A plan sponsor fiduciary won their case in court, refuting allegations that they should have removed a fund from the plan’s investment menu.
The plaintiff in this case was Marc J. Muri, an employee of National Indemnity, an insurance provider located in Omaha, Nebraska, and a participant in National Indemnity Company's Employee Retirement Savings Plan. One of the investments in the plan was the Sequoia Fund, and Muri alleged that the Sequoia Fund was, as of January 2015, no longer a prudent investment option. Moreover, that the Sequoia Fund violated its own "value policy" by over-concentrating its investments in one, high risk stock: Valeant Pharmaceuticals.
Prudence, Not Prescience
Judge John Gerrard of the U.S. District Court for the District of Nebraska, noted that while “the duty of prudence requires fiduciaries to act solely in the interest of plan participants and beneficiaries and ERISA requires fiduciaries to carry out their duties with care, skill, prudence, and diligence under the circumstances,” that duty “requires fiduciaries to act with prudence, not prescience, and thus, the relevant inquiry focuses on the information available to the fiduciary at the time of the relevant investment decision.”
Generally speaking, Muri contended that because "[n]o reasonable fiduciary would have made the poor choices that [National Indemnity] made and cost the Plan and its participants tens of millions of dollars in lost retirement savings[,]" National Indemnity has breached its duty of prudence. Further, Muri noted that Charles Wert––an institutional trustee for many major corporations including Boeing, AT&T, Ford Motor Company, and Parsons––opined that the Committee had "failed to follow an appropriate process under the circumstances for monitoring and removing the Sequoia Fund" and "failed to implement an investment policy and thus had no legitimate process to evaluate investments."
“But even viewing those facts in the light most favorable to Muri, no reasonable fact finder could determine that National Indemnity failed to meet its duty of prudence,” wrote Judge Gerrard. “Indeed, nothing in Wert's opinion suggests that National Indemnity's Plan committee was not thinking about, or consistently reviewing, the prudence of the Sequoia Fund.” Moreover, he noted that the plaintiff had not pointed to any authority that “the failure to have an investment policy in place, standing alone, proves imprudence.”
Gerrard noted that “when evaluating whether a fiduciary has acted prudently, the Court must focus on the process by which the fiduciary makes its decisions rather than the results of those decisions,” and that “fiduciaries breach the continuing duty to monitor when they fail to investigate whether an investment is imprudent after changed financial circumstances increase the risk of holding stock.”
“Here, the record evidence demonstrates that the committee did not ignore the increased risk of maintaining the Sequoia Fund,” Gerrard observed. He noted that the “Committee monitored Sequoia and the Plan's other investments by meeting quarterly, reviewing performance evaluation reports from Wells Fargo, and relying on information in the financial press surrounding Valeant and the Sequoia Fund,” and that, in particular, around August 2014, the time that the Sequoia Fund began performing lower than its initial benchmarks, the Committee regularly discussed the prudence of that fund. “As reflected in the committee minutes of that meeting, the committee discussed the Sequoia Fund's recent underperformance and Wells Fargo's downgrade of Sequoia from an "A" rating to a "B" rating was addressed,” but that “despite its underperformance, and Wells Fargo's downgrade of the Sequoia Fund's rating, the committee recognized that "Wells Fargo considers it to still be an excellent fund," and noted that the Sequoia Fund's three, five, and ten year performance projections were higher than its benchmarks.”
And then Gerrard proceeded to outline what amounted to an ongoing process of deliberation and review of that holding, which eventually led the defendants to send a “communication to Plan participants notifying them that Valeant was Sequoia's largest holding, that Valeant was in the news due to a significant price decline, and that two of Sequoia's outside directors had resigned.” Now, Gerrard noted, that letter did not take a position as to whether plan participants should reconsider investing in the Sequoia Fund, “but it did highlight to participants that the Sequoia Fund was not performing to expectations and that "[i]t is up to each plan participant to make her or his investment decisions in the Plan.”
Subsequently, the Committee discussed various options with regard to Sequoia, one of which was whether to remove Sequoia as an investment option in the Plan, but noting that there were alternative investment options in the Plan available to participants that do not want to invest in Sequoia or who want to liquidate their investment in Sequoia, the Committee did not want to force participants into liquidating their investment – which is what would have been the result had they removed the Sequoia fund from the plan.
“In other words,” Gerrard wrote, “there is extensive undisputed evidence in the record demonstrating that the Committee monitored funds in the Plan, and specifically, evidence that the Committee analyzed and reviewed the prudence of maintaining the Sequoia Fund as a plan option.”
“That conduct satisfies National Indemnity's continuing duty to monitor and evaluate the fund options in the Plan, and no reasonable fact finder could conclude otherwise,” Gerrard wrote.
That wasn’t the end of Muri’s argument – he claimed that the monitoring process was nonetheless insufficient, specifically that their “reliance on publicly available information––such as Valeant's declining market value, the financial press concerning Valeant and the Sequoia Fund, and signs that the Sequoia Fund may be overly concentrated in a high-risk stock (i.e., Valeant)—did not satisfy its duty to prudently monitor its Plan assets.”
“But that notion—that a plan fiduciary must go beyond the review of publicly available information when nothing in the record suggests that a particular investment's market price is unreliable—was recently rejected by the Eighth Circuit in Usenko v. MEMC LLC et al., No. 18-1626, slip op. at 1-9 (8th Cir. June 4, 2019), where the plaintiff alleged that the defendants "knew or should have known" that one of the stocks offered in the retirement savings plan at issue, SunEdison, was in poor financial condition and thus, should have been removed from the plan's assets. That court noted that the evidence suggested that the financial press' negative commentary and SunEdison's liquidity problems were reflected in the decline of SunEdison's stock price, and that "a security's price in an efficient market reflects all publicly available information and represents the market's best estimate of its value in light of its riskiness and the future net income flows that those holding it are likely to receive,” and thus a failure to outperform the market based solely on their analysis of publicly available information" there cannot, as a matter of law, be a breach of the duty of prudence.
The Eighth Circuit noted that although "an ERISA fiduciary has a continuing duty to monitor trust investments and remove imprudent ones," there must be some "special circumstances undermining the market price" to state a duty of prudence claim based on public information.” Gerrard went on to explain that, “Simply put, following Usenko, a plaintiff cannot prevail on a duty of prudence claim by arguing that the Plan fiduciaries failed to act prudently, or failed to adequately monitor the investments in the Plan, by not removing an excessively risky stock "based solely on their analysis of publicly available information."
“In sum,” Gerrard concluded, “contrary to Muri's contentions, National Indemnity was regularly monitoring and discussing Valeant's performance and its impact on the Sequoia Fund, and the Committee reviewed relevant, and most importantly reliable, valuation information. As such, the Court concludes that no reasonable fact finder could find for Muri on his duty of prudence claim.”
Conflict of Interest
Defendant Muri also claimed a conflict of interest in that National Indemnity’s parent company Berkshire Hathaway was a stock held by the Sequoia Fund – but Gerrard noted that to support that claim, “Muri must point to evidence from which a reasonable fact finder could infer that the subjective motivation behind the Committee's conduct placed Berkshire Hathaway's interests over those of the Plan participants,” but found no evidence in the record to support that allegation. “Instead, the only evidence before the Court is that the Committee was skeptical of removing the Sequoia Fund from the Plan because they did not want to "force participants into liquidating their investments" and wanted "to allow participants to decide based on their individual investment goals whether to continue their investment in [the] Sequoia [Fund] or to liquidate."
“To that end,” Gerrard concluded, “Muri's own expert found that "committee members seem to have believed that the fund's popularity among the participants was an important reason to defer any removal decision." However, he noted that “it is not disloyal for an investment committee to consider what the Plan participants they represent might want. In fact, it simply bolsters the conclusion that the committee members were acting with the participants' interests in mind,” he wrote, going on to note “the evidence before the Court demonstrates that based on the undisputed material facts, Muri's duty of prudence and duty of loyalty claims cannot survive summary judgment. So, the Court will grant National Indemnity's motion in its entirety.”
Other Sequoia Suits
It's not the first such litigation to be filed based on investments in the Sequoia Fund. As an interesting side note, in March 2016, Zamansky, LLC, which represented the plaintiffs here, announced the launch of an “investigation” into “potential violations of ERISA,” specifically whether the plan fiduciaries violated their duties to prudently manage and invest plan assets “by the continued offering of the Sequoia Fund as an investment option” in the plan. Guessing that the plaintiff here was part of that investigation.
What This Means
The Supreme Court has already agreed to take on a case that might either affirm, modify, or rewrite the standard for fiduciary review of plan investments (notably employer stock). Significant as that ruling will surely be as regards future litigation (particularly if a new standard emerges), the “special circumstances” standard also bears watching.
While an Eighth Circuit decision was cited here, a similar case – with an identical result was produced in the Second Circuit Court of Appeals earlier this month, concluding that “special circumstances” were required to require more than a review of publicly available materials with a publicly tradeable stock. Not to mention the notion that “allegations based solely on publicly available information that a stock is excessively risky in light of its price do not state a claim for breach of the ERISA duty of prudence.”
Ultimately, however, this is a case where a plan committee not only did their job, but documented that review – and the prudence, not prescience standard is surely of comfort to plan fiduciaries.