Trustees of the Local 138 Pension Trust Fund v. Logan Circle Partners, L.P. et al
ORDER denying 28 Motion to Dismiss. Ordered by Senior Judge I. Leo Glasser on 5/25/2012. (Green, Dana)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
TRUSTEES OF THE LOCAL 138 PENSION
Memorandum and Order
10 Civ. 5758
- against LOGAN CIRCLE PARTNERS, L.P. and
SEGAL ADVISORS, INC.
GLASSER, United States District Judge:
Plaintiff, Trustees of the Local 138 Pension Trust Fund (“the Fund” or “plaintiff”),
commenced this action against Logan Circle Partners, L.P. (“Logan Circle” or
“defendant”), an asset management firm with responsibility for the investment of a
portion of the Fund’s pension assets, and Segal Advisors, Inc. (“Segal”), an investment
consultant to the Fund, alleging violations of fiduciary duties pursuant to the Employee
Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 404-05, for which
defendants are liable pursuant to ERISA Section 409, 29 U.S.C. § 1109. Essentially, the
Fund alleges Logan Circle purchased and retained securities in violation of certain
investment guidelines and that Segal failed to monitor and report on Logan Circle’s
activities. Defendant Logan Circle moves to dismiss the Second Amended Complaint
(the “Complaint”) with prejudice pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure. For the reasons set forth below, defendant’s motion is denied.
The following facts are presumed to be true for the purposes of deciding this
motion and are drawn from the Complaint and documents of which the Court may take
judicial notice. Plaintiff is trustee of a multi-employer benefit plan. Second Amended
Complaint dated June 17, 2011 (“Am. Compl.”) ¶ 2. Logan Circle is an asset
management firm responsible for managing a portfolio of fixed income securities
purchased with plaintiff’s assets. Id. ¶ 8. From 2003 until December 2009, plaintiff
hired Segal as an investment consultant to monitor and oversee the performance of its
investment managers, including Logan Circle. Id. ¶ 11.
Plaintiff initially contracted with Delaware Investment Advisors to manage its
assets. See Declaration of Brett D. Jaffe dated June 30, 2011 (“Jaffe Decl.”), Ex. B (the
“Investment Advisory Contract”). On September 26, 2007, the Investment Advisory
Contract was assigned to Logan Circle. See Jaffe Decl. Ex. C. The Investment Advisory
Contract specifies that, “[Logan Circle] shall have sole discretion with respect to
investments of funds in the Account as to purchases and sales without prior
consultation. [Logan Circle] shall, however, be bound by such written guidelines for the
management of the Account as shall from time to time be provided.” Id. Ex. B, ¶ 4.
With the advice of Segal, plaintiff promulgated the “Local 138 Pension Trust Fund
Statement of Overall Investment Objectives and Policy” (the “Guidelines”). Am. Compl.
¶ 13; Declaration of Brett D. Jaffe dated June 30, 2011 (“Jaffe Decl.”), Ex. A. The
Guidelines established the criteria for the selection and retention of securities held by
Logan Circle on behalf of the Fund. Am. Compl. ¶ 8.
Plaintiff alleges that Logan Circle violated the Guidelines in several ways. First,
plaintiff alleges that the Guidelines required Logan Circle “to adhere to an overall
selection of securities consistent with a Lehman Bond Index” and that Logan Circle
failed to do so. Am. Compl. ¶¶ 9, 23. Second, plaintiff alleges that Logan Circle violated
the Guidelines by purchasing, without advance written consent, securities below the
Guideline’s minimum class, quality, and grade. Id. ¶¶ 11, 24. Third, plaintiff alleges that
the Guidelines required Logan Circle to provide written notice to the Fund and Segal if
purchased securities were subsequently downgraded below the Guidelines’ minimum.
Id. ¶ 17; see Jaffe Decl. Ex. A, at 8. Fourth, plaintiff alleges that if a security fell below
investment grade, Logan Circle was also required to take action to return the portfolio to
compliance within 90 days. Am. Compl. ¶ 14. Plaintiff alleges that beginning in 2007,
numerous securities held under Logan Circle’s management were downgraded to ratings
below those permitted by the Guidelines and that Logan Circle failed to provide written
notice or bring the portfolio into compliance within 90 days. Id. ¶¶ 13-14, 25-26.
Plaintiff alleges that as a result of these violations, the Fund was damaged by no less
than $2 million. Id. ¶ 27.
A. Motion to Dismiss
Rule 8(a)(2) of the Federal Rules of Civil Procedure requires a complaint to
include “a short and plain statement of the claim showing that the pleader is entitled to
relief.” Fed. R. Civ. P. 8(a)(2). To survive a motion to dismiss pursuant to Rule
12(b)(6), the Fund’s pleadings must contain “sufficient factual matter, accepted as true,
to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662,
129 S. Ct. 1937, 1940, 173 L. Ed. 2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). 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.” Iqbal, 129 S. Ct. at
1949. On a motion to dismiss for failure to state a claim, “‘[t]he issue is not whether a
plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to
support the claims.’” York v. Ass’n of the Bar of City of N.Y., 286 F.3d 122, 125 (2d Cir.
2002) (citing Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 40 L. Ed. 2d 90
Although detailed factual allegations are not necessary, the pleading must include
more than an “unadorned, the-defendant-unlawfully-harmed-me accusation;” mere
legal conclusions, “a formulaic recitation of the elements of a cause of action,” or “naked
assertions” by the plaintiff will not suffice. Id. (alteration in original) (internal
quotations, citations, and alterations omitted). This plausibility standard “is not akin to
a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant
has acted unlawfully.” Id. (quoting Twombly, 550 U.S. at 556). Determining whether a
complaint states a plausible claim for relief is “a context-specific task that requires the
reviewing court to draw on its judicial experience and common sense. But 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 ‘show[n]’—‘that the pleader is
entitled to relief.’” Id. at 1950 (quoting Fed. R. Civ. P. 8(a)(2)).
Although the Court is limited to facts as stated in the Amended Complaint, it may
consider “any written instrument attached to the complaint, statements or documents
incorporated into the complaint by reference, legally required public disclosure
documents filed with the SEC, and documents possessed by or known to the plaintiff
and upon which it relied in bringing the suit.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
493 F.3d 87, 98 (2d Cir.2007). Here, the Amended Complaint incorporates the
Guidelines, the Investment Advisory Contract, and the Consent to Assignment by
reference, see Am. Compl. ¶¶ 6, 8, 13, and they are appropriately considered in deciding
ERISA § 1132(a)(2) provides that an “action may be brought . . . by a participant,
beneficiary or fiduciary for appropriate relief under [29 U.S.C. § 1109],” which in turn
makes ERISA fiduciaries who breach their duties “personally liable to make good to
[the] plan any losses to the plan resulting from each such breach, and to restore to such
plan any profits of such fiduciary which have been made through use of assets of the
plan by the fiduciary.” 29 U.S.C. § 1109(a).
To state a claim for breach of fiduciary duty, a complaint must allege that: (1) the
defendant was a fiduciary who (2) was acting in a fiduciary capacity, and (3) breached
his fiduciary duty, (4) resulting in losses to the plan. See 29 U.S.C. § 1109 (“Any person
who is a fiduciary with respect to a plan who breaches any of the responsibilities,
obligations or duties imposed upon fiduciaries by this subchapter shall be personally
liable to make good to such plan any losses to the plan resulting from each such
breach”); In re Bank of Am. Corp. Sec., Derivative, and ERISA Litig., 756 F. Supp. 2d
330, 350 (S.D.N.Y. 2010) (discussing elements of breach); Brandt v. Grounds, 687 F.2d
895, 898 (2d Cir. 1982) (“[A] causal connection is required between the breach of
fiduciary duty and the losses incurred by the plan.”). It is undisputed that defendant
was a fiduciary, acting in a fiduciary capacity. Plaintiff’s claims for breach of fiduciary
duty are primarily based on ERISA’s dictate that a fiduciary must adhere to a pension
fund’s governing documents. See 19 U.S.C. § 1104(a)(1)(D); Dardaganis v. Grace Capital
Inc., 889 F.2d 1237, 1241-42 (2d Cir. 1989) (holding a fiduciary has a duty to act in
accordance with plan documents, a separate basis for liability from the general duty of
prudence). For the purposes of this motion only, Logan Circle does not dispute those
claims. Logan Circle brings this motion to dismiss solely on the grounds that plaintiff
has failed to plead the fourth element: a causal connection between the breach of
fiduciary duty and the losses incurred by the plan.
Logan Circle argues that plaintiff has failed to plead damages with the requisite
specificity because the Amended Complaint “does not contain a single non-conclusory
allegation to suggest that [Logan Circle] . . . was the actual cause of any injury to the
Local 138 Fund.” Def.’s Mem. at 1. These arguments are without merit. In an attempt
to obtain dismissal of the Amended Complaint, Logan Circle repeatedly
mischaracterizes plaintiff’s claims and selectively quotes from the Amended Complaint.
For example, defendant states that plaintiff’s “central allegation” is that after 2007,
Logan Circle retained 74 securities, even though they had been downgraded to ratings
below that permitted by the Guidelines, and neither notified plaintiff of the downgrade
nor sold the securities. Def.’s Mem. at 8 (citing Am. Compl. ¶¶ 23, 25, 28). Logan
Circle argues that even if this allegation is true, plaintiff has failed to plead causation
because “[n]owhere does [the Amended Complaint] allege that the 74 downgraded
securities actually lost value subsequent to their downgrade and prior to their ultimate
sale.” Def.’s Mem. at 8. In fact, the next sentence in the Amended Complaint states that
“The  securities that were downgraded lost approximately $2 million in value over
the period 2008 to 2009.” Am. Compl. ¶ 23.
It is apparent that it is not the sufficiency but the merits of the Amended
Complaint that Logan Circle challenges, for Logan Circle goes on to make a number of
factual allegations regarding the retention and sale price of those 74 downgraded
securities, claiming they were not actually downgraded until 2009 and that Logan Circle
ultimately produced substantial returns for plaintiff in 2009 and 2010. Def.’s Mem. at 9
n.5. Essentially, Logan Circle argues plaintiff ultimately benefited economically, despite
defendant’s breach of fiduciary duty, and therefore plaintiff is not entitled to damages.
See id. at 11. These factual arguments are premature and not relevant to the sufficiency
of plaintiff’s pleading.
Logan Circle then argues that plaintiff “relies entirely on a ‘20/20 hindsight
approach’” in alleging that Logan Circle’s failure to notify plaintiff of the retention of
downgraded securities damaged plaintiff because it effectively prevented plaintiff from
taking any action to return the Fund’s portfolio to within the Guidelines. Def.’s Mem. at
9 (citing Am. Compl. ¶ 34). Logan Circle argues that plaintiff has failed to show it could
have prevented losses, suggesting that “market volatility during an unprecedented credit
and financial crisis” would have prevented plaintiff from doing so. See Def.’s Reply
Mem at 7; Def.’s Mem at 9 (“This allegation—devoid of any detailed allegations as to
how the [plaintiff] would have ‘repaired and restored the portfolio’ or ‘replaced the
downgraded securities with quality securities’–is not grounded in plausible facts.”
(emphasis in original)). Logan Circle also argues that plaintiff has failed to plead it “had
the capacity or intention to actually control the portfolio’s investments to ‘invest in
higher quality securities.’” Def.’s Reply. Mem. at 8-9. Again, Logan Circle’s argument
addresses the merits of plaintiff’s claims, not the sufficiency of the Amended Complaint.
Whether the portfolio’s losses were the result of “unprecedented” changes in the market
or of Logan Circle’s breach of fiduciary duty and whether plaintiff feasibly could have
taken corrective measures are factual issues and defenses. See In re Morgan Stanley
ERISA Litig., 696 F. Supp. 2d 345, 363 (S.D.N.Y. 2009) (“In ERISA cases, generally loss
causation is an issue of fact and is thus not properly considered at this early stage in the
proceeding.” (citations omitted). Plaintiff’s allegations are adequate to meet the
pleading requirements of Rule 8. See, e.g. In re First Am. Corp. ERISA Litig., No. SACV
07-01357, 2008 WL 5666637, at *8 (C.D. Cal. July 14, 2008) (denying motion to dismiss
where complaint alleged an identical theory of causation).
Logan Circle also argues plaintiff fails to plead any lawful measure of damages:
“the [Amended Complaint] alleges without explanation that the Fund’s losses are
estimated to be ‘between $2 million to $5 million.’ [Am. Compl. ¶ 53].” Def.’s Mem. at
13. In fact, the Amended Complaint elsewhere clearly sets forth plaintiff’s grounds for
alleging this loss amount. The Amended Complaint alleges that Logan Circle used the
Barclay’s Aggregated Bond Index as a benchmark for the portfolio’s performance. 1 Am.
According to the Amended Complaint, “The Barclay’s Index is a simulated investment portfolio
comprised of available fixed income securities.” Am. Compl. ¶ 29. As defendant notes, the Guidelines
state that the benchmark for the Fund’s portfolio “would be measured against the ‘Lehman Aggregate
Bond Index.’ Following Lehman Brother’s collapse and subsequent purchase by Barclay’s Capital, the
Compl. ¶ 29. At the beginning of 2008, the portfolio under Logan Circle’s management
was valued at $40 million. Id. ¶¶ 9, 31. Plaintiff alleges that during 2008, the Barclay’s
Aggregated Bond Index had a positive investment return of 5.25%. Id. at ¶ 30. In
contrast, during 2008 the portfolio managed by Logan Circle had a negative return of
6.8%, a difference of 12% from the Barclay’s Aggregated Bond Index performance (or
$4.8 million dollars). Id. ¶¶ 30-31. The Amended Complaint specifically alleges that
“[t]he portfolio’s losses were the direct result of Logan’s failure to comply with [the]
Guidelines.” Id. ¶ 33. Plainly, paragraph 53 of the Amended Complaint refers to the
fact that plaintiff’s damages could either be measured as the amount actually lost (6.8%
of $40 million, or $2.7 million) or the amount required to restore plaintiffs to the
position they would have occupied but for the breach, using the Barclay’s Aggregated
Bond Index performance as a benchmark (12%, or $4.8 million). Defendant elsewhere
concedes in their own brief that “[u]nder ERISA, damages are a relative measure,
comparing how the portfolio performed subsequent to the alleged breach of duty to how
it would have performed absent that breach,” Def.’s Reply Mem. at 10 (citing
Dardaganis, 889 F.2d at 1243-44), precisely the theory of damages advanced by
plaintiff. Again, it is apparent that it is not the sufficiency of the Amended Complaint
that Logan Circle challenges but the legitimacy of using the Barclay’s Aggregated Bond
Index as the standard for measuring plaintiff’s losses. See, e.g., Def.’s Reply Mem. at 7
(arguing “Logan Circle had no obligation whatsoever to perform up to the benchmark”).
Defendant also urges the Court to dismiss the Amended Complaint because
plaintiff has not pled damages with sufficient specificity and plaintiff should have
‘Lehman Aggregate Bond Index’ was renamed the ‘Barclays Aggregate Bond Index.”’ Def.’s Reply Mem. at
provided: “(i) a list of securities held in the Local 138 Fund’s portfolio, including their
credit rating, (ii) in the case of downgraded securities, the date of those downgrades,
and (iii) the date on which Logan Circle sold any downgraded security out of the Local
138 Fund portfolio.” Def.’s Reply Mem. at 11. But fiduciary duty claims brought under
ERISA are subject only to the “simplified pleading standard” of Federal Rule of Civil
Procedure 8(a). In re Worldcom, Inc., 263 F. Supp. 2d 745, 756 (S.D.N.Y. 2003) (citing
Swierkiewicz v. Sorema N.A., 534 U.S. 506, 513, 122 S. Ct. 992, 152 L. Ed. 2d 1 (2002)).
The particularized pleading requirements of the securities laws do not apply in ERISA
cases. In re Morgan Stanley ERIA Litig., 696 F. Supp. 2d at 363 (citing In re: Cardinal
Health, Inc. ERISA Litig., 424 F. Supp. 2d 1002, 1043–44 (S.D.Ohio 2006)).
Finally, Logan Circle relies heavily on Colliton v. Cravath, Swaine & Moore LLP,
No. 08 Civ. 400 (NRB), 2008 WL 4386764 (S.D.N.Y. Sept. 24, 2008), a case that is
plainly distinguishable. In Colliton, plaintiff, a former employee, alleged that defendant,
a leading law firm, breached its fiduciary duties to him in its management of its savings
plan for attorneys, in violation of ERISA. Those breaches included, for example, failing
to investigate whether cash was deposited promptly and failing to monitor whether plan
funds were invested outside of the jurisdiction of U.S. Courts. Id. at * 9. However,
plaintiff failed to show that such investigations would have uncovered any irregularities.
Plaintiff’s complaint presented no logical or plausible theory as to how the alleged
breaches could have harmed him. Plaintiff then summarily alleged that he was injured
in the amount of $15,000, but “[did] not assert how he arrived at this figure, whether
the figure is an actual loss or failure to make an additional $15,000, or even which of the
sixteen different breaches actually caused the ‘loss.’” Id.
Here, in contrast, plaintiff presents a logical and plausible theory of liability,
namely: defendant breached its fiduciary duties by purchasing and retaining
downgraded securities; those downgraded securities then declined in value; an
aggregated bond index of available fixed income securities is a reasonable measure of
how the portfolio would have performed absent the breach; and therefore defendant is
liable to plaintiff for the difference between the actual performance of the portfolio and
the benchmark. Plaintiff’s Amended Complaint contains sufficient factual allegations to
state a claim for relief and provides “fair notice of what the claim is and the grounds
upon which it rests.” Erickson v. Pardus, 551 U.S. 89, 93 (2007). As such, defendant’s
motion to dismiss must be denied.
For all of the reasons set forth above, defendant’s motion to dismiss the Second
Amended Complaint is DENIED.
Brooklyn, New York
May 25, 2012
I. Leo Glasser
United States District Judge
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