb, Inc. ERISA Litig., No. 06-CV-6297, 2008 WL 5234281, at *8 (W.D.N.Y. Dec.

12, 2008) ("B & Land the Director Defendants, however, had no duty under ERISA to

communicate or otherwise present investment information to Plan Participants. Under the terms

of the Plan's governing documents, the only entity assigned responsibility for Plan

communications was the EBAC").

Plaintiffs' contention that "Defendants breached their fiduciary duties by making direct

and indirect communications with Plan participants in a fiduciary capacity which contained

materially inaccurate statements," SCAC ~ 428, fares no better. Plaintiffs assert that these

alleged misstatements were contained in Lehman's SEC filings and/or certain of Mr. Fuld's

public announcements. Id. However, as discussed in Point I(B), supra, persons who sign SEC

filings "do not become ERISA fiduciaries through such acts." Feb. 2010 Op. at 10 (internal

citations and quotation marks omitted). Instead, "[ s ]tatements concerning a company's financial

condition become subject to ERISA fiduciary duties only if they are made in an ERISA fiduciary

capacity, which means that the statements are made by the plan administrator and are

intentionally connected to statements regarding a plan's benefits." Gearren, at 272; see also

Benefit Comm. Defs.' Mem of Law at 25-26. Here, the Court has already found that the alleged

misstatements upon which Plaintiffs' claim is based were not made in a fiduciary capacity and

nothing in the SCAC provides any basis for abandoning this conclusion.

16


B. Count II Of The SCAC Should Be Dismissed Against The Director Defendants Because Plaintiffs Have Failed To Plead Adequately Any Conflict Of Interest Or How Such Alleged Conflicts Affected Any Decisions Relating To The Plan

The allegations comprising Plaintiffs' "conflict of interest" claims (Count II) are entirely

conclusory. The SCAC fails to identify any specific alleged conflict of interest possessed by the

Director Defendants and makes no allegations tying these alleged conflicts to any harm to

Plaintiffs. For these reasons, Count II cannot stand as a matter oflaw.

As one court has stated, "[n]o case of which the court is aware has held that ERISA

fiduciaries breach their duty ofloyalty simply 'for placing themselves in a position' where they

might act disloyally .... The duty of loyalty requires fiduciaries to refrain from actual disloyal

conduct, not simply running the risk that such behavior will occur." See In re McKesson HBOC,

Inc. ERISA Litig., 391 F. Supp. 2d 812, 835 (N.D. Cal. 2005). Courts have consistently rejected

claims, like Plaintiffs' here, that are premised upon nothing more than theoretical conflicts

arising from a defendant's generalized interest in seeing his or her company succeed. See, e.g.,

In re Polaroid, 362 F.Supp.2d at 479 (rejecting conflict of interest claim because "Plaintiffs fail

to allege that the conflict of interest impeded [the fiduciaries'] prudent decision-making with

respect to the Plan and Plan participants"); In re Dynegy, Inc. ERISA Litig., 309 F. Supp. 2d 861,

897-98 (S.D. Tex. 2004) (granting motion to dismiss breach ofloyalty claim on the basis that

"plaintiff has failed to state a conflict of interest claim because she has failed to allege an

identifiable conflict that either benefited the defendants or caused an identifiable harm to the

Plan"); In re WorldCom, Inc., 263 F.Supp.2d 745 (S.D.N.Y. 2003) ("Plaintiffs' allegations that

Ebbers's holding ofWorldCom stock and participation in its compensation program created a

conflict of interest are insufficient by themselves to state a claim under ERISA. Plaintiffs do not

allege that Ebbers's personal investments caused him to take or fail to take any actions

17


detrimental to the Plan while he was wearing his "fiduciary hat"). Thus, because Plaintiffs have

offered no allegations whatsoever that suggest that any of the Director Defendants took any

action adverse to Plan participants based on any alleged conflict of interest (let alone how such

actions harmed the Plan), Count II fails and should be dismissed.17

C. Count III Should Be Dismissed Against The Director Defendants Because Plaintiffs Have Failed To Plead A Valid Claim For Breach Of The Duty To Monitor

Plaintiffs' duty to monitor claim is also without merit. While Plaintiffs have added to the

SCAC their own legal conclusions regarding the proper scope of the duty to monitor (which

follow from their prior unsuccessful opposition to the motion to dismiss the CAC), 18 the SCAC' s

attempts to revive this claim are fruitless.

17

18

In support of their allegations of conflict of interest against Mr. Fuld, Plaintiffs allege that he "knew or should have known of Lehman's artificially inflated stock price during much of the Class Period," and "benefited directly from this knowledge or neglect by selling [his] personal holdings of Company Stock for significant gain." SCAC, 453. However, as this Court stated in its prior decision, "[n]either serving as a corporate officer or director nor owning or selling stock is sufficient to state a conflict of interest claim." February 2010 Op. at 16 n.67. Rather, a plaintiff alleging a conflict of interest arising out of stock ownership must allege that a defendant's "personal investments caused him to take or fail to take ... actions detrimental to the Plan while he was wearing his 'fiduciary hat."' In re Worldcom, Inc., 263 F. Supp. 2d at 768. Plaintiffs' allegations do not satisfY those requirements. First, Plaintiffs concede that Mr. Fuld sold Lehman stock "[i]n the period immediately preceding the Class Period," not during the Class Period. SCAC , 453. Plaintiffs thus have not alleged that Mr. Fuld in any way failed to avoid conflicts of interest or otherwise harmed the Plan or its participants during the Class Period, the time period relevant to Plaintiffs' alleged harm. Second, Plaintiffs have failed to allege that Mr. Fuld's personal investments caused him to take or fail to take any actions in his fiduciary capacity that were detrimental to the Plan. See In re Worldcom, Inc., 263 F. Supp. 2d at 768; see also In re SLM Corp. ERISA Litig., 2010 WL 3910566, at *11. Third, Plaintiffs have failed to allege any harm to the Plan and the Plan Participants stemming from the alleged conflict of interest. See In re McKesson, 391 F. Supp. 2d at 835; Lanfear, 2010 WL 2427413, at* 14.

Compare, e.g., Pis.' Mem. of Law in Opp. to Defs.' Mot. to Dismiss the CAC, at 43 ("[T]he Director Defendants should have informed their appointees of the undue risks posed by Lehman Stock .... ") with SCAC, 489 ("[A] monitoring fiduciary must provide

18


Plaintiffs' duty to monitor claim fails for three reasons. First, as discussed above and in

the Benefit Committee Defendants' motion, Plaintiffs' claim that the Defendants breached their

fiduciary duty of prudence by continuing to offer the Lehman Stock Fund as an investment

option under the Plan is without merit. Because Plaintiffs' duty to monitor claim is predicated

on an allegation of underlying imprudent conduct, that claim must necessarily fail as well.

Second, even if Plaintiffs are correct that the Director Defendants' power to appoint carried with

it a duty to monitor the performance of the individuals they appointed, Plaintiffs' allegations that

the Director Defendants failed to comply with this obligation are entirely conclusory and should

be disregarded by the Comi. Third and finally, while Plaintiffs have added several allegations

concerning the Director Defendants' alleged obligation to provide material, non-public

information to the members of the Benefit Committee for their use in administering the Plan,

those allegations are inconsistent with ERJSA's fiduciary duty principles and cannot support a

claim.

1. Plaintiffs' Duty to Monitor Claim Is Derivative of Their Meritless Claim for Breach of the Duty of Prudence

Absent a basis upon which it can be concluded that the members of the Benefit

Committee acted imprudently, there can be no claim for a breach ofERISA's duty to monitor.

See Pugh v. Tribune Co., 521 F.3d 686, 702 (7th Cir. 2008) (affirming dismissal of duty to

monitor claim because "it is premised on the first two rejected claims that the appointed

fiduciaries breached their duties"); In re Bank of America Corp., 2010 WL 3448197, at *25

("Where a claim rests on allegations that the appointed fiduciaries breached a duty of prudence, a

failure to monitor claim fails where the plaintiffs do not successfully allege a breach of the duty

of prudence"); In re Bausch & Lomb Inc. ERISA Litig., 2008 WL 5234281, at *10 ("Because the

the monitored fiduciaries with complete and accurate information in their possession that they know or reasonably should know that monitored fiduciaries must have .... ").

19


plaintiffs' Complaint fails to state a claim for breach of fiduciary duty by any of the Plan's

fiduciaries, the plaintiffs' claims for failing to adequately monitor these fiduciaries must also be

dismissed"). Because, for the reasons stated above and in the Benefit Committee Defendants'

brief, Plaintiffs have failed to state an underlying claim for the breach of the duty of prudence,

their duty to monitor claim must fail as well.

2. Plaintiffs Do Not Validly Allege That the Director Defendants Failed to Prudently Exercise Their Appointment Power Under the Plan

In its February 2010 decision, the Court dismissed Plaintiffs' duty to monitor claims

against the Director Defendants based, in part, on the absence of any non-conclusory allegations

that the Director Defendants failed to exercise prudently their limited appointment power under

the Plan. Specifically, the Court held that:

As an initial matter, the only factual allegations that Director Defendants exercised control and authority over the Plan is the contention that the board appointed its Compensation Committee and that that committee in turn appointed the Plan Committee-I so assume. But that does not help plaintiffs. Persons who are fiduciaries by virtue of the exercise of control and authority over a plan are subject to fiduciary duties only "to the extent" they have or have exercised such power. Thus, while this allegation would suffice if the complaint alleged that the Director Defendants breached fiduciary duties with respect to the appointment of the Compensation Committee or that the Compensation Committee breached its duties in appointing the Plan Committee, there is no such contention.

Feb. 2010 Op. at 8-9.

Plaintiffs respond to the Court's conclusion with the addition of a single allegation.

Specifically, Plaintiffs allege that "[t]o the extent that the Director Defendants ... appointed

members of the Benefit Committee who were insufficiently informed to determine when, at the

beginning of the Class Period, the Company stock had become imprudent for retirement savings,

the Director Defendants ... breached their fiduciary duties by failing to appoint fiduciaries who

20


were able to act in the best interests of the Plan and their [sic] participants." SCAC ~ 437. This

utterly conclusory allegation is not sufficient to state a valid claim.

ERISA does not require an appointing fiduciary to provide its appointees with the non-

public business infonnation that Plaintiffs contend should have been provided. Because the

Director Defendants had no obligation to provide the Benefit Committee Defendants with such

information, they similarly had no obligation to make their appointment decisions based on

whether the fiduciaries to be appointed possessed such infonnation. Plaintiffs' assertion

essentially is that the Director Defendants were required to appoint high-level management

employees of Lehman Brothers to the Benefit Committee. However, ERISA imposes no such

requirement. Rather, ERISA merely requires that plan fiduciaries be capable of impartially

interpreting and administering the terms of a benefit plan and of making prudent decisions in

performing those duties. Plaintiffs have offered no allegations whatsoever that any Benefit

Committee member was not so capable. 19

To the extent that Plaintiffs contend that the members of the Benefit Committee were not

qualified to act as ERISA fiduciaries, they rely on nothing more than that the Benefit Committee

failed to predict that Lehman would ultimately file for bankruptcy. However, such an ipso facto

19 Indeed, as Plaintiffs' own allegations make clear, the members of the Compensation and Benefit Committees were highly qualified, experienced employees of Lehman (such as, for example, the Global Head of Employee Benefits, the Head of Human Resources for Fixed Income, a Managing Director for Equity Research, and the Chief Investment Officer of Lehman Brothers Trust Company). See SCAC ~~ 26, 29, 34,62-68. The SCAC fails to show any reason for the Director Defendants to have concluded, that they could not satisfy their fiduciary obligations. Moreover, Plaintiffs' conclusory allegation that the Director Defendants did not have sufficient review and evaluation procedures in place, see SCAC ~ 433, is insufficient to support a claim for breach of the duty to monitor--especially absent any "red flags" regarding the Benefit Committee. See, e.g., In reWash. Mut., Inc. Sec. Derivative and ERISA Litig., 2009 WL 3246994, at *11 (holding that where a plaintiff asserts a failure to review appointees periodically, the plaintiff must "also allege facts relating to the periodic review process").

21


allegation cannot support a valid claim for breach of fiduciary duty. See, e.g., In re Wash. Jvfut.,

Inc. Securities, Derivative & ERISA Litig., 2009 WL 3246994, at * 11 (dismissing duty to

appoint/monitor claim because "Plaintiffs include no allegations of fact about the Board's

procedures with respect to appointment and retention and merely argue that this duty must have

been breached by the precipitous fall in WaMu's stock price"); see also In re WorldCom ERISA

Litig., 263 F. Supp. 2d at 7 60-61 (dismissing failure to monitor claim against board of directors

because plaintiffs' argument "would make any supervisor of an ERJSA fiduciary also an ERJSA

fiduciary"). In order for a plaintiff to state a claim for breach of fiduciary duty against an

appointing fiduciary, that plaintiff must allege the existence of"red flags" that should have led

the appointing fiduciary to suspect "possible misadventure" by his or her appointees. See In re

Dynegy, Inc. ERISA Litig., 309 F. Supp. 2d at 903. Here, Plaintiffs have alleged no

circumstances that should put the Director Defendants on notice that the members of the

Compensation or Benefit Committees were either unqualified or failing to perform their duties

with respect to the Plan.

Accordingly, the SCAC contains no cognizable allegations that the Director Defendants

failed to act prudently in appointing any person to the Board's Compensation Committee or that

any of the Compensation Committee members failed to act prudently in appointing any member

of the Benefit Committee. For this reason, Plaintiffs have failed to cure the core deficiencies in

their duty to monitor claim against the Director Defendants, and that claim must fail yet again.

3. Plaintiffs' Assertion That the Director Defendants Were Required to Disclose Non-Public Information Concerning Lehman's Alleged "Business Problems" to the Benefit Committee Defendants Fails to State a Claim

Plaintiffs' primary attempt to save their duty to monitor claim against the Director

Defendants is their repeated conclusory asse1iion that the Director Defendants were subject to an

22


ongoing obligation to provide the Plan's other fiduciaries with "sufficient material, non-public

information about Lehman's deteriorated financial condition and its imminent collapse to the

members ofthe Benefit Committee .... " SCAC ~ 438; see also id. ~~ 100, 108,427,432,492.

Plaintiffs' assertion, which they argued in their opposition to the last motion to dismiss (see Pls.'

Mem. of Law in Opp. to Defs.' Mot. to Dismiss the CAC, at 43-45), is premised upon a

misunderstanding of the law governing ERISA's fiduciary duties.

Just as a fiduciary responsible for administering a plan "ha[ s] no affirmative duty under

ERISA to disclose infonnation about the company's financial condition to plan participants,"

Gearren, 690 F. Supp. 2d at 271, a fiduciary whose only responsibility is to appoint the members

of a plan's administrative committee is not subject to a constant duty to provide information to

those it has appointed. Cf Edgar v. Avaya, Inc., 503 F.3d 340, 350 (3d Cir. 2007) (holding that a

fiduciary does not have a general obligation to "give investment advice" or "opine on a stock's

condition"); In re Citigroup ERISA Litig., 2009 WL 2762708, at *22 ("[W]hen it comes to

financial information about companies in which participants may invest, it is 'inappropriate to

infer an unlimited disclosure obligation on the basis of general provisions that say nothing about

disclosure."') (quoting CWAIITU Negotiated Pension Plan v. Weinstein, 107 F.3d 139, 147 (2d

Cir. 1997) ). Indeed, to hold otherwise would transform the limited fiduciary duties of an

appointing fiduciary into a generalized duty even more stringent than that imposed upon those

who actually control a plan. Such a result is wholly inconsistent with ERISA's fiduciary duty

. . 1 20 pnnc1p es.

20 Plaintiffs' argument with respect to the Director Defendants' alleged non-disclosure further fails insofar as Plaintiffs are asserting that the Director Defendants should have provided the Benefit Committee with material, non-public information that the Committee would then be required to act upon to protect the Plan. The problem with this argument is that ifthe Benefit Committee took action based on material information that

23


In In re Citigroup, the court recently rejected the precise argument that Plaintiffs are

making here:

[T]he Monitoring Defendants were fiduciaries only to the extent that they appointed the members of the Administration and Investment Committees. Their fiduciary obligations in no way extended to managing the Plans' investments or to communicating with Plan participants. To hold that the Monitoring Defendants had a duty to provide material, non-public information to the Plan's fiduciaries would extend the Monitoring Defendants' fiduciary responsibilities far past their limited role as outlined by the Plan Agreement.

2009 WL 2762708, at *26; see also In re American Express Co. ERISA Litig., 2010 WL

4371434, at* 14 ("[T]he allegation that American Express and the Monitoring Defendants are

liable for failing to provide the Benefit Committee Defendants with non-public information

regarding American Express's financial position extends beyond the duties of American Express

and the Monitoring Defendants under the Plan."). The same exact principle applies here.

For all these reasons, Plaintiffs' claim for breach ofERISA's fiduciary duty to monitor

(Count III) cannot stand as a matter oflaw.

had not been publicly disclosed, they would potentially have been guilty of insider trading. See, e.g., Edgar v. Avaya, Inc., 503 F.3d at 350 ("[H]ad defendants decided to divest [the Plans of Advanta stock], based on information that was not publicly available, they would have faced potential liability under the securities laws for insider trading"). Indeed, "[t]iduciaries are under no obligation to violate securities laws in order to satisfy their ERISA fiduciary duties." Quan v. Computer Sciences Corp.,-- F.3d --,No. 09-56190, 2010 WL 3784702, at *8 n.8 (9th Cir. Sept. 30, 2010).

24


CONCLUSION

For the reasons stated above, as well as in the Memorandum of Law of the Benefit

Committee Defendants in support of their Motion to Dismiss the Second Consolidated Amended

Complaint and all prior filings in this action, all of the claims against the Director Defendants

asserted in Plaintiffs' Second Consolidated Amended Complaint should be dismissed with

prejudice.

Respectfully submitted,

By: 4~ 4~----,., ---· Andf;wJ.L~ ( [email protected]) Kathleen N. Massey ([email protected]) Adam J. Wasserman ( [email protected]) DECHERTLLP 1095 A venue of the Americas New York, NY 10036-6797 (212) 698-3500

Attorneys for All Director Defendants Other than RichardS. Fuld. Jr.

Thomas K. Johnson II ([email protected]) J. Ian Downes ([email protected]) DECHERTLLP Cira Centre 2929 Arch Street Philadelphia, PA 19104 (215) 994-4000

Of Counsel

November 23, 2010

13912863

25

By:ft/zr~ ~ Patricia M. Hynes·· (patricia. hynes@allenovery. com) Todd S. Fishman (todd.jishman@allenovery. com) ALLEN & OVERYLLP 1221 Avenue ofthe Americas New York, NY 10020 Tel: (212) 610-6300 Fax: (212) 610-6399

Attorneys for Defendant RichardS. Fuld, Jr.

x dkt 0370 dir defs memo p&as... · case 1:09-md-02017-lak document 370 filed 11/23/10 page 1...

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