Jones v. SunEdison, Inc. et al
Filing
180
OPINION, MEMORANDUM AND ORDER re: 20 ORDERED that Defendants' Motion to Dismiss, [Doc. No. 20], is GRANTED. FURTHER ORDERED that this matter is DISMISSED.. Signed by District Judge Henry E. Autrey on 3/24/14. (CEL)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
JERRY JONES AND MANUEL ACOSTA, )
on behalf of themselves and all others
)
similarly situated,
)
)
Plaintiffs,
)
)
v.
)
)
SUN EDISON., INC., et al.,
)
)
Defendants,
)
Case No. 4:08CV1991 HEA
OPINION, MEMORANDUM AND ORDER
This matter is before the Court on Defendants’ Motion to Dismiss, [Doc.
No. 20]. Plaintiffs oppose the motion and the parties have extensively and
arduously briefed the issues. For the Reasons set forth below, the Motion is
granted.
Facts and Background
Plaintiff,1 on behalf of himself, and a class of all other similarly situated
Plan participants, have brought this action under the Federal Employee Retirement
Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (“ERISA”) against the
1
On June 28, 2011, Plaintiff Jerry Jones withdrew as a plaintiff in this action, thus, the
only remaining named Plaintiff is Manuel Acosta.
fiduciaries of the MEMC Electronics Materials, Inc.2 401(k) Savings Plan (the
Plan) for violations of ERISA. Plaintiff contends the following:
The Plan is a retirement plan sponsored by MEMC. (MEMC Retirement
Savings Plan (2002) Restatement (“Plan Document”), Article II, § 2.21).
Plaintiffs’ claims arise from the alleged failure of Defendants, who are fiduciaries
of the Plan, to act solely in the interest of the participants and beneficiaries of the
Plan, and to exercise the required skill, care, prudence, and diligence in
administering the Plan and the Plan’s assets during the period June 13, 2008
through June 1, 2009. (the “Class Period”).
Allegedly, Defendants allowed the imprudent investment of the Plan’s
assets in MEMC common stock (“MEMC Stock” or “Company Stock”)
throughout the Class Period, even though they knew or should have known that
such investment was unduly risky and imprudent. The Company’s serious
mismanagement and improper business practices led to the artificial inflation
of MEMC Stock. As a result, MEMC Stock was an unduly risky and inappropriate
investment option for Plan participants’ retirement savings during the Class
Period.
2
MEMC Electronics Materials, Inc. has changed its name to SunEdison, Inc. For the
sake of consistency, the Court will refer to Defendant as MEMC throughout this Opinion.
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In Count I, Plaintiff alleges that certain Defendants, each having specific
responsibilities regarding the management and investment of Plan assets, breached
their fiduciary duties to the Plan and Plan participants by failing to prudently and
loyally manage the Plan’s investment in Company securities by (a) continuing to
offer MEMC Stock as a Plan investment option when it was imprudent to do so;
(b) failing to provide complete and accurate information to Plan participants
regarding the Company’s financial condition and the prudence of investing in
MEMC Stock; and (c) maintaining the Plan’s pre-existing investment in MEMC
Stock when Company stock was no longer a prudent investment for the Plan.
In Count II, Plaintiff alleges that certain Defendants breached their fiduciary
duties by failing to adequately monitor other persons to whom management/
administration of Plan assets was delegated, despite the fact that Defendants knew
or should have known that such other fiduciaries were imprudently allowing the
Plan to continue offering MEMC Stock as an investment option and investing Plan
assets in MEMC Stock when it was no longer prudent to do so.
In Count III, Plaintiff alleges that certain Defendants failed to avoid or
ameliorate inherent conflicts of interests which crippled their ability to function as
independent, “singleminded” fiduciaries with the best interests of the Plan and
Plan participants solely in mind.
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In Count IV, Plaintiff alleges that Defendants breached their duties and
responsibilities as co-fiduciaries by knowing of breaches of fiduciary duties and
failing to remedy them, knowingly participated in the breaches of fiduciary duties,
and/or enabling the breaches of fiduciary duties.
During the Class Period, Defendants (with responsibility for the Plan’s
investments) imprudently permitted the Plan to hold and acquire tens of millions
of dollars in MEMC Stock despite the Company’s serious mismanagement and
improper business practices. Based on publicly available information for the Plan,
Defendants’ breaches have caused a loss of millions of dollars of retirement
savings.
Plaintiff brings this action on behalf of the Plan and seeks to recover losses
to the Plan for which Defendants are allegedly personally liable pursuant to
ERISA §§ 409 and 502(a)(2), 29 U.S.C. §§ 1109, and 1132(a)(2). In addition,
under § 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), Plaintiff seeks other
equitable relief from Defendants, including, without limitation, injunctive
relief and, as available under applicable law, constructive trust, restitution,
equitable tracing, and other monetary relief.
ERISA §§ 409(a) and 502(a)(2) authorize participants such as Plaintiff to
sue in a representative capacity for losses allegedly suffered by the Plan as a result
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of breaches of fiduciary duty. Pursuant to that authority, Plaintiff brings this action
as a class action under Fed. R. Civ. P. 23 on behalf of all participants and
beneficiaries of the Plan whose Plan accounts were invested in MEMC Stock
during the Class Period. Because the information and documents on which
Plaintiff’s claims are based are, for the most part, solely in Defendants’
possession, certain of Plaintiff’s allegations are made by necessity on information
and belief.
Plaintiff Manuel Acosta is a resident of St. Charles County in the State of
Missouri. He is a participant in the Plan within the meaning of ERISA § 3(7), 29
U.S.C. § 1102(7), and held MEMC Stock in the Plan during the Class Period.
Defendant MEMC is a Delaware corporation with its principal executive
offices located at 501 Pearl Drive, St. Peters, Missouri. MEMC designs,
manufactures, and sells silicon wafers for the semiconductor industry worldwide.
The Company is the Plan Sponsor. MEMC has the power to appoint the Plan
Administrator to serve at its pleasure. The Company also has the power to appoint
the Plan Investment Committee. The Company reserves the right to change or
terminate the Plan at any time and for any reason.
Defendant Nabeel Gareeb (“Gareeb”) was, at relevant times, the Company’s
Chief Executive Officer (“CEO”) and a Director of the Company. Defendant
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Gareeb resigned as President and CEO on November 12, 2008, but remained fully
employed by the Company through December 31, 2008. During the Class Period,
Defendant Gareeb was a fiduciary within the meaning of ERISA, because he
exercised discretionary authority or discretionary control with respect to the
appointment of the Plan fiduciaries and with respect to the management of the
Plan, he possessed discretionary authority or discretionary responsibility in the
administration of the Plan, and he exercised authority or control with respect to the
management of the Plan’s assets.
Defendant Ahmad R. Chatila (“Chatila”) was, as of March 2, 2009 to the
present, President, CEO and a Director of the Company. During this time,
Defendant Chatila was a fiduciary within the meaning of ERISA, because he
exercised discretionary authority or discretionary control with respect to the
appointment of the Plan fiduciaries and with respect to the management of the
Plan, he possessed discretionary authority or discretionary responsibility in the
administration of the Plan, and he exercised authority or control with respect to the
management of the Plan’s assets.
Defendant Peter Blackmore (“Blackmore”) was, at relevant times, a Director
of the Company. During the Class Period, Defendant Blackmore was a fiduciary
within the meaning of ERISA, because he exercised discretionary authority or
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discretionary control with respect to the appointment of the Plan fiduciaries and
with respect to the management of the Plan, he possessed discretionary authority
or discretionary responsibility in the administration of the Plan, and he exercised
authority or control with respect to the management of the Plan’s assets.
Defendant Marshall Turner (“Turner”) was, at relevant times, a Director of the
Company. During the Class Period, Defendant Turner was a fiduciary within the
meaning of ERISA, because he exercised discretionary authority or discretionary
control with respect to the appointment of the Plan fiduciaries and with respect to
the management of the Plan, he possessed discretionary authority or discretionary
responsibility in the administration of the Plan, and he exercised authority or
control with respect to the management of the Plan’s assets.
Defendant Robert J. Boehlke (“Boehkle”) was, at relevant times, a Director
of the Company. During the Class Period, Defendant Boehkle was a fiduciary
within the meaning of ERISA, because he exercised discretionary authority or
discretionary control with respect to the appointment of the Plan fiduciaries and
with respect to the management of the Plan, he possessed discretionary authority
or discretionary responsibility in the administration of the Plan, and he exercised
authority or control with respect to the management of the Plan’s assets.
Defendant John Marren (“Marren”) was, at relevant times, the Chairman of
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the Board of the Company. During the Class Period, Defendant Marren was a
fiduciary within the meaning of ERISA, because he exercised discretionary
authority or discretionary control with respect to the appointment of the Plan
fiduciaries and with respect to the management of the Plan, he possessed
discretionary authority or discretionary responsibility in the administration of
the Plan, and he exercised authority or control with respect to the management of
the Plan’s assets.
Defendant C. Douglas Marsh (“Marsh”) was, at relevant times, a Director of
the Company. During the Class Period, Defendant Marsh was a fiduciary within
the meaning of ERISA, because he exercised discretionary authority or
discretionary control with respect to the appointment of the Plan fiduciaries and
with respect to the management of the Plan, he possessed discretionary authority
or discretionary responsibility in the administration of the Plan, and he exercised
authority or control with respect to the management of the Plan’s assets.
Defendant William E. Stevens (“Stevens”) was, at relevant times, a Director
of the Company. During the Class Period, Defendant Stevens was a fiduciary
within the meaning of ERISA, because he exercised discretionary authority or
discretionary control with respect to the appointment of the Plan fiduciaries and
with respect to the management of the Plan, he possessed discretionary authority
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or discretionary responsibility in the administration of the Plan, and he exercised
authority or control with respect to the management of the Plan’s assets.
Defendant James B. Williams (“Williams”) was, at relevant times, a
Director of the Company. During the Class Period, Defendant Williams was a
fiduciary within the meaning of ERISA, because he exercised discretionary
authority or discretionary control with respect to the appointment of the Plan
fiduciaries and with respect to the management of the Plan, he possessed
discretionary authority or discretionary responsibility in the administration of the
Plan, and he exercised authority or control with respect to the management of the
Plan’s assets.
Defendant Michael McNamara (“McNamara”) was, at relevant times, a
Director of the Company. During the Class Period, Defendant McNamara was a
fiduciary within the meaning of ERISA, because he exercised discretionary
authority or discretionary control with respect to the appointment of the Plan
fiduciaries and with respect to the management of the Plan, he possessed
discretionary authority or discretionary responsibility in the administration of the
Plan, and he exercised authority or control with respect to the management of the
Plan’s assets.
Defendants Gareeb, Chatila, Blackmore, Turner, Boehkle, Marren, Marsh,
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Stevens, Williams and McNamara are herein referred to as the “Director
Defendants.” The Director Defendants are fiduciaries of the Plan as they have
general responsibility for the investment of Plan assets. Plan Document, Article
XIII, § 13.6
Defendant Plan Investment Committee (the “Investment Committee”) was,
at all relevant times, a named fiduciary of the Plan. Pursuant to the Plan
Document, Article XIII, § 13.6, the Investment Committee was allocated the
following power and authority: To establish investment policies; to appoint,
monitor and remove a Trustee or Trustees; to appoint, monitor and remove
Investment Managers, if any; and to select investment Funds in accordance with
Article VIII.
Further, pursuant to the Plan Document, Article XIII, § 13.7: If a
Committee is serving as Plan Administrator or as the Plan Investment Committee,
an action of the Committee shall be valid if concurred in (a) by a majority of the
members then serving at a meeting of which all members receive reasonable
advance notice, or (b) unanimous written consent in lieu of a meeting. A member
may participate in a meeting by means of conference telephone or similar
communications equipment.
A Committee may appoint one or more of its members to carry out
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any particular duty or duties or to execute any and all documents. Any documents
so executed shall have the same effect as if executed by all such persons. Such
appointment shall be made by an instrument in writing that specifies which duties
and powers are so allocated and to whom each such duty or power is so allocated.
The Plan Administrator and Plan Investment Committee “may delegate to
any agents such duties and powers, both ministerial and discretionary, as the Plan
Administrator or Plan Investment Committee deems appropriate, by an instrument
in writing which specifies which duties are so delegated and to whom each such
duty is so delegated.
The Investment Committee has the power and authority to select the
Trustee(s). The Investment Committee has the power and authority to remove the
Trustee(s). The Investment Committee has the power and authority to “deliver to
the Trustee and each Investment Manager an investment policy that sets out the
guidelines for the investment of the assets over which the trustee or Investment
Manager has discretionary control.” The Investment Committee “may add, change
or eliminate investment alternatives at any time or from time to time.” During the
Class Period, the Investment Committee was comprised of the following Company
employees:
(a) Defendant Kenneth H. Hannah (“Hannah”) was, at all relevant times,
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Senior Vice President and Chief Financial Officer. Defendant Hannah was a
fiduciary within the meaning of ERISA because he possessed discretionary
authority or discretionary responsibility in the administration of the Plan, and he
exercised authority or control with respect to the management of the Plan’s assets;
(b) Defendant Mignon Cabrera (“Cabrera”) was Senior Vice President of Human
Resources of MEMC. As of May 6, 2009, Defendant Cabrera no longer serves as
Senior Vice President, Human Resources for the Company. During the Class
Period, Defendant Cabrera was a fiduciary within the meaning of ERISA because
he possessed discretionary authority or discretionary responsibility in the
administration of the Plan, and he exercised authority or control with respect to the
management of the Plan’s assets; (c) Defendant Jairaj Chetnani (“Chetnani”) was,
at all relevant times, Treasurer. Chetnani was a fiduciary within the meaning of
ERISA because he possessed discretionary authority or discretionary
responsibility in the administration of the Plan, and he exercised authority or
control with respect to the management of the Plan’s assets; (d) Defendant Brandi
Wallace (“Wallace”) was, at all relevant times, Manager of Benefits of the
Company. During the Class Period, Defendant Wallace was a fiduciary within the
meaning of ERISA because she possessed discretionary authority or discretionary
responsibility in the administration of the Plan, and she exercised authority or
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control with respect to the management of the Plan’s assets; and (e) Defendant
James Welsh (“Welsh”) was, at all relevant times, Manager of Benefits. During the
Class Period, Defendant Wallace was a fiduciary within the meaning of ERISA
because he possessed discretionary authority or discretionary responsibility in the
administration of the Plan, and he exercised authority or control with respect to the
management of the Plan’s assets.
Defendants John Does 1-10 (“John Does 1-10”) are residents of the United
States and are or were fiduciaries of the Plan during the Class Period. These
defendants whose identities are currently unknown to Plaintiffs, may include
additional MEMC employees.
The Plan, sponsored by MEMC, is a defined contribution plan. The Plan is a
legal entity that can sue and be sued. ERISA § 502(d)(1), 29 U.S.C. § 1132(d)(1).
However, in a breach of fiduciary duty action such as this, the Plan is neither a
defendant nor a plaintiff. Rather, pursuant to ERISA § 409, 29 U.S.C. § 1109, and
the law interpreting it, the relief requested in this action is for the benefit of the
Plan and its participants and beneficiaries. The Plan is a voluntary contribution
plan whereby participants make contributions to the Plan (“Voluntary
Contributions”) and direct the Plan to purchase investments with those
contributions from options pre-selected by Defendants which are then allocated to
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participants’ individual accounts. Pursuant to the Company’s 2008 Form 11-K,
Plan participants can direct their accounts to be invested in MEMC Stock Fund,
along with eleven (11) other funds offered by the Plan as investment options.
The Company selects the investment assets in the Plan. MEMC Retirement
Plan Service Agreement. The Plan is a retirement plan. Generally, all
employees of MEMC Electronic Materials, Inc. (the Company) who are
compensated in U.S. dollars from a payroll location with the United States are
eligible to participate in the Plan.
Putnam Fiduciary Trust Company serves as the trustee of the Plan.
Pursuant to the 2008 Form 11-K: The Plan permits voluntary contributions
from participants up to 100% of their compensation. Such contributions are
credited directly to the participants’ accounts and are fully vested. Contributions
may be allocated to the available investment options at the discretion of the
participant. Gains and losses under the Plan are valued on a daily basis and
allocated to participant accounts based on account balances.
MEMC employees may elect to contribute from 1% to 50% of his/her
covered compensation as described in the Plan on a before-tax basis. The beforetax contribution is limited to the amount specified by Section 402(g) of the
Internal Revenue Code ($15,500 and $15,000 in 2007 and 2006, respectively). A
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Plan participant is also eligible to receive employer matching contributions of
100% of the first 3% of the employee’s contribution for the Plan year; 50% of the
next 2% contributed, and 20% of the next 1% contributed, up to 4.2% of the
participant’s covered compensation for the Plan year.
As of December 31, 2007, the Plan held $33,326,853 of MEMC’s Stock.
The Plan documents do not mandate that MEMC Stock be offered in the Plan.
Pursuant to the Trust Agreement, “[n]otwithstanding the investment Characteristic
of a Fund, the assets of any Fund may be invested in obligations of the United
States Government, commercial paper, certificates of deposits, money market
deposit accounts, money market mutual funds, savings accounts and/or short-term
investments . . . .”
The Plan incorporates by reference the Company’s SEC filings. In addition,
the Company’s Form S-8, dated Jan. 2, 1997, incorporates the Company’s SEC
filings and all subsequently filed Company documents (i.e., Form 10-Ks, Form
10-Qs, Form 8-Ks, and Form 11-Ks) with the SEC.
During the Class Period, a significant amount of the Plan’s assets were
invested in MEMC Stock. As of December 31, 2007, the Plan held approximately
$33,326,853 in Company Stock. 2008 Form 11-K at 2. Following revelations that
Defendants misrepresented or failed to disclose that: (a) the Company had
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experienced material disruptions in its Texas and Italy facilities; (b) such
disruptions had prevented the Company, to a material extent, from generating
expected revenues; (c) the Company operated its productive facilities on a run-tofailure basis; and (d) that, as a result of the foregoing, the Company’s previously
issued guidance became lacking in any reasonable basis and required immediate
revision, the price of MEMC Stock decreased dramatically.
On July 23, 2008, MEMC shocked investors (which included Plan
participants) when it disclosed, for the first time, that in June 2008 there was a
failure of a heat-exchanger at the Company’s Merano, Italy facility that reduced
the Company’s second quarter polysilicon output by almost five percent.
Additionally, on that same date, MEMC stated that a loose pipe fitting caused a
fire on June 13, 2008 at the Company’s Pasadena, Texas facility, which resulted
in a shutdown of half the silane production in that facility for approximately a
week. This was the first revelation that the Company had suffered these significant
problems at its production facilities. These problems caused MEMC’s second
quarter net sales to be over $8 million less than the bottom range of the financial
guidance that the Company issued in April 2008.
As a result of this news, MEMC’s shares fell $11.57 per share, or 21.51%,
from July 23, 2008 to close on July 24, 2008 at $42.23 per share, on unusually
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heavy trading volume. As a result, the Plan incurred substantial losses due to its
investment in MEMC Stock.
Despite the Plan’s substantial investment in MEMC Stock, Defendants
failed to protect the Plan from the risks that resulted from the Company’s reckless
and improper conduct. Defendants continued to hold the Plan’s shares of MEMC
Stock and compounded the problem (and the losses) by purchasing additional
shares during the Class Period. Plaintiffs estimate a principal loss of millions of
dollars.
ERISA requires every plan to have one or more “named fiduciaries.” ERISA
§ 402(a)(1), 29 U.S.C. § 1102(a)(1). The person named as the “administrator” in
the plan instrument is automatically a named fiduciary, and in the absence of such
a designation, the sponsor is the administrator. ERISA § 3(16)(A), 29 U.S.C. §
1002(16)(A). ERISA treats as fiduciaries not only persons explicitly named as
fiduciaries under § 402(a)(1), but also any other persons who in fact perform
fiduciary functions. See ERISA § 3(21)(A)(I), 29 U.S.C. § 1002(21)(A)(I). Thus, a
person is a fiduciary to the extent “(I) he exercises any discretionary authority or
discretionary control respecting management of such plan or exercises any
authority or control respecting management or disposition of its assets, (ii) he
renders investment advice for a fee or other compensation, direct or indirect, with
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respect to any moneys or other property of such plan, or has any authority or
responsibility to do so, or (iii) he has any discretionary authority or discretionary
responsibility in the administration of such plan.” Id.
Each of the Defendants was a fiduciary with respect to the Plan and owed
fiduciary duties to the Plan and the participants in the manner and to the extent set
forth in the Plan’s documents, under ERISA, and through their conduct. As
fiduciaries, Defendants were required by ERISA § 404(a)(1), 29 U.S.C. §
1104(a)(1), to manage and administer the Plan and the Plan’s investments solely in
the interest of the Plan’s participants and beneficiaries and with the care, skill,
prudence, and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like aims.
Plaintiffs do not allege that each Defendant was a fiduciary with respect to
all aspects of the Plan’s management and administration. Rather, as set forth
below, Defendants were fiduciaries to the extent of the fiduciary discretion and
authority assigned to or exercised by each of them, and the claims against each
Defendant are based on such specific discretion and authority.
Instead of delegating all fiduciary responsibility for the Plan to external
service providers, MEMC chose to delegate its responsibility regarding the
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administration of the Plan to the Investment Committee. MEMC chose to assign
the appointment and removal of fiduciaries to itself, which, in turn, selected the
members of the Investment Committee.
ERISA permits fiduciary functions to be delegated to insiders without an
automatic violation of the rules against prohibited transactions. ERISA §
408(c)(3), 29 U.S.C. § 1108(c)(3). However, insider fiduciaries, like external
fiduciaries, must act solely in the interest of participants and beneficiaries, not in
the interest of the Plan sponsor.
Plaintiff believes that in order to comply with ERISA, the Company
exercised responsibility through the Investment Committee for communicating
with participants regarding the Plan in a plan-wide, uniform, mandatory manner by
providing participants with information and materials required by ERISA. In this
regard, the Company and the Investment Committee disseminated the Plan’s
documents and related materials, which incorporated by reference, among other
things, MEMC’s allegedly inaccurate SEC filings, thus converting such materials
into fiduciary communications.
The Company is also charged with the appointment, monitoring, and
removal of the Investment Committee. Moreover, on information and belief,
MEMC exercised control over the activities of its employees who performed
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fiduciary functions with respect to the Plan, including the Investment Committee.
MEMC, on information and belief, can hire or appoint, terminate, and replace such
employees at will. Thus, MEMC is responsible for the activities of its employees
as fiduciaries with respect to the Plan through traditional principles of agency and
respondeat superior liability. Under basic tenets of corporate law, MEMC is
imputed with the knowledge its officers and employees (which include the other
Defendants) had regarding the alleged misconduct, even if such knowledge is not
communicated to MEMC.
Consequently, MEMC was both a named fiduciary of the Plan pursuant to
ERISA § 402(a)(1), 29 U.S.C. § 1102(a)(1), and a de facto fiduciary of the Plan
within the meaning of ERISA § 3(21), 29 U.S.C. § 1002(21), during the Class
Period because it exercised discretionary authority or discretionary control over
the management of the Plan, exercised authority or control over the management
or disposition of the Plan’s assets, and/or had discretionary authority over or
discretionary responsibility for the administration of the Plan.
Pursuant to the Plan Document, “the Plan Investment Committee shall have
the general responsibility for the investment of Plan assets, as authorized by the
Board of Directors of the Sponsor.” The Director Defendants (Defendants Gareeb,
Chatila, Blackmore, Turner, Boehkle, Marren, Marsh, Stevens, Williams and
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McNamara) were de facto fiduciaries of the Plan within the meaning of ERISA §
3(21), 29 U.S.C. § 1002(21), during the Class Period because they exercised
discretionary authority or discretionary control over the management of the Plan,
exercised authority or control over the management or disposition of the Plan’s
assets, and/or had discretionary authority over or discretionary responsibility for
the administration of the Plan.
During the Class Period, the Company relied on the Investment Committee
Defendants to carry out its fiduciary responsibilities under the Plan and ERISA.
As a result, the Investment Committee Defendants are both named and functional
fiduciaries under ERISA. The Investment Committee Defendants (Hannah,
Cabrera, Chetnani, Wallace, and Welsh) are named fiduciaries of the Plan
pursuant to ERISA § 402(a)(1), 29 U.S.C. § 1102(a)(1), and de facto
fiduciaries of the Plan within the meaning of ERISA § 3(21), 29 U.S.C. §1002(21),
during the Class Period because they exercised discretionary authority or
discretionary control over the management of the Plan, exercised authority or
control over the management or disposition of the Plan’s assets, and/or had
discretionary authority over or discretionary responsibility for the administration of
the Plan.
During the Class Period, Plaintiff alleges that MEMC Stock became an
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imprudent investment for participants’ in the Plan because (a) the Company had
experienced material disruptions in its Texas and Italy facilities; (b) such
disruptions had prevented the Company, to a material extent, from generating
expected revenues; (c) the Company operated its productive facilities on a run-tofailure basis (but failed to disclose this information); and (d) as a result of the
foregoing, the Company’s previously issued guidance became lacking in any
reasonable basis and required circumstances that exposed the Plan to the risk of
substantial losses.
MEMC’s inaccurate statements increased the risk of loss by contributing to
the artificial inflation of the value of Company Stock.
MEMC is a manufacturer and seller of polysilicon wafers and related
intermediate products to the semiconductor and solar industries. According to
MEMC’s website (http://www.memc.com), the Merano, Italy facility manufactures
single crystal ingots and polysilicon. The MEMC Pasadena, Texas facility
produces semiconductor-grade granular polysilicon, monosilane and SiF4 gases
and semiconductor-grade silicon powder. The ultra-pure granular polysilicon
manufactured at the MEMC Pasadena facility is the base material for
manufacturing of silicon wafers.
Since 1995, MEMC Pasadena facility has expanded from the original
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capacity of approximately 1,100 metric tons of semiconductor-grade polysilicon
per year to an estimated 4,400 metric tons per year. Upon information and belief, a
proposed, additional expansion will increase production capacity to approximately
5,000 metric tons of semiconductor-grade polysilicon per year. According to an
article published on April 3, 2008 in Semiconductor International entitled “MEMC
Fixing Buildup Issues at Texas Polysilicon Facility,” the Pasadena facility accounts
for two-thirds of MEMC’s total polysilicon capacity.
Polysilicon has several commercial applications, including silicon wafers
and solar panels. Refined polysilicon – the semiconductor substrate used for
integrated circuits – is a component part of semiconductor-grade silicon wafers.
Polysilicon manufacturing technology is highly technical and while some aspects
are patented, companies maintain proprietary manufacturing processes and seek to
keep the details of their methods of manufacturing known only to themselves.
MEMC manufactures a number of high-grade silicon products, including the
OptiaTM and AegisTM silicon wafers, for use in advanced device technologies, as
well as component parts. The wafers such as those manufactured and produced by
MEMC are the foundation upon which virtually all of the world’s semiconductors
are built. Those products are the building blocks for the $1 trillion electronic
market (i.e., cell phones, computers, PDSs, CD/DVD players, satellite and
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automotive electronics, etc.).
The demand for semiconductor-grade polysilicon has increased at a rapid
rate from 1995 to the present. This upward trend is expected to continue as the
worldwide demand for polysilicon continues to grow, along with the advancement
of the computer and electronics industries, and technology dependent on silicon
wafers and demand for photovoltaic panels.
Prior to the Class Period, MEMC’s financial results had been negatively
impacted by production problems at its Pasadena, Texas facility that materially
impacted the Company’s financial results for the periods ended September 30,
2007, December 31, 2007 and March 31, 2008. According to an article published
on Seeking Alpha on September 5, 2007, entitled “MEMC Cuts Q3 Guidance Due
To Pasadena Construction Accident,” the Pasadena, Texas facility accounts for
70% of MEMC’s total production.
On September 4, 2007, the Company issued a press release entitled “MEMC
Provides Updated Third Quarter Guidance.” This press release discussed a
construction accident at the Company’s Pasadena, Texas facility that caused it to
lower its third quarter 2007 guidance by approximately 5%. This press release was
filed with the SEC and was incorporated into Plan documents. It was therefore a
fiduciary communication to Plan participants.
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On October 5, 2007, the Company issued a press release entitled “MEMC
Reports Third Quarter Results.” It was in this press release the Company reported
results of operations for the quarter ended September 30, 2007, which included the
previously disclosed construction accident: “The impact associated with the
previously disclosed construction incident at the company’s Pasadena polysilicon
manufacturing facility was the primary factor contributing to the sequential
reduction in gross margin.” It was in this same October 5, 2007 press release that
Defendant Gareeb stated that “the extended effects of the [construction] incident
caused [the Company] to lose well over a week’s worth of production, miss our
cost projections by the double digit millions, and delay our expansion.”
As stated in a news article in IndustryWeek, dated October 11, 2007, “such
unplanned power disruptions at technologically sophisticated plants like MEMC’s
mean a long startup and recalibration process and both the short-and long-term
repercussions were severe.”
On October 25, 2007, the Company held an earnings conference call to
discuss its third quarter 2007 results. It was at this earnings conference call that
Defendant Gareeb further discussed the construction incident, stating in relevant
part: “To give an update on Pasadena, as you know, a construction incident caused
by electrical subcontractor resulted in a power outage to our Pasadena polysilicon
- 25 -
manufacturing facility. […] We have recovered from this discrete event to a steady
state rate of production and are pleased to indicate that we are targeting to achieve
the level of Q4 revenue targeted prior to the construction incident and be
able to recover some of the lost revenue from Q3.”
On January 24, 2008, the Company issued a press release entitled “MEMC
Announces Fourth Quarter & Full Year Results.” It was in this press release that
the Company issued results of operations for the quarter and year ended December
31, 2007. Defendant Gareeb also stated in relevant part:
Based on customer input, we are targeting first quarter 2008 sales
to be approximately $560 million. In addition, we are targeting
margins to be approximately flat to slightly up compared to the
exceptional fourth quarter. Operating expenses are targeted to be
approximately $42 million as a result of the timing of stock
compensation expenses within 2008.
On that same day, the Company also held an earnings conference call to
discuss its fourth quarter 2007 results. The Company also discussed at this
conference call its production problems at the Texas facility:
Gordon Johnson - Lehman Brothers: Okay. And then lastly, I
guess on the revenue line, a bit softer than expected this quarter.
Can you talk a little bit about kind of what drove that?
Gareeb: Yes. On the revenue in Q4, really what the issue with the
revenue shortfall from our target as kind of alluded to in statement
was that we ended up needing to do maintenance on some pieces
of poly equipment in our Pasadena, Texas facility in December,
- 26 -
in the last week really of December rather than in January as we
had originally anticipated. And you can try to predict these
things, but you can’t, it’s not very scientific. And our expansion
that was coming online was really planned to offset that
maintenance activity in January, not in December. So instead of
growing by 15% sequentially, we grew by 13%, and margins you
saw what happened up well over 400 bases points. And so really,
it was about a 1 day’s impact, even though we did the some of that
maintenance in the fourth week.
***
Tim Luke - Lehman Brothers: Thanks Nabeel, couple of quick
questions. Just if you can comment what are the milestones going
forward now on your payment schedule and I was just wondering
if you could clarify again in terms of the one day disruption that
you saw that impact the fourth quarter revenue. Can you just
clarify what that was again? Thanks.
Gareeb: So the fourth quarter piece Tim, the net affect was
basically one days worth of production that you saw in that
approximately $5 million off the target that we had articulated it
wasn’t the . . . .
Tim Luke - Lehman Brothers: When did that come . . . when did
you get that disruption?
Gareeb: Right, so it wasn’t a lets call it a disruption, call it early
maintenance really. We had anticipated that semi-annual maintenance
would be occurring in the January, February time table and basically
because of the shut down in September some of those pieces of
equipment weren’t running at a 100% operational efficiency. And so you can’t
really predict this plus, minus in a couple in a weeks and we thought it would
happen January, February we had to basically take them down in the 4th late 3rd
week, early 4th week of December and do some maintenance on them. And so that
really cause[d] the shortage of poly which ripples through the entire pipeline.
That’s obviously behind us and we did some maintenance on that in December, we
did some maintenance on that this week and we'll do some again in probably late
- 27 -
this quarter and so the expansion will offset those maintenance activities in this
quarter.
Defendant Hannah also discussed on this conference call the problem at its
Texas facility that caused the Company to miss its revenue target by about $5
million. Defendant Hannah stated in relevant part that “. . . we missed our revenue
target by less than one days worth of production due to earlier than planned
maintenance activity required on our polysilicon equipment in Texas.”
On April 3, 2008, the Company issued a press release entitled “MEMC
Provides First Quarter Update,” announcing the results of the Company’s
operations for the quarter ended March 31, 2008. In discussing the reasons behind
the guidance, the Company stated in relevant part:
The company reported that during the first quarter it experienced
accelerated buildup of chemical deposits inside the new expansion
unit (“Unit 3”) at its Pasadena, Texas facility. These buildups
occurred multiple times, and each instance required downtime of
several days for premature maintenance to clean and re-stabilize
the unit. The company also delayed the remaining maintenance
(from the prior quarter) on the existing units (“Unit 1” and “Unit
2”) waiting for Unit 3 to stabilize, but eventually had to perform
the maintenance on Unit 2. The combination of these items
caused the utilization of the Pasadena facility to be
approximately 20% lower than the fourth quarter, resulted in
much lower than anticipated output, and caused the company to
not achieve the financial targets for the first quarter as disclosed
on January 24, 2008.
Shortly thereafter, on April 24, 2008, the Company issued another press
- 28 -
release entitled “MEMC Reports First Quarter Results,” announcing the results of
operations for the quarter ended March 31, 2008. It was in this press release that
Defendants Gareeb stated in relevant part:
Regarding our production and maintenance efforts in Pasadena,
our new unit (Unit 3) has demonstrated good results, and the
announced maintenance activities on our pre-existing unit (Unit
1) have been completed.
Demand indications from semiconductor application customers are
a bit weaker than typical, resulting in additional price declines
from first quarter levels. Demand from solar application customers,
however, continues to be strong. Although we are pleased with
the results of the actions we have taken to address the issues that
caused the lower than targeted polysilicon volume in the first
quarter, given the unplanned issues that were encountered with
our expected polysilicon ramp in the first quarter, we feel it is
prudent to be extra cautious regarding our polysilicon output
expectations in the second quarter. As a result, we are targeting
revenues of approximately $540 to $570 million for the second
quarter. In addition, we are targeting gross margin of
approximately 54%-55%, with operating expenses of less than $40
million.
Regarding our polysilicon expansion, we are currently
targeting to achieve mechanical completion of Unit 4 (silane unit) in
our Pasadena facility before the end of the second quarter, as well as
additional polysilicon reactor capacity in the third quarter. This
combination will mark the mechanical completion of our 8,000
metric tons of capacity which was originally targeted for the end of
2008. Depending on the output ramp of the different units, this
improved installation schedule may allow us to make good
progress toward achieving our annual financial targets in the
second half of 2008.
Defendant Gareeb’s discussion regarding production matters at the Texas
- 29 -
facility clearly demonstrates that each day of production was extremely important
in order to meet the Company’s production goals. In fact, during a Company
conference call for the first quarter 2008, Defendant Gareeb stated in relevant part
that “Unit 1, as we had said, was down for maintenance. Obviously that
maintenance is now complete. That maintenance took a few days longer because
we had run it to failure and so it took a little bit longer to clean up.”
It was also in the first quarter 2008 conference call that Defendant Gareeb
provided investors (which included Plan participants) with an update on the Texas
facility:
To give you an update on Pasadena, as you know, accelerated
chemical deposits experienced inside our expansion unit, Unit 3,
resulted in reduced output for the quarter. On our update call
earlier this month, we reported that Unit 3 was ramping, but Unit 2
was running with good output and that Unit 1 was undergoing
maintenance. Since then, maintenance on Unit 1 has been
completed and Unit 3 has demonstrated good results. While we
are encouraged by the progress and are trying to be more
cautious than normal, we are still providing second quarter
targets that would result in strong sequential growth in revenue
and margins.
In the near term, I remain encouraged by our progress on our
polysilicon expansion. We are currently targeting to achieve
mechanical completion of our Unit 4 silane unit before the end
of the current quarter, as well as additional polysilicon reactor
capacity in the third quarter. This combination will mark the
mechanical completion of our targeted 8,000 metric tons of
polysilicon capacity, which was originally targeted for the end of
2008.
- 30 -
On April 24, 2008, the Company also issued a press release entitled
“MEMC Provides Status Update After Raw Material Release” reporting that a
transfer line developed a leak and caused a release of raw material gas. The press
release stated in relevant part: “At this stage, the company anticipates that
production will resume on Friday, April 25, 2008 and does not anticipate any
impact to the financial targets provided earlier today as a result of this incident.”
Investors (including Plan participants) were kept current of the status of the
impact of this event as the Company issued a second release on April 29, 2008,
confirming that production at its Pasadena facility did, in fact, resume on April 25,
2008 and all three of the facility’s silane units were operational. The Company
had set a precedent for promptly informing investors (and Plan participants) of
adverse potential impact on production and confirming that the prompt resumption
of production after such an event. Further, for example, in the third and fourth
quarters of 2007 and the first quarter of 2008, the Company provided two timely
updates on previously issued guidance when an event possibly affecting
production, and thus that guidance, had taken place and issued two additional
press releases regarding events even when the Company did not believe there
would be an impact on production. Having established this precedent, the
Company created an expectation that it would, and thus had a duty to, promptly
- 31 -
disclose events that might impact production that the Company had reason to
believe would be of importance to investors (which included Plan participants).
Given its past production problems and the adverse impact such problems
had on the Company’s financial condition, Defendants were well aware that
investors (including Plan participants) would find any production problems to be
highly material. In fact, during the first quarter 2008 press release, Defendants
stated that “we feel it is prudent to be extra cautious regarding our polysilicon
output expectations.” Because Defendants were being “prudent,” investors
(including Plan participants) were left to believe that in the event anything
occurred that might knowingly (to Defendants) reduce revenue indicated in their
previous guidance, the Company would promptly disclose such information.
On June 5, 2008, the Company met with analysts from Deutsche Bank
and, after the meeting, on June 6, 2008, Deutsche Bank issued a report stating in
part, that “[w]e hosted MEMC Electronics management in San Francisco
yesterday, and while the company offered no new or incremental guidance, we are
increasingly convinced that recent production issues are largely resolved, that
silicon pricing remains very strong, and that semiconductor industry pricing
weakness will likely be compensated for by solar PV business strength. We
maintain our Buy rating.”
- 32 -
On June 13, 2008, a fire erupted at the Company’s Pasadena facility
(brought on by a loose pipe fitting) and as a result caused the Company’s silane
production to be shut down. MEMC did not disclose the event. Also in June 2008,
a heat-exchanger at MEMC’s Merano, Italy facility failed, causing an interruption
in the Company’s polysilicon output at that plant.
Given MEMC’s past production issues and the precedent it set by promptly
informing investors (including Plan participants) of any events that would
potentially impact production, at the beginning of the Class Period, Defendants
should have informed Plan participants (and the investing community) about the
problems at MEMC’s Pasadena, Texas and Merano, Italy facilities, but failed to do
so. Rather than remaining silent regarding the occurrences at its two facilities,
MEMC had a duty to disclose: (a) that the Company had experienced material
disruptions at its two facilities; (b) that such disruptions would prevent the
Company, to a material extent, from generating expected revenues and reach its
previously issued guidance; and (c) that, as a result of the foregoing, the
Company’s previously issued guidance became lacking in any reasonable
basis and required immediate revision.
The fire caused the Company’s silane production at the Texas facility to be
shut down for a week. In short, there was a strong possibility that such an
- 33 -
interruption in production would have an adverse impact on earnings and would
cause the Company’s previously published financial projections to be inaccurate.
Similarly, the failure of the heat exchanger in the Merano, Italy plant caused an
interruption in the Company’s production of polysilicon. There was also a strong
possibility that such an interruption in production would have an adverse impact
on earnings and would cause the Company’s previously published financial
projections to be inaccurate.
During the June 23, 2008 earnings call, discussed below, Defendant
Gareeb admitted that the Company knew that the previously issued guidance
lacked any reasonable basis. Defendant Gareeb stated in relevant part: “And so we
didn’t take that as a pre- announcement in terms of doing it earlier in this quarter if
you will, primarily because we didn’t think 2% outside the bottom end of the
range was material if you will.” The production issues at the Company’s Italian
facility and the Pasadena facility combined, Defendants knew, yet failed to timely
disclose, would materially adversely impact the Company’s financial results for
the period ended June 30, 2008.
On July 23, 2008, after the close of the market, MEMC filed a Form 8-K
with the SEC, disclosing (for the first time) that its financial results were below
the bottom end of its targeted range as it encountered unanticipated events toward
- 34 -
the tail end of the quarter. The Company attributed the miss to: “The premature
failure of a relatively new heat-exchanger at the company’s Merano, Italy facility
in June [which] reduced the company’s second quarter polysilicon output by just
under five percent.” The Form 8-K also disclosed “a loose pipe fitting [which]
caused a fire at the company’s Pasadena facility that required a shut down of half
the silane production . . . for approximately a week.”
It was in this same press release that Defendant Gareeb stated in relevant
part:
MEMC grew sales by 6% sequentially, expanded gross and
operating margins by 150 and 200 basis points, respectively,
continued to generate industry-leading levels of free cash flow at
22% of sales, and further expanded our cash and investment
balances to approximately $1.5 billion. However, our financial
results were a bit below the bottom end of our targeted range as
the company encountered unanticipated events towards the tail
end of the quarter.
The premature failure of a relatively new heat-exchanger at the
company’s Merano, Italy facility in June reduced the company’s
second quarter polysilicon output by just under five percent. The
output from the company’s Pasadena, Texas facility during the
month of May and early part of June (shown on the attached silane
and polysilicon output charts) had positioned the company on a
trajectory to exceed the upper end of the company’s targeted
second quarter revenue range. Unfortunately, a loose pipe fitting
caused a fire at the company’s Pasadena facility that required a
shut down of half the silane production commencing on Friday
June 13. Even though the complications lasted for approximately a
week, the Pasadena facility recovered and managed to produce
enough silane and polysilicon during the remainder of the quarter
to be in the middle of that facility’s targeted range for second
- 35 -
quarter production, but there was not enough Pasadena production
to completely offset the Merano shortfall.
While we are disappointed that we experienced an
uncharacteristic event at our Merano facility, we are pleased that
we were able to limit the impact to a few percent below the
targeted revenue range. This was primarily a result of the
accomplishments in the second quarter that helped to offset the
Merano shortfall. Specifically, we:
-- Achieved strong output from Unit 3 in Pasadena,
overcoming most of the issues that held us back in the first quarter.
While output was limited by the fire incident and its associated
complications, the unit has recovered well.
-- Completed and ramped Unit 4 in Pasadena over a month
prior to the end of the quarter, with the unit running at good rates
save for the interruption of the fire incident.
Also, on July 23, 2008, the Company held a conference call to discuss the
second quarter 2008 financial results. It was at this conference call that Defendant
Gareeb provided an overview of why the Company’s financial results were below
the low end of the range. Defendant Gareeb stated in relevant part:
So let’s start with a summary of what caused us to miss our
targeted range of results. The premature failure of the heat
exchanger that was relatively new at our Merano facility in June,
reduced the company’s total second quarter polysilicon output by
just under 5% for the quarter. While Pasadena had been
running enough ahead of schedule to offset the Merano
shortfall, complications there from a loose pipefitting and
resulting fire caused us to shut down half the silane production
on June 13th.
And while the facility recovered from this fairly quickly and
- 36 -
manage to produce enough silane and polysilicon to be in the
middle of its targeted range for production, Pasadena could not
produce enough product fast enough to offset the Merano
shortfall and allow us to finish the quarter within our targeted
band of revenue.
I am disappointed that we were not able to avoid additional
unexpected events in Q2 or result the complications Merano
faster or produce more polysilicon in Pasadena to offset all the
Merano shortfalls. However, what I am pleased and excited about
is the following: First, in Pasadena, Unit 3 overcame the issues
that held us back in Q1 although with some limitations due to the
fire, but has recovered well. Second, Unit 4 was started up over a
month prior to the end of the quarter and has ramped and run at
good rates other than interruption of the fire.
Third, the combined output from Units 3 and 4 during May and
early June alone had positioned us on a trajectory to finish the
quarter ahead of the upper end of our targeted revenue range
and the strong output allowed us to offset a portion of the Merano
shortfall in the last week of June.
Fourth, we have completed this technically and operationally
challenging phase of silane expansion in Pasadena, and now have a
high level of confidence in the longer-term performance of Units 3
and 4. We expect this should eliminate silane production as a
constraining element. Fifth, we have mechanically completed the
two additional poly-reactors in Pasadena, where the ramp is
scheduled to begin next week. As a result of these installations, we
are now at 75 to 100 metric tons of annualized poly capacity, have
a number of […] record number rectors available to produce poly,
and have demonstrated good output in July.
Last, but not least, we have replaced the heat exchanger on
Merano, started the expansion and are on track to finish the
expansion and phases in August 1st, and September 1st, which will
get us to the 8,000 metric tons of annualized capacity before the
end of the third quarter. So, I would like to put all these events in
perspective. Although we have had a difficult first half of this
- 37 -
year, with ramps and unexpected events and discoveries, we have
achieved numerous milestones and demonstrated capability for
extended periods of time that have positioned us for significant
growth in the second half of this year versus the first half. This
is what we had hoped to accomplish when we last talked in our
April call.
.
Further, it was during this same earnings call that an analyst from
Oppenheimer questioned Defendant Gareeb about his failure to timely disclose
these incidents as the Company has done in the past:
Sam Dubinsky – Oppenheimer: Hey guys couple of quick
questions. It seems just do the size estimate, just surprising that
you guys can do a preannouncement. I am just wondering what
the reasoning was for not doing a pre announce this time as you
served down on in the past with sort of these ramp up issues and
then I have a couple of follow up questions.
Gareeb: Sure, basically when we had the Merano issue, we
thought that pretty comfortable that we could offset that with the
strength of the silane […] the poly production Pasadena as you can
see from the charts through the month of May and early June. They
are really up for the fire in Pasadena. We felt okay may be we
won’t be at the top end of the range, but we should be in the range.
And basically we ended about 2% outside the range, which is
about a couple of days’ worth of production. And so we didn’t
take that as a pre announcement in terms of doing it earlier in
this quarter if you will, primarily because we didn’t think 2%
outside the bottom end of the range was material if you will.
But also we wanted to provide a second half up date that we
would not have been ready to provide. And we also wanted to
have the demonstrated recovery both from the fire as well as the
replacement of the equipment in Merano to ensure that we had a
pretty solid set of numbers in our head for Q3 and for the second
half of the year.
- 38 -
In a report dated July 23, 2008, a Deutsche Bank analyst expressed surprise
at the Company’s disclosure: “This is the third miss in four quarter . . . we were
surprised the company did not pre-announce these results.”
On July 24, 2008, an analyst from Credit Suisse stated in relevant part:
“This was the first instance company had to deliver on a complex factory build –
and for the third time company slipped on execution. Company did not
preannounce [] either compounding issues – making it “Strike 3” for several
investors we spoke with . . .”
The July 23, 2008 disclosure caused the price of the Company’s stock to
drop from $53.80 to $42.23 in unusually heavy trading.
As ERISA fiduciaries, Defendants were required to manage the Plan’s
investments, including the investment in MEMC Stock, solely in the interest of the
participants and beneficiaries, and for the exclusive purpose of providing benefits
to participants and their beneficiaries. This duty of loyalty requires fiduciaries to
avoid conflicts of interest and to resolve them promptly when they occur.
Conflicts of interest arise when a company that invests plan assets in company
stock flounders. As the situation deteriorates, plan fiduciaries are torn between
their duties as officers and directors for the company on the one hand, and to the
plan and plan participants on the other.
- 39 -
MEMC’s SEC filings, including proxy statements, during the Class Period
make clear that a significant percentage of the Company’s officers and directors’
compensation is stock-based. For example, the following stock awards, fees and
options allocated to Director Defendants: (I) Defendant Blackmore, $363,051; (ii)
Defendant Boehlke, $207,239; (iii) Defendant Marren, $219,239; (iv) Defendant
Marsh, $196,239; (v) Defendant McNamara, $158,603; (vi) Defendant Stevens,
$368,937; (vii) Defendant Turner, $232,471; and (viii) Defendant Williams,
$194,239. Defendant Gareeb also received option awards for 2008 and 2007 in
the amount of $4,831,721 and $12,455,747, respectively. Further, Defendant
Gareeb’s 2008 short term incentive award was determined as follows. For 2008, as
part of his Employment Agreement, the Compensation Committee established a
target bonus level of 100% of Defendant Gareeb’s annual base salary and a
maximum bonus level of 200% of his annual base salary. Defendant Gareeb’s
target award was based on the Company’s overall financial performance
(including operating income and earnings per share), and the Company’s
achievement of certain strategic initiatives and objectives (including executive
team development, certain capacity expansion and product launches, solar
business development, key account penetration and market share, customer
satisfaction and research and development). Under the heading “Long Term
- 40 -
Incentive Awards (Equity Awards),” the 2008 Form 14A provides that executive
compensation is based in part on the Company’s earnings. Certain Defendants’
compensation was directly tied to the performance of the Company and the price
of MEMC’s Stock. Accordingly, certain Defendants were motivated to inflate the
perceived success of the Company and boost its apparent performance, because
the better the Company’s performance and, consequently, the higher the price of
the Company’s Stock, the larger certain Defendants’ salaries and incentive
compensation.
Some Defendants may have had no choice in tying their compensation to
MEMC Stock (because compensation decisions were out of their hands), but
Defendants did have the choice of whether to keep the Plan’s participants’ and
beneficiaries’ retirement savings invested in MEMC Stock or whether to properly
inform participants of material negative information concerning the aboveoutlined Company problems.
Any signal to the market that the Company was not a sound, long term
investment, such as the Plan’s divestiture of MEMC Stock, would have called into
question Defendants’ job performance as corporate officers. Rather than have
anyone question their soundness as leaders of MEMC, Defendants chose to remain
silent and let the Plan continue to hold and acquire MEMC Stock.
- 41 -
These conflicts of interest put Defendants in the position of having to
choose between their own interests as directors, executives, and stockholders, and
the interests of the Plan’s participants and beneficiaries, in whose interests
Defendants were obligated to loyally serve with an “eye single.” Defendants did
nothing to protect the Plan and the Plan’s participants from the inevitable losses
the Plan would suffer.
While the above Defendants protected themselves, they stood idly by as the
Plan lost millions of dollars because of its investment in MEMC Stock.
Count I alleges fiduciary breach against the following Defendants: the
Company, the Director Defendants, and the Investment Committee Defendants
(collectively, the “Prudence Defendants”).
Count II alleges fiduciary breach against the following Defendants: the
Company and the Director Defendants (collectively, the “Monitoring
Defendants”).
Count III alleges that Defendants breached their duty to avoid conflicts of
interest and to promptly resolve them by, inter alia: failing to timely engage
independent fiduciaries who could make independent judgments concerning the
Plan’s investments in the Company’s own securities and otherwise placing their
own and/or the Company’s interests above the interests of the participants with
- 42 -
respect to the Plan’s investment in MEMC Stock.
Count IV alleges co-fiduciary liability against all Defendants. Plaintiff
claims that ERISA § 405(a)(3), 29 U.S.C. § 1105, imposes co-fiduciary liability on
a fiduciary for a fiduciary breach by another fiduciary if he has knowledge of a
breach by such other fiduciary, unless he makes reasonable efforts under the
circumstances to remedy the breach. Each Defendant knew of the breaches by the
other fiduciaries and made no effort to remedy those breaches. In particular, they
did not communicate their knowledge of the Company’s improper activity to the
other fiduciaries.
The Amended Complaint alleges that MEMC, through its officers and
employees, was unable to meet its business goals, withheld material information
from the market, and profited from such practices. Thus, according to Plaintiff,
knowledge of such practices is imputed to MEMC as a matter of law. Because
Defendants knew or should have known of the Company’s failures and
inappropriate business practices, they also knew that Defendants were breaching
their duties by continuing to maintain Plan investments in Company stock. Yet
they failed to undertake any effort to remedy these breaches. Instead, they
compounded them by downplaying the significance of MEMC’s failed and
inappropriate business practices and by obfuscating the risk that these practices
- 43 -
posed to the Company, and, thus, to the Plan.
It is further alleged that MEMC knowingly participated in the fiduciary
breaches of Defendants who failed to prudently and loyally manage the Plan in
that it benefitted from the sale or contribution of its stock at prices that were
disproportionate to the risks for Plan participants. Likewise, the Monitoring
Defendants knowingly participated in the breaches of Defendants who failed to
loyally and prudently manage the Plan because, as alleged above, they had actual
knowledge of the facts that rendered MEMC Stock an imprudent retirement
investment and yet, ignoring their oversight responsibilities, permitted these
Defendants to breach their duties.
The Monitoring Defendants’ failure to monitor the Investment Committee
Defendants enabled that committee to breach its duties. As a direct and proximate
result of the breaches of fiduciary duties alleged herein, the Plan, and indirectly
the Plaintiffs and the Plan’s other participants and beneficiaries, lost
millions of dollars of retirement savings.
The Plan suffered millions of dollars in principal losses because Defendants
imprudently invested the Plan’s assets in MEMC Stock during the Class Period, in
breach of Defendants’ fiduciary duties.
Plaintiff claims Defendants are liable for the Plan’s losses in this case
- 44 -
because the Plan’s investment in MEMC Stock was the result of Defendants’
decision to imprudently maintain the assets of the Plan in MEMC Stock. Had
Defendants properly discharged their fiduciary and co-fiduciary duties, including
the monitoring and removal of fiduciaries who failed to satisfy their ERISAmandated duties of prudence and loyalty, eliminating MEMC Stock as an
investment alternative when it became imprudent, and divesting the Plan of
MEMC Stock when maintaining such an investment became imprudent, the Plan
would have avoided some or all of the losses that it, and indirectly, the participants
suffered.
Discussion
ERISA is a comprehensive remedial statute designed to “protect ... the
interests of participants in employee benefit plans and their beneficiaries, ... by
establishing standards of conduct, responsibility, and obligation for fiduciaries of
employee benefit plans, and by providing for appropriate remedies, sanctions, and
ready access to the Federal courts.” 29 U.S.C. § 1001(b). Specifically, ERISA
provides, in pertinent part:
(a)(1) Subject to sections 403(c) and (d), 4042, and 4044 [29 U.S.C.
§§ 1103(c), (d), 1342, 1344], a fiduciary shall discharge his duties
with respect to a plan solely in the interest of the participants and
beneficiaries and—
(A) for the exclusive purpose of:
- 45 -
(I) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of
an enterprise of a like character and with like aims;
(C) by diversifying the investments of the plan so as to minimize the
risk of large losses, unless under the circumstances it is clearly
prudent not to do so; and
(D) in accordance with the documents and instruments governing the
plan insofar as such documents and instruments are consistent with
the provisions of this title and title IV.
(2) In the case of an eligible individual account plan (as defined in
section 407(d)(3) [29 U.S.C. § 1107(d)(3) ], the diversification
requirement of paragraph 1(C) and the prudence requirement (only to
the extent that it requires diversification) of paragraph 1(B) is not
violated by acquisition or holding of qualifying employer real
property or qualifying employer securities (as defined in section
407(d)(4) and (5) [29 U.S.C. § 1107(d)(4) and (5) ] ).
29 U.S.C. § 1104(a).3 These requirements generally are referred to as
the duties of loyalty and care, or as the “solely in the interest” and
“prudence” requirements.
3
ERISA defines an eligible individual account plan as follows:
an individual account plan which is (i) a profit-sharing, stock bonus, thrift, or
savings plan; (ii) an employee stock ownership plan; or (iii) a money purchase
plan which was in existence on the date of enactment of this Act and which on
such date invested primarily in qualifying employer securities. 29 U.S.C. §
1107(d)(3)(A).
- 46 -
The Plan
The Plan is an “individual account plan,” or “defined contribution plan,” see
ERISA § 3(34). The Plan provides for acquisition and holding of employer
securities, such that it is an “eligible individual account plan” (EIAP) under
Section 407(d)(3) of ERISA. The Plan includes a “Qualified cash or deferred
arrangement,” making it a 401(k) plan. Contributions for a Plan participant come
from Participant elective contributions, MEMC matching contributions and
MEMC non-matching contributions.
Participants self direct their investments among a variety of investment
options offered under the plan, including MEMC stock. Participants may direct
the investment of the Individual Account Assets among the Plan investment funds
as they choose.
The Summary Plan Description, (SPD) which is provided to all participants
under ERISA specifically notifies participants that “[t]he funds available provide
varying degrees of risk and potential return...[b]y choosing a mix of funds, you can
reduce risk and help to protect your return.” The SPD describes the MEMC Stock
Fund as a Single Common Stock Fund which is composed solely of shares of
MEMC common stock for those investors who want to share in the potential
growth of MEMC. Significantly, the MEMC Stock Fund is included among the
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Growth options which are described as the most volatile from day to day, and as
having a strong potential for providing growth, with an added degree of risk.
Moreover, participants are warned that investments in individual stocks are not
diversified, therefore an investment in the MEMC Stock Fund may expose the
participants to a greater investment risk because the returns are dependent on the
performance of a single company.
Plaintiff seeks to recover substantial losses to the Plan for which he claims
Defendants are liable pursuant to ERISA §§ 409 and 502, 29 U.S .C. §§ 1109 and
1132. Because Plaintiff’s claims apply to the Plan, inclusive of all participants
with accounts invested in Company Stock during the Class Period, and because
ERISA specifically authorizes participants, such as Plaintiff, to sue for relief to the
Plan for breaches of fiduciary duty such as those alleged herein, Plaintiff brings
this action as a class action on behalf of the Plan and all participants and
beneficiaries of the Plan during the proposed Class Period.
Standard For Dismissal
Regarding the standard for determining whether to dismiss a claim pursuant
to Federal Rule of Civil Procedure 12(b)(6), the United States Supreme Court has
held:
To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that is
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plausible on its face. 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. The
plausibility standard is not akin to a “probability requirement,” but it
asks for more than a sheer possibility that a defendant has acted
unlawfully. Where a complaint pleads facts that are merely consistent
with a defendant's liability, it stops short of the line between
possibility and plausibility of entitlement to relief.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotations and citations
omitted). Further, “where the well-pleaded facts do not permit the court to infer
more than the mere possibility of misconduct, the complaint has alleged-but it has
not shown-that the pleader is entitled to relief.” Id. at 679 (internal quotations and
citations omitted). Additionally, “[a] pleading that offers labels and conclusions or
a formulaic recitation of the elements of a cause of action will not do. Nor does a
complaint suffice if it tenders naked assertion[s] devoid of further factual
enhancement.” Id. at 678 (internal quotations and citations omitted). “To survive
a motion to dismiss, a complaint must contain sufficient factual matter, accepted
as true, to ‘state a claim to relief that is plausible on its face.’ ” Id, (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Thus, “although a complaint
need not include detailed factual allegations, ‘a plaintiff's obligation to provide the
grounds of his entitlement to relief requires more than labels and conclusions, and
a formulaic recitation of the elements of a cause of action will not do.’” C.N. v.
Willmar Pub. Sch., Indep. Sch. Dist. No. 347, 591 F.3d 624, 629-30 (8th Cir.2010)
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(quoting Twombly, 550 U.S. at 555).
On a motion to dismiss pursuant to Rule 12(b)(6), “courts must consider the
complaint in its entirety, as well as other sources courts ordinarily examine when
ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated
in the complaint by reference, and matters of which a court may take judicial
notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)
Prudence Claim (Count I)
Defendants contend that plaintiffs fail to state a claim for breach of the duty
of prudence. Specifically, defendants assert that a presumption of prudence
attaches to the offering of employer stock where, as here, the plan is expressly
designed to offer employer stock as an investment option. Defendants further
assert that under this presumption, plan fiduciaries are only required to divest an
EIAP of employer stock where the fiduciaries know or should know that the
employer is in a “dire situation,” such that the employer's viability as a going
concern was threatened or its stock was in danger of becoming essentially
worthless. Defendants contend that Plaintiff does not, and cannot, plead facts
demonstrating that MEMC is, or ever was, in such a “dire situation” sufficient to
overcome the presumption of prudence.
Plaintiff, on the other hand, contend that Count I states a claim for breach of
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the duty to prudently manage the Plan's assets. Specifically, Plaintiffs assert that
the presumption of prudence does not apply to this Plan because Moench was
decided in the context of an ESOP, not an EIAP type plan. Plaintiff further asserts
that the presumption of prudence does not apply at the pleading stage. Plaintiff
argues that even if the presumption of prudence does apply, plaintiff need not
plead impending collapse to overcome the presumption, and he has pled sufficient
facts to overcome the presumption.
“Presumption of prudence”
In Moench, the Third Circuit Court of Appeals held that “an [Employment
Stock Ownership Program], ESOP fiduciary who invests the assets in employer
stock is entitled to a presumption that it acted consistently with ERISA by virtue
of that decision.” 62 F.3d at 571. In Edgar v. Avaya, Inc., 503 F.3d 340 (3d Cir.
2007), the Court extended the Moench presumption to all eligible individual
account plans, EIAPs. 503 F.3d at 347. Likewise, the Fifth Circuit has also held
that the Moench presumption applies to any allegations of fiduciary duty breach
for failure to divest all types of EIAPs. Kirschbaum v. Reliant Energy, Inc., 526
F.3d 243, 254 (5th Cir. 2008).
Moreover, the majority of courts considering the Moench presumption have
concluded that overcoming the presumption requires allegations which entail
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substantially more than merely challenging the prudence and loyalty exhibited by
Defendants, as stated by this Court’s Order. See, e.g., Wright v. Medronic, Inc.,
2010 WL 1027808, *5 (D. Minn.2010)(“plaintiffs must allege sufficient facts to
demonstrate that they have a non-speculative claim that investing in [the
Defendant company] stock during the class period was so risky that no prudent
fiduciary would have invested any Plan assets in” the stock.(emphasis in original);
In re Bank of America, 2010 WL 3448197 * 20 (“The pleading must allege that
the fiduciary had knowledge at a pertinent time of ‘an imminent corporate collapse
or other “dire situation” sufficient to compel an ESOP sell-off,’” quoting, In re
Lehman Bros, 683 F.Supp.2d at 301; Crocker v. KV Pharm. Co, 2010 WL
1257671, * 20 (E.D. Mo. 2010)(“[T]o meet this standard on the pleadings, the
facts alleged must depict the kind of ‘dire situation’ at the subject company which
would require plan fiduciaries to disobey plan terms to invest in company stock so
that they might satisfy their prudent investment obligation to plan participants
under ERISA. Facts that could indicate that plan fiduciaries abused their discretion
by continuing to invest in company stock include, as was the case in Moench, a
‘precipitous decline in the price of [the employer’s] stock,’ together with
allegations that plan fiduciaries knew of the stock’s ‘impending collapse’ and the
conflicted status of the fiduciaries,” quoting, In re Merck & Co, Inc. Sec., Deriv. &
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ERISA Litig, 2009 WL 790452, *3 (D.N.J. 2009) (internal citations omitted).
Recognizing the competing goals of ERISA and ESOPs,4 and attempting to
balance these goals in relation to claims that an ESOP fiduciary violated its
ERISA duties by continuing to invest in employer securities, the Third Circuit, in
Moench v. Robertson, 62 F.3d 553 (3rd Cir.1995), developed the “presumption of
prudence.” Specifically, the Third Circuit found:
In a case such as this, in which the fiduciary is not absolutely
required to invest in employer securities but is more than simply
permitted to make such investments, while the fiduciary
presumptively is required to invest in employer securities, there may
come a time when such investments no longer serve the purpose of
the trust, or the settlor's intent. Therefore, fiduciaries should not be
immune from judicial inquiry, as a directed trustee essentially is, but
also should not be subject to the strict scrutiny that would be
exercised over a trustee only authorized to make a particular
investment. Thus, a court should not undertake a de novo review of
the fiduciary's actions.... Rather, the most logical result is that the
fiduciary's decision to continue investing in employer securities
should be reviewed for an abuse of discretion.
... we hold that in the first instance, an ESOP fiduciary who
invests the assets in employer stock is entitled to a presumption that it
acted consistently with ERISA by virtue of that decision. However,
4
“ESOPs, unlike pension plans, are not intended to guarantee retirement
benefits, and indeed, by its very nature an ESOP places employee retirement assets
at much greater risk than does the typical diversified ERISA plan.” Moench, 62
F.3d at 568 (internal quotations and citation omitted). “Under their original
rationale, ESOPs were described as ... device[s] for expanding the national capital
base among employees—an effective merger of the roles of capitalist and worker.”
Id. (internal quotations and citation omitted).
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the plaintiff may overcome that presumption by establishing that the
fiduciary abused its discretion by investing in employer securities.
In attempting to rebut the presumption, the plaintiff may introduce
evidence that “owing to circumstances not known to the settlor and
not anticipated by him [the making of such investment] would defeat
or substantially impair the accomplishment of the purposes of the
trust.” Restatement (Second) § 227 comment g. As in all trust cases,
in reviewing the fiduciary's actions, the court must be governed by the
intent behind the trust—in other words, the plaintiff must show that
the ERISA fiduciary could not have believed reasonably that
continued adherence to the ESOP's direction was in keeping with the
settlor's expectations of how a prudent trustee would operate. In
determining whether the plaintiff has overcome the presumption, the
courts must recognize that if the fiduciary, in what it regards as an
exercise of caution, does not maintain the investment in the
employer's securities, it may face liability for that caution, particularly
if the employer's securities thrive.
In considering whether the presumption that an ESOP fiduciary who
has invested in employer securities has acted consistently with
ERISA has been rebutted, courts should be cognizant that as the
financial state of the company deteriorates, ESOP fiduciaries who
double as directors of the corporation often begin to serve two
masters. And the more uncertain the loyalties of the fiduciary, the less
discretion it has to act.
Moench, 62 F.3d at 571–72 (internal citation omitted).
The Second, Fifth, Sixth, Seventh, Ninth and Eleventh Circuits have all
expressly adopted the Moench “presumption of prudence,” and no federal
appellate court has rejected the presumption on its merits. See White v. Marshall &
Ilsley Corp., 714 F.3d 980 (7th Cir.2013); Lanfear v. Home Depot, Inc., 679 F.3d
1267 (11th Cir.2012); In re Citigroup ERISA Litig. ., 662 F.3d 128 (2d Cir.2011);
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Quan v. Computer Sciences Corp., 623 F.3d 870 (9th Cir.2010); Kirschbaum v.
Reliant Energy, Inc., 526 F.3d 243 (5th Cir.2008); Kuper v. Iovenko, 66 F.3d 1447
(6th Cir.1995). However, while the circuit courts have adopted the “presumption
of prudence,” the framework of the presumption does vary to some extent among
the circuits.
Circuit Courts throughout the country have applied the Moench presumption
of prudence to EIAPs. See, e.g., Kirschbaum, 526 F.3d at 254; Edgar v. Avaya,
503 F.3d 340, 345-48 (3d Cir. 2007); Wright v. Oregon Metallurgical Corp., 360
F.3d 1090, 1098 (9th Cir. 2005).
When adopting the Moench presumption, the Ninth Circuit agreed with the
Third Circuit and added “that if there is room for reasonable fiduciaries to disagree
as to whether they are bound to divest from company stock, the abuse of discretion
standard protects a fiduciary's choice not to divest. This will allow fiduciaries to
fulfill their duties in the safe harbor that Congress seems to have intended to
provide them for managing EIAPs and ESOPs.” Quan, 623 F.3d at 882 (internal
quotations and citation omitted). The Ninth Circuit further held:
To overcome the presumption of prudent investment, plaintiffs must
therefore make allegations that clearly implicate the company's
viability as an ongoing concern or show a precipitous decline in the
employer's stock ... combined with evidence that the company is on
the brink of collapse or is undergoing serious mismanagement.
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Id. (internal quotations and citations omitted).
In In re Citigroup, the Second Circuit adopted the Moench “presumption of
prudence” and endorsed the “guiding principle” recognized by the Ninth Circuit
that “judicial scrutiny should increase with the degree of discretion a plan gives its
fiduciaries to invest,” finding that “a fiduciary's failure to divest from company
stock is less likely to constitute an abuse of discretion if the plan’s terms
require—rather than merely permit—investment in company stock.” In re
Citigroup, 662 F.3d at 138. The Second Circuit then set forth its formulation of the
presumption as follows:
We agree with [the Moench court’s] formulation and cannot
imagine that an ESOP or EIAP settlor, mindful of the long-term
horizon of retirement savings, would intend that fiduciaries divest
from employer stock at the sign of any impending price decline.
Rather, we believe that only circumstances placing the employer in a
“dire situation” that was objectively unforeseeable by the settlor
could require fiduciaries to override plan terms. The presumption is to
serve as a “substantial shield,” that should protect fiduciaries from
liability where there is room for reasonable fiduciaries to disagree as
to whether they are bound to divest from company stock. The test of
prudence is ... one of conduct rather than results, and the abuse of
discretion standard ensures that a fiduciary’s conduct cannot be
second-guessed so long as it is reasonable.
Although proof of the employer’s impending collapse may not be required
to establish liability, [m]ere stock fluctuations, even those that trend downhill
significantly, are insufficient to establish the requisite imprudence to rebut the
Moench presumption. We judge a fiduciary’s actions based upon information
available to the fiduciary at the time of each investment decision and not from the
vantage point of hindsight. We cannot rely, after the fact, on the magnitude of the
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decrease in the employer's stock price; rather, we must consider the extent to
which plan fiduciaries at a given point in time reasonably could have predicted the
outcome that followed.
Id. at 140 (internal quotations and citations omitted).
On the other hand, in Kirschbaum, the Fifth Circuit did not hold that the
“presumption of prudence” could be overcome only in the case of investments in
stock of a company that is about to collapse. See Kirschbaum, 526 F.3d at 256.
The Fifth Circuit held:
[t]he presumption, however, is a substantial shield. As Moench states,
it may only be rebutted if unforeseen circumstances would defeat or
substantially impair the accomplishment of the trust's purposes. One
cannot say that whenever plan fiduciaries are aware of circumstances
that may impair the value of company stock, they have a fiduciary
duty to depart from ESOP or EIAP plan provisions. Instead, there
ought to be persuasive and analytically rigorous facts demonstrating
that reasonable fiduciaries would have considered themselves bound
to divest. Less than rigorous application of the Moench presumption
threatens its essential purpose. A fiduciary cannot be placed in the
untenable position of having to predict the future of the company
stock's performance. In such a case, he could be sued for not selling if
he adhered to the plan, but also sued for deviating from the plan if the
stock rebounded.
Id. (internal citation omitted).
Additionally, in Lanfear, the Eleventh Circuit rejects any interpretation of
the presumption that provides that the only circumstance in which a fiduciary
could abuse its discretion by following an ESOP plan’s directions about company
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stock was when the fiduciary knew that the company was peering over the
precipice into a financial abyss. See Lanfear, 679 F.3d at 1280. Instead, the
Eleventh Circuit sets forth the test as follows:
Although a fiduciary is generally required to invest according to the
terms of the plan, when circumstances arise such that continuing to do
so would defeat or substantially impair the purpose of the plan, a
prudent fiduciary should deviate from those terms to the extent
necessary. Because the purpose of a plan is set by its settlors (those
who created it), that is the same thing as saying that a fiduciary
abuses his discretion by acting in compliance with the directions of
the plan only when the fiduciary could not have reasonably believed
that the settlors would have intended for him to do so under the
circumstances. That is the test.
Id. at 1281.
The Eighth Circuit has not addressed whether it would adopt the Moench
“presumption of prudence.” Based upon the sound reasoning behind the Moench
“presumption of prudence,” the Court finds that the Eighth Circuit would adopt
the Moench “presumption of prudence” in cases in which, under the terms of an
ERISA plan such as this where the individual participants direct their
contributions to the various plans and would apply an abuse of discretion standard
of review to the fiduciary’s decision to continue to offer employer securities.
Further, the Court finds that the Eighth Circuit would require the plaintiff to show
that the ERISA fiduciary could not have believed reasonably that continued
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adherence to the EIAP’s direction was in keeping with the settlor's expectations of
how a prudent trustee would operate in order to demonstrate an abuse of
discretion. The Eighth Circuit would also require the plaintiff to present
persuasive and analytically rigorous facts demonstrating that reasonable
fiduciaries would have considered themselves bound to divest.
Applicability of presumption at motion to dismiss stage
Plaintiff asserts that the “presumption of prudence” is not applicable at the
pleading stage of an action. The Second, Third, Fifth, Seventh, and Eleventh
Circuits have applied the presumption when considering motions to dismiss; the
Sixth Circuit has not.5
The “presumption” is not an evidentiary presumption; it is a standard of
review applied to a decision made by an ERISA fiduciary. Where plaintiffs do not
allege facts sufficient to establish that a plan fiduciary has abused his discretion,
there is no reason to deny a motion to dismiss. In re Citigroup, 662 F.3d at 139.
See also Lanfear, 679 F.3d at 1281 (“The Moench standard of review of fiduciary
action is just that, a standard of review; it is not an evidentiary presumption. It
5
The Court is cognizant that this issue is currently pending before the United States
Supreme Court. See Fifth Third Bancorp v. Dudenhoeffer, No 12-751, cert. granted December
13, 2013. Consistent with the majority of courts construing the applicability of the presumption,
the Court will apply it with respect to the pending Motion. In the event that the Supreme Court
determines the presumption is inapplicable in the 12(b)(6) analysis, the Court will entertain a
motion to reconsider.
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applies at the motion to dismiss stage as well as thereafter.”); White, 714 F.3d at
990–91 (“As to its application at the pleading stage, the presumption of prudence
is not an evidentiary standard but a substantive legal standard of liability and
conduct. Thus, we agree with the Second, Third, and Eleventh Circuits that a claim
against ESOP fiduciaries alleging a violation of the duty of prudence may be
dismissed at the pleading stage if the plaintiffs do not make allegations sufficient
to overcome the presumption of prudence.”)
Having reviewed the decisions by the circuit courts that have addressed this
issue, the Court finds the reasoning of the Second, Third, Fifth, Seventh, and
Eleventh Circuits more persuasive, particularly in light of the requirement that the
plaintiff plead “enough facts to state a claim to relief that is plausible on its face,”
Twombly, 550 U.S. at 570. The Court, therefore, finds that the “presumption of
prudence” is appropriately applied at the motion to dismiss stage.
Applicability of presumption to Plan
As set forth in Moench, the “presumption of prudence” applies when “the
fiduciary is not absolutely required to invest in employer securities but is more
than simply permitted to make such investments.” Moench, 62 F.3d at 571. In the
Plan before the Court, the fiduciaries are allowed to offer the MEMC Stock Fund
as an investment option in the Plan. This role clearly falls within the protections
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of the presumption.
“One cannot say that whenever plan fiduciaries are aware of
circumstances that may impair the value of company stock, they have
a fiduciary duty to depart from ESOP or EIAP plan provisions.
Instead, there ought to be persuasive and analytically rigorous facts
demonstrating that reasonable fiduciaries would have considered
themselves bound to divest. Less than rigorous application of the
Moench presumption threatens its essential purpose. A fiduciary
cannot be placed in the untenable position of having to
predict the future of the company’s stock’s performance. In such a
case, he could be sued for not selling if he adhered to the plan, but
also sued for deviating from the plan if the stock rebounded.
Kirschbaum, 526 F.3d at 256. Accordingly, the Court finds that the “presumption
of prudence” is applicable to the Plan.
Sufficiency of complaint
In order for Plaintiff to sufficiently allege his prudence claim, he must set
forth sufficient facts, presumed to be true and construed in the light most favorable
to Plaintiff, showing that he plausibly can overcome the “presumption of
prudence.” As set forth above, Plaintiff must plead persuasive and analytically
rigorous facts demonstrating that reasonable fiduciaries would have considered
themselves bound to divest and discontinue offering MEMC stock as an
investment option.
Having carefully reviewed the Amended Complaint, the Court finds that
although Plaintiff has set forth numerous specific and detailed facts regarding
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certain aspects of MEMC’s financial well-being, and even presuming these facts
to be true and construing them in the light most favorable to Plaintiff, Plaintiff has
not shown that he plausibly can overcome the “presumption of prudence.” Most
damaging to Plaintiff’s prudence claim is the fact that the price of Chesapeake
stock during the Class Period always retained significant value. The Court finds
that it is implausible that a reasonable fiduciary would have considered himself
bound to divest when the price of the stock had not decreased so low as to be
worth almost nothing. In fact, had the defendant fiduciaries stopped offering
MEMC stock and divested the Plan of the stock, they would have risked liability
for having failed to follow the terms of the Plan, particularly if the price of MEMC
stock increased.
Accordingly, the Court finds that plaintiffs' prudence claim should be
dismissed.
Plaintiff’s claim that Defendants should have sold the stock and withdrawn
the stock as an investment option does not support his loyalty claim. Defendants
made no investment recommendations. The participants themselves directed
which fund they wanted their investments in; they could also change the
investments to other funds.
Plaintiff alleges that MEMC suffered operational disruptions which caused
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the MEMC stock to decrease and caused MEMC to miss its earnings projections.
As Defendants point out, the projections were missed by less than 2%. Plaintiff
fails to set forth any facts which would notify a Plan fiduciary that this change in
operations required them to withdraw the stock from being an investment option.
Indeed, the Plan Summary explains to investors that there exists risks in any stock,
including the MEMC stock. The fact that a company’s stock price will or
conceivably may experience a decline – even a substantial decline – is not enough
to overcome the Moench presumption. See, e.g., Wright, 360 F.3d at 1099 (“Mere
stock fluctuations, even those that trend downward significantly, are insufficient to
establish the requisite imprudence to rebut the Moench presumption.”)
Failure to Disclose Material Non-Public Information
Plaintiff’s claim that Defendants should have disclosed non-public
information fails because to do so, Defendants would have been in violation of
other federal laws. To impose such disclosure duties would directly alter, amend,
and, supersede – indeed, violate – federal securities laws and contravene section
514(d) of ERISA. 29 U.S.C. § 1144(d) (“Nothing in [Title I of ERISA] shall be
construed to alter, amend, modify, invalidate, impair, or supersede any law of the
United States ... or any rule or regulation issued under any such law.”) “Congress
has made clear when ERISA conflicts with another provision of federal law,
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ERISA must be subordinated.” In re CF&I Fabricators of Utah, 150 F. 3d 1293,
1301 (10th Cir. 1998).Surely Plaintiff would not advocate such a wanton level of
disregard for the law.
Had Defendants disclosed non-public information, Defendants would have
violated federal securities law. 17 CAR 243.100. Plan participants would have
been in violation of the Securities Exchange Act. United States v. O’Hagan, 521
U.S. 642, 651-52 (1997).
Prior notifications
Defendants are correct in arguing that the statements made by Defendants
regarding business communications are not actionable under ERISA. Crowley ex
rel. Corning, Inc, Inv. Plan v. Corning, Inc., 234 F. Supp. 2d 222, 228 (W.D.N.Y.
2002) (public statements and omissions concerning financial performance fail to
state a claim under ERISA “regardless of [the] truth or falsity.”); In re Calpine
Corp. ERISA Litig., No. C 03-1685, 2005 WL 3288469, at *9 (N.D. Cal.
Dec. 5, 2005) (granting motion to dismiss ERISA disclosure claim where plaintiff
could not establish statements were made in fiduciary capacity or were directed at
plan participants);Kirschbaum, 526 F.3d at 257 (affirming summary judgment
where, inter alia, plaintiff failed to show “defendants were acting in anything
other than a corporate capacity in making these statements”). Plaintiff has failed
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to set forth a link between the business communications and Defendants’ fiduciary
capacity actions.
Failure to Adequately Monitor Other Fiduciaries Claim
Because plaintiff’s failure to adequately monitor other fiduciaries claim in
Count II is derivative of their prudence and loyalty claims, and because the
prudence and loyalty claims have been dismissed, the Court finds that plaintiff’s
failure to adequately monitor other fiduciaries claim must likewise be dismissed.
Conflict of Interest
Plaintiff contends that he has sufficiently allege a claim for avoiding
conflict of interest by engaging independent fiduciaries to make independent
judgments concerning the plan. Plaintiff sets out Defendants’ compensation and
that they engaged in their own self-interest without regard to safe-guarding the
interests of the Plan and its participants.
The Court finds that plaintiffs have not set forth sufficient factual
allegations to state a claim. In his Amended Complaint, Plaintiff simply makes
conclusory statements regarding Defendants’ compensation with no factual
allegations to support the statements or how they relate to any duty owed to
Plaintiff. Additionally, a conflict of interest claim can not be based solely on the
fact that an ERISA fiduciary’s compensation was linked to the company's stock.
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See In re Citigroup, 662 F.3d at 146 (“We agree with the many courts that have
refused to hold that a conflict of interest claim can be based solely on the fact that
an ERISA fiduciary’s compensation was linked to the company’s stock.”).
Co-Fiduciary Liability
Section 1105(a) of ERISA provides that a fiduciary shall be liable for a cofiduciary’s breach, only if he: (1) knowingly participated in the breach or
knowingly undertook to conceal an action or omission, knowing that such act or
omission was a breach; (2) enabled the breach by failing to comply with section
1104(a)(1), the prudent-man standard; or (3) had knowledge of the breach by the
co-fiduciary and failed to take steps to remedy the breach. 29 U.S.C. § 1105(a).
Plaintiff must set forth facts that Defendants each had actual knowledge of a
breach by another fiduciary and failed to take reasonable steps to remedy the
breach. Donovan v. Cunningham, 716 F.2d 1455, 1475 (5th Cir. 1983)(explaining
that a “fiduciary must know the other person is a fiduciary with respect to the plan,
and must know that he participated in the act that constituted a breach, and must
know that it was a breach”). The Amended Complaint fails to set out sufficient
facts to state a claim for Co-Fiduciary liability.
Conclusion
For the reasons set forth above, the Court now concludes that the Amended
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Complaint fails to sufficiently set forth plausible causes of action against
Defendants under ERISA.
Accordingly,
IT IS HEREBY ORDERED that Defendants’ Motion to Dismiss, [Doc.
No. 20], is GRANTED.
IT IS FURTHER ORDERED that this matter is DISMISSED.
Dated this 24th day of March, 2014.
_______________________________
HENRY EDWARD AUTREY
UNITED STATES DISTRICT JUDGE
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