Coulter et al v. Morgan Stanley & Co. Incorporated et al

Filing 26

OPINION: For the forgoing reasons, Defendants Motion to Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure is GRANTED. Plaintiffs may file a second amended complaint that presents adequate allegations of their disclosure claim against Jamesley and their theories of secondary liability. All other claims are dismissed with prejudice because Plaintiffs are unable to demonstrate that [they] would be able to amend [their] complaint in a manner which would survive dismissal. Bea chum v. Awisco New York Corp., 459 Fed. Appx 58, 59 (2d Cir. 2012) (quoting Hayden v. County of Nassau, 180 F.3d 42, 53 (2d Cir.1999). Any amended complaint shall be filed within 45 days of the date of this Order. Failure to do so shall result in dismissal of this case in its entirety without further Order of the Court. (Signed by Judge Deborah A. Batts on 3/28/2013) (ago)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------X
G. KENNETH COULTER, JOHN SIEFKEN,
GREGORY MAJOR, MICHAEL CHIEKO,
ELI MOND, JOHN SUDOLSKY, on behalf
of themselves and all others similarly
situated,
Plaintiffs,
v.

11 Civ. 1849 (DAB)
OPINION

MORGAN STANLEY & CO., INC. et al.,
Defendants.
-------------------------------------X
DEBORAH A. BATTS, United States District Judge.

This class action is brought by participants in the Morgan
Stanley 401(k) Plan (“401(k) Plan”) and the Morgan Stanley
Employee Stock Ownership Plan (“ESOP”) (collectively the “Plans”)
against Defendants Morgan Stanley (“Morgan Stanley” or the
“Company”), Morgan Stanley & Co., Inc. (“MS & Co.”), Karen
Jamesley, Morgan Stanley’s Global Director of Human Resources
(“Jamesley”), John Mack, the Chairman of Morgan Stanley’s Board
of Directors and Morgan Stanley’s Chief Executive Officer
(“Mack”), members of MS & Co.’s Board of Directors (the “MS & Co.
Board”), and members of the Investment Committee (the “Investment
Committee Defendants”) (collectively, the “Defendants”).
Plaintiffs allege Defendants violated their fiduciary duties
under the Employee Retirement Income Security Act of 1974

(“ERISA”) from September 15, 2008 through December 31, 2008 (the
“Class Period”).1

In particular, Plaintiffs allege that (1)

Defendants failed to manage prudently and loyally the Plans’
assets, (2) Morgan Stanley and Jamesley failed to provide
complete and accurate information,2 (3) Defendants breached their
duty to avoid conflicts of interest, (4) Morgan Stanley, MS &
Co., the MS & Co. Board, and Mack failed to monitor adequately
other fiduciaries and to provide them with accurate information,
and (5) Defendants have co-fiduciary liability.
Defendants have moved to dismiss the Corrected Amended Class
Action Complaint (the “Complaint”) pursuant to Federal Rule of
Civil Procedure 12(b)(6).

For reasons that follow, Defendants’

Motion to Dismiss is GRANTED in its entirety.

1

In their Complaint, Plaintiffs allege the Class Period
began January 1, 2008. In a letter dated April 26, 2012,
Plaintiffs notified the Court that they wished to limit the Class
Period from September 2008 through December 31, 2008, indicating
that they could submit a redlined version of the Complaint.
After the Court requested a redlined copy, Plaintiffs submitted a
letter to the Court, dated November 20, 2012, indicating that
they wanted the Class Period to begin on September 15, 2008.
2

Plaintiffs clarified, in a November 20, 2012 letter to the
Court, that their claim for breach of the duty of candor is
limited to only Morgan Stanley and Jamesley.
2

I.

BACKGROUND
A.

Procedural History

Plaintiffs commenced a related action before this Court,
asserting similar claims for breaches of ERISA fiduciary duties.
In re Morgan Stanley ERISA Litig., No. 07 Civ. 11285 (“Related
Action”).

After Judge Robert W. Sweet denied a motion to

dismiss, discovery commenced.

In re Morgan Stanley ERISA Litig.,

696 F. Supp. 2d 345 (S.D.N.Y. 2009) (“Morgan Stanley”).
Magistrate Judge Andrew J. Peck limited the scope of discovery to
the period before the Related Action’s amended complaint was
filed in June 2008.

Shortly thereafter, on March 16, 2011,

Plaintiffs filed the instant matter; they amended the Complaint
on September 27, 2011.

Defendants filed their Motion to Dismiss

on October 28, 2011, which was fully submitted on January 18,
2012.
In light of two Second Circuit decisions, In re Citigroup
ERISA Litigation, 662 F.3d 128 (2d Cir. 2011) (“Citigroup”) and
Gearren v. McGraw Hill Cos., 660 F.3d 605 (2d Cir. 2011), on
February 28, 2012, the Court granted the defendants in the
Related Action leave to filed a renewed motion to dismiss, which
was filed on March 26, 3012.

On March 30, 2012, the Court denied

Plaintiffs’ request to consolidate this instant Complaint with
the Related Action.
3

B.

Parties

The following facts alleged in the Complaint are assumed to
be true for the purposes of the Motion to Dismiss before the
Court.
This action is brought by and on behalf of participants in
the 401(k) Plan and the ESOP, who held Morgan Stanley stock in
their individual 401(k) Plan or ESOP accounts during the Class
Period.

(Compl. ¶¶ 14-19.) Plaintiffs allege that all Defendants

were fiduciaries of the Plans during the Class Period.

(Compl. ¶

20.)
Morgan Stanley is a financial services company headquartered
in New York, New York.

It provides its clients and customers

with financial advisory services, investment advisory services,
global asset management products and services in equity, fixed
income, alternative investments, and private equity.
21.) Morgan Stanley is the ESOP’s sponsor.

(Compl. ¶

(Compl. ¶ 23.)

MS & Co., a wholly-owned subsidiary of Morgan Stanley, is
headquartered in New York, New York.

(Compl. ¶ 28.)

As part of

Morgan Stanley’s Global Wealth Management Group, MS & Co. is
Morgan Stanley’s primary broker-dealer in the United States.
(Compl. ¶ 28.) MS & Co. is the 401(k) Plan’s “sponsor.” (Compl. ¶
29.)
Karen Jamesley was Morgan Stanley’s Global Director of Human
4

Resources and the Plan Administrator of the 401(k) Plan and the
ESOP during the Class Period.

(Compl. ¶¶ 25-26.) John J. Mack,

was Morgan Stanley’s Chief Executive Officer and its Chairman of
the Board during the Class Period.

(Compl. ¶ 27.)

Walid A. Chammah, Charles Chasin, James P. Gorman, Ellyn A.
McColgan, Michael J. Petrick, Richard Portogallo, Neal A. Shear,
and Cordell G. Spencer were members of the MS & Co. Board of
Directors during the Class Period.

(Compl. ¶ 31.)

During the Class Period, the Plans’ management was in the
hands of the Investment Committee, members of which were
appointed by and served at the pleasure of the MS & Co. Board.
(Compl. ¶ 32.) Under the Plans’ terms, the Investment Committee
consisted of no fewer than three persons, each of whom was an
employee or advisory director of Morgan Stanley or MS & Co.
(Compl. ¶ 32.) Michael Rankowitz, Thomas C. Schneider, Michael T.
Cunningham, R. Bradford Evans, Kirsten Feldman, Edmund C.
Puckhaber, William B. Smith, and Caitlin Long served as members
of the Investment Committee during the Class Period.

(Compl. ¶

33.)
Additionally, Plaintiffs’ Complaint names unknown “John Doe”
Defendants 1–10, individuals including members of the Investment
Committee and officers, directors and employees of Morgan Stanley
and MS & Co.

These John Doe Defendants were fiduciaries of the
5

Plans during the Class Period, but their identities are currently
unknown to Plaintiffs.

C.

(Compl. ¶ 34.)

The Plans

Judge Sweet thoroughly described the 401(k) Plan and the
ESOP, including employee eligibility and the allocation of
employee and Company contributions.
2d at 351-52.

Morgan Stanley, 696 F. Supp.

The same 401(k) Plan and ESOP are at issue in the

instant matter before the Court.

Both Plans appointed Morgan

Stanley’s Global Head of Human Resources, Karen Jamesley, as Plan
Administrator.

(Compl. ¶¶ 41, 44, 54; Wise Decl. Ex. E, 401(k)

Plan § 2 (“401(k) Plan”); Wise Decl. Ex. F, ESOP § 1.34
(“ESOP”).) The Investment Committee was a named fiduciary of the
401(k) Plan.

(Compl. ¶ 48; 401(k) Plan § 8(f)(i).)

Before August 31, 2008, the Plans’ assets were combined and
commingled in the Morgan Stanley Defined Contribution Master
Trust held in trust by Mellon Bank, N.A.

(Compl. ¶ 51.) On

August 31, 2008, the ESOP’s assets were merged into the 401(k)
Plan, resulting in one ERISA plan.

(Compl. ¶ 52.) Pursuant to

that merger, all assets were transferred to the 401(k) Plan on
October 20, 2008.

(Compl. ¶ 52.)

At the end of 2007, the total combined value of Company
stock in the Plans was approximately $2.2 billion.
6

(Compl. ¶

56.) At the end of 2008, the 401(k) Plan’s value in Company stock
was approximately $673.6 million.

D.

(Compl. ¶ 56.)

Factual Allegations

Plaintiffs allege Defendants breached their fiduciary duties
to the Plans, their participants, and their beneficiaries during
the Class Period in violation of ERISA sections 404(a) and 405.
Despite warnings throughout 2007 that the subprime housing market
was deteriorating and despite Morgan Stanley being aware of the
crisis in 2007, Morgan Stanley continued investing in subprime
and mortgage backed securities.

(Compl. ¶¶ 87-118.) As a result

of the crisis and the Company’s subprime investments, Morgan
Stanley reported $9.4 billion in mortgage-related write-downs
during 2007.

(Compl. ¶ 114.)

Despite knowing of those events and of market volatility, on
January 2, 2008, Mack made the decision to fund all Company
contributions to the Plans solely in Company stock.

(Compl. ¶¶

119-29.) Plaintiffs allege that after the collapse of Bear
Stearns in March 2008 and because the risks the Company would
face if another banking institution failed, Defendants knew or
should have known that Morgan Stanley stock was too risky an
investment for the Plans.

(Compl. ¶¶ 126-27.) Concerns of the

systemic problems in the banking and mortgage sectors increased
7

from March to July 2008.

(Compl. ¶¶ 138-55.)

Plaintiffs claim Morgan Stanley faced dire circumstances
after Fannie Mae and Freddie Mac were placed into
conservatorship, after Lehman Brothers collapsed, and when hedge
funds made a multi-billion dollar run on Morgan Stanley during
the week of September 15, 2008.

(Compl. ¶¶ 157-92.) As a result

of these occurrences, Morgan Stanley lost $128.1 billion in prime
brokerage deposits during the weeks of September 15, 2008 and
September 22, 2008.3

(Compl. ¶¶ 194-96.) To avoid defaulting on

its market commitments, Plaintiffs claim Morgan Stanley borrowed
$107.1 billion from the Federal Reserve during the weeks of
September 15, 2008 and September 22, 2008.4

(Compl. ¶ 197-201.)

According to the Complaint, while looking back on these
events, Mack speculated that Morgan Stanley was “next in line” to
collapse and that the Company was “close to really going out of
business, call it near death.”

(Compl. ¶¶ 159, 205.) And, on

September 17, 2008 Morgan Stanley’s CFO Colm Kelleher
3

On September 15, 2008, Morgan Stanley executives informed
the Federal Reserves that a loss of $21.1 billion during that
two-week period would be catastrophic. (Compl. ¶ 164.)
4

Plaintiffs explain: “As of September 29, 2008, after
borrowing $107.1 billion from the Federal Reserve . . . , Morgan
Stanley reported $99.8 billion of liquidity. Thus, without the
$107.1 billion in emergency loans from the Federal Reserve,
Morgan Stanley would have become illiquid sometime between
September 15, 2008 . . . and September 29, 2008.” (Compl. ¶
200.)
8

(“Kelleher”) told Mack, “We’re going to be out of money on
Friday.”

(Compl. ¶ 175.) After Mack asked Kelleher to recheck

the numbers, Kelleher said, “Maybe we’ll make it through early
next week.”

(Compl. ¶ 175.) As a result of these concerns,

Morgan Stanley began seeking a merger or an investor.

(Compl. ¶¶

174, 176, 180, 182, 186, 191.) On September 21, 2008, Mitsubishi
UFJ, Japan’s largest bank, agreed to invest $9 billion in Morgan
Stanley, yet the Company still needed a source of additional
funding. (Compl. ¶ 193.) After the Troubled Asset Relief Program
(“TARP”) was enacted, the government called in the heads of nine
banks, including Morgan Stanley, to encourage them to take TARP
financing; Mack was the first to accept.

(Compl. ¶¶ 203-05.)

Plaintiffs claim that Defendants could have provided the
Plans’ participants with specific warnings, suspended or limited
future investments of Company stock in the 401(k) Plan,
liquidated Company stock in the Plans and converted those assets
into cash, or funded Company contributions in cash. (Compl. ¶
208.)

Instead, Defendants did nothing even though Morgan

Stanley’s stock traded at $32.19 at the beginning of the Class
Period, then to under $20 after Lehman Brothers’ collapse,
dropping to under $10 on October 10, 2008 and November 20, 2008,
and remaining around $15 for the rest of 2008.
Wise Decl. Ex. I.)
9

(Compl. ¶ 209;

II.

DISCUSSION
A.

Legal Standards
1.

Rule 12(b)(6) Motion to Dismiss

For a complaint to survive dismissal under Federal Rules of
Civil Procedure 12(b)(6) (“Rule 12(b)(6)”), a plaintiff must
plead “enough facts to state a claim to relief that is plausible
on its face.”
(2007).

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

“A claim has facial plausibility,” the Supreme Court

explained,
[W]hen 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) (quoting Twombly, 550
U.S. at 556-57).

“[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.”
quotation marks omitted).

Twombly, 550 U.S. at 555 (internal

“[I]n keeping with these principles,”

the Supreme Court stated,
A court considering a motion to dismiss can choose to
begin by identifying pleadings that, because they are
10

no more than conclusions, are not entitled to the
assumption of truth. While legal conclusions can
provide the framework of a complaint, they must be
supported by factual allegations. When there are
well-pleaded factual allegations, a court should assume
their veracity and then determine whether they
plausibly give rise to an entitlement to relief.
Iqbal, 556 U.S. at 678.
In ruling on a Rule 12(b)(6) motion, a court may consider
the complaint as well as “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) (citation omitted).

The court may also consider “well

publicized stock prices.”

Ganino v. Citizens Utils. Co., 228

F.3d 154, 167 n. 8 (2d Cir. 2000).
2.

ERISA Claims for Breaches of Fiduciary Duties

ERISA “‘protect[s] beneficiaries of employee benefit plans’
. . . , by imposing fiduciary duties of prudence and loyalty on
plan fiduciaries.”

Citigroup, 662 F.3d at 135 (quoting Slupinski

v. First Unum Life Ins. Co., 554 F.3d 38, 47 (2d Cir. 2009)).
With respect to the duty of prudence, ERISA requires fiduciaries
to act “with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like
11

capacity and familiar with such matters would use in the conduct
of an enterprise of a like character and with like aims.”
U.S.C. § 1104(a)(1)(B).

29

With respect to the duty of loyalty,

fiduciaries must act “solely in the interest of the participants
and beneficiaries.”

29 U.S.C. § 1104(a)(1).

A participant in retirement plan may bring a civil action
against a person for breaching ERISA fiduciary duties.
§ 1132(a)(2); 29 U .S.C. § 1109(a).

29 U.S.C.

However, “[a] person is only

subject to these fiduciary duties ‘to the extent’ that the
person, among other things, ‘exercises any discretionary
authority or discretionary control respecting management of such
plan’ or ‘has any discretionary authority or discretionary
responsibility in the administration of such plan.’”
662 F.3d at 135 (quoting 29 U.S.C. § 1002(21)(A)).

Citigroup,
Because “a

person may be an ERISA fiduciary with respect to certain matters
but not others,” Harris Trust & Savings Bank v. John Hancock
Mutual Life Insurance Co., 302 F.3d 18, 28 (2d Cir. 2002), “in
suits alleging breach of fiduciary duty, the ‘threshold question’
is whether the defendants were acting as fiduciaries ‘when taking
the actions subject to complaint.’”

Citigroup, 662 F.3d at 135

(quoting Pegram v. Herdrich, 530 U.S. 211, 226 (2000)).

12

B.

Whether Plaintiffs Adequately Pled an Imprudence Claim

Plaintiffs allege Defendants failed to manage prudently the
Plans’ assets and that Mack failed to fund prudently Company
contributions.

(Compl. ¶¶ 231-39.) Defendants claim their

actions are entitled to the Moench presumption that investing the
Plans’ assets in Company stock is prudent; and, since Morgan
Stanley was not in dire circumstances, Plaintiffs cannot overcome
that presumption of prudence.
1.

The Court agrees.

Whether Defendants Acted in a Fiduciary Capacity
with Respect to Plan Investments

Defendants concede that Jamesley is a named fiduciary for
the 401(k) Plan and the ESOP.

(Defs.’ Mot. Dismiss 10.) As Plan

Administrator for the 401(k) Plan, Jamesley had the authority to
impose processes, conditions, or limitations on the selection of
investments by the 401(k) Plan participants.
F.3d at 136; 401(k) Plan § 8(d)(i).

See Citigroup, 662

As Plan Administrator for

the ESOP, Jamesley is expressly given similar fiduciary
responsibilities.

(ESOP § 9.02(b)-(c).) Defendants also concede

that the Investment Committee is a named fiduciary for the 401(k)
Plan.

(Defs.’ Mot. Dismiss 10.) The Investment Committee

selected and monitored the 401(k) Plan’s investments.

(401(k)

Plan § 8(b)(i).)
Relying on Citigroup, Defendants argue that Morgan Stanley,
13

MS & Co., the MS & Co. Board, and Mack were not fiduciaries with
respect to Plaintiffs’ imprudence claim because they lacked any
fiduciary duties to add or eliminate investment funds and lacked
the authority to veto investment options.
10-12.)

(Defs.’ Mot. Dismiss

However, they were de facto fiduciaries of the Plans

because Morgan Stanley, MS & Co., the MS & Co. Board, and Mack
had the authority to determine whether to make contributions in
either cash or Company stock.

In re Fannie Mae ERISA Litig., No.

09 Civ. 1350, 2012 WL 5198463, at *2 (S.D.N.Y. Oct. 22, 2012)
(holding defendants were fiduciaries because they “had discretion
to determine the extent of [the company’s] annual contribution to
the Plan, and whether the contribution would be made in . . .
stock or cash”); Morgan Stanley, 696 F. Supp. 2d at 356-57;
401(k) Plan § 6(f); ESOP § 3.01(a). Accordingly, with respect to
Company contributions, Plaintiffs have sufficiently plead the
fiduciary status of Morgan Stanley, MS & Co., the MS & Co. Board,
and Mack.5

5

Plaintiffs claim Morgan Stanley is a named fiduciary
because the Plans’ named fiduciary is “Morgan Stanley’s Global
Director of Human Resources.” That is not the case. Morgan
Stanley, 696 F. Supp. 2d at 355-56. Nor are Morgan Stanley or MS
& Co. fiduciaries based on agency theory or respondeat superior.
In re Bank of Am. Corp. Secs., Derivative, and ERISA Litig., 756
F. Supp. 2d 330, 346-47 (S.D.N.Y. 2010) (noting that, while there
is split circuit authority on whether respondeat superior
provides a viable theory of recovery in ERISA, “several district
courts in this circuit have declined to apply” it). Finally,
14

2.

The Moench Presumption

The Second Circuit recently adopted the Moench presumption
“of compliance with ERISA when an ESOP [or an EIAP] fiduciary
invests assets in the employer’s stock.”

Citigroup, 662 F.3d at

137, 138 (citing Moench v. Robertson, 62 F.3d 553 (3rd Cir.
1995)).

After examining a plan’s terms and if the terms require

or strongly favor investing in employer stock, a court applies
the presumption.

Citigroup, 662 F.3d at 140; In re

GlaxoSmithKline ERISA Litig., No. 11-2289, 2012 WL 3798260, at *1
(2d Cir. Sept. 4, 2012).

A court then “review[s the] defendants’

decision to continue to allow Plan participants to invest in
employer stock, in accordance with the [plan’s] terms, for an
abuse of discretion.”

Gearren, 660 F.3d at 610 (citing Moench,

62 F.3d at 571); Citigroup, 662 F.3d at 138.
The Moench presumption “protect[s] fiduciaries from
liability where ‘there is room for reasonable fiduciaries to
disagree as to whether they are bound to divest from company
stock.’”

Citigroup, 662 F.3d at 140.

Nonetheless, “judicial

scrutiny should increase with the degree of discretion a plan

although Plaintiffs claim that Morgan Stanley possessed the
“authority to establish rules regarding the transfer of Company
Stock,” (Compl. ¶ 43), there is no evidence of that authority;
rather that authority was conferred on the Plan Administrator.
(ESOP § 3.08(c).)
15

gives its fiduciaries to invest.”
(citation omitted).

Citigroup, 662 F.3d at 138

Therefore, once a court examines the plan’s

terms and determines those terms “require or strongly favor
investment of company stock, . . .

only circumstances placing

the employer in a dire situation that was objectively
unforeseeable by the settlor could require fiduciaries to
override the plan terms” and divest an EIAP or ESOP of employer
stock.

In re GlaxoSmithKline, 2012 WL 3798260, at *1 (quoting

Citigroup, 662 F.3d at 140) (alterations omitted); Gearren, 660
F.3d at 610.
3.

Whether the Moench Presumption Applies to the
Plans

Defendants assert that the Plans mandated or strongly
favored investment in Company stock.

(Wise Decl. Ex. G, Summary

Plans Description, at 6 (“SPD”); 401(k) Plan § 8(b)(ii)(A); ESOP
§ 4.01(a).) Although the Plans allow for instances in which the
fiduciaries may choose not to invest in Company stock, those
terms closely mirror those in Citigroup.6

6

The court in

The 401(k) Plan explains: “The Morgan Stanley Stock Fund
[“MSSF”] shall be invested and reinvested exclusively in Morgan
Stanley Stock, except that pending investments in Morgan Stanley
Stock, amounts held in the [MSSF] may be invested and reinvested
temporarily in interest-bearing, short-term investments . . . as
the Trustee deems suitable . . . . The [MSSF] may be liquidated,
removed or closed as an Investment Fund only by amendment to the
Plan.” Compare 401(k) Plan § 8(b)(ii)(A) with In re Citigroup
16

Citigroup determined the fiduciary had little discretion even
though the plan “authorized the holding of ‘cash and short-term
investments’ . . . to facilitate the ‘orderly purchase’ of more
company stock.”

Citigroup, 662 F.3d at 139.

See Slaymon v. SLM

Corp., No. 10-4061, 2012 WL 6684564, at *1 (2d Cir. Dec. 26,
2012) (upholding the application of the Moench presumption even
when the plans stated that “investments in the Stock Fund shall
consist primarily of shares of [company s]tock”); see also In re
GlaxoSmithKline, 2012 WL 3798260, at *2.
offer Defendants little discretion.

Similarly, the Plans

Furthermore, participants’

default investment option with the Plans is investment in Company
stock.

See In re GlaxoSmithKline, 2012 WL 3798260, at *2.

Plaintiffs argue the Moench presumption is inapplicable
because, even though a cash contributions to the ESOP could
eventually be invested in Company stock, Morgan Stanley, MS &
Co., the MS & Co. Board, and Mack had the discretionary authority
to decide whether to make Company contributions in cash or stock.
(Pls.’ Opp’n 19-21.) The abuse of discretion standard still

ERISA Litig., No. 07 Civ. 9790, 2009 WL 2762708, at *4 (S.D.N.Y.
Aug. 31, 2009). Similarly, the ESOP explains: “Employer
Contributions . . . shall be invested in shares of Company Stock.
Consistent with the Plan’s status as an employee stock ownership
. . . , the Trustee may keep such amounts of cash, securities or
other property as it . . . shall deem necessary or advisable as
part of the Trust Fund, all within the limitations specified in
the trust agreement.” (ESOP § 4.01(a).)
17

applies.

See In re Fannie Mae, 2012 WL 5198463, at *2-3

(applying the Moench presumption where defendants had the option
to contribute cash or company stock).

And, even if Company

contributions were made in cash, Jamesley and the Investment
Committee had no authority to avoid investment in Company stock.7
(SPD, at 6 (“The Company Match is allocated to the ESOP and may
be made in cash and invested in the [MSSF] or may be made in
shares of Morgan Stanley common stock contributed directly to the
[MSSF].”).)

Even though there were limited instances in which

the Plans’ fiduciaries could choose not to invest in Company
stock, the Plans strongly favored such investments; Defendants’
actions thereby are entitled to a presumption of prudence.

See

Taveras v. UBS AG, No. 12-1661, 2013 U.S. App. LEXIS 4061, at
*23-25 (2d Cir. Feb. 27,2013); see also Fisher v. JP Morgan Chase
& Co., 469 F. App’x 57, 59-60 (2d Cir. 2012).
4.

Applying the Moench Presumption

Plaintiffs allege that by September 15, 2008, Defendants

7

Plaintiffs argue that, had Company contributions been made
in cash, the Plan Administrator could have held the cash without
investing in Company stock. (Pls.’ Opp’n 19-20.) However, the
ESOP provides no such discretionary authority, instead merely
allows the Plan Administrator to suspend, delay, or limit a
participant’s transfers into or out of Company stock if it is
necessary or advisable. (ESOP § 7.04(d)(i).) It does not prevent
a cash contribution from being invested in the MSSF, as required
by the ESOP. (See ESOP § 4.01; see also SPD, at 6.)
18

knew or should have known that Morgan Stanley’s viability was in
serious jeopardy.

(Pls.’ Opp’n 18; Compl. ¶¶ 158-72.) Thereby,

Plaintiffs assert, Defendants breached their duty of prudence by
continuing to invest the Plans’ assets in Company stock and by
Morgan Stanley, MS & Co., the MS & Co. Board, and Mack
contributing to the Plans in Company stock.

(Pls.’ Opp’n 18.)

Defendants assert, however, that Plaintiffs fail to plead that
Jamesley or the Investment Committee knew of those circumstances
and that the situation was not dire.
a.

(Defs.’ Reply 5.)

Continuing to Invest in Company Stock

Plaintiffs make no specific allegations that Jamesley or the
Investment Committee knew of the alleged dire circumstances,
including the withdrawals of prime brokerage deposits following
Lehman’s collapse, what amount of withdrawals the Company
considered catastrophic, and that the Federal Reserve loaned
Morgan Stanley money.

Accordingly, Jamesley and the Investment

Committee could not have breached their duty because the
Complaint never claims they knew or should have known of those
events.

Gearren, 660 F.3d at 610; In re UBS AG ERISA Litig., No.

08 Civ. 6696, 2012 WL 1034445, at *7 (S.D.N.Y. Mar. 23, 2012),
aff’d, No. 12-1662, 2013 U.S. App. LEXIS 4016, at *10 (2d Cir.
Feb. 27, 2013); In re Lehman Bros. Secs. & ERISA Litig., No. 09
MD 2017, 2011 WL 4632885, at *5 (S.D.N.Y. Oct. 5, 2011) (holding
19

the plan administrator “who worked in human resources” was not
aware of Lehman’s imminent collapse despite similar warning signs
and circumstances).
Even if Jamesly and the Investment Committee knew of the
circumstances at Morgan Stanley, those circumstances were not
dire.

Courts have found that similar banking entities, with

similar factual allegations, did not face dire circumstances
during approximately the same time as the instant Class Period.
See Citigroup, 662 F.3d at 141; In re Bank of Am., 756 F. Supp.
2d at 354-55; In re Bear Stearns, 763 F. Supp. 2d 423, 572-74
(S.D.N.Y. 2011); In re Lehman Bros., 2011 WL 4632885, at *5; In
re Wachovia Corp. ERISA Litig., No. O9 Civ. 262, 2010 WL 3081359,
at *14 (W.D.N.C. Aug. 6, 2010).

Simply because Lehman failed and

suffered a run did not place Morgan Stanley at or near the brink
of collapse.

In re Lehman Bros., 2011 WL 4632885, at *5

(explaining the failure of Bear Stearns and its suffered run did
not render Lehman in a dire situation).

And, although Morgan

Stanley borrowed money from the Federal Reserve in order to avoid
defaulting when it suffered a run, that did not threaten its
viability.

See In re Bear Stearns, 763 F. Supp. 3d at 573

(holding Bear Stearns was not facing collapse even though it
necessitated government funding and saw its stock price drop $30
in one day).
20

Additionally, “[a]lthough proof of the employer’s impending
collapse may not be required to establish liability, ‘mere stock
fluctuations, even those that trend downward significantly, are
insufficient to establish the requisite imprudence to rebut the
presumption.’”

Citigroup, 662 F.3d at 140 (quoting Wright v. Or.

Metallurgical Corp., 360 F.3d 1090, 1099 (9th Cir. 2004));
Gearren, 660 F.3d at 610.

Morgan Stanley’s share price fell from

$50.95 to $16.04 from January 2, 2008 to the end of the Class
Period, approximately a 79% drop.

(Wise Decl. Ex. I.) From the

beginning to the end of the Class Period, the Company’s stock
dropped approximately 50%.

(Id.)

Similar stock declines have

been insufficient to trump the Moench presumption.

Citigroup,

662 F.3d at 141 (50% drop); Gearren, 660 F.3d at 609-10 (64%
drop); Fisher, 469 F. App’x at 59 (55% drop); In re Am. Exp. Co.
ERISA Litig., 762 F. Supp. 2d 614, 628 (S.D.N.Y. 2010) (78%
drop); In re Bank of Am., 756 F. Supp. 2d at 354 (83% drop).
Even when the stock hit a low of $9.20 per share during the Class
Period, Morgan Stanley’s stock “still retained significant
value.”8

Fisher, 469 F. App’x at 59 (55% drop with a low of

8

Although not dispositive, because Morgan Stanley’s share
price has rebounded since the end of the Class Period, the
presumption of prudence is reinforced. See Fisher, 469 F. App’x
at 59; see also In re GlaxoSmithKline, 2012 WL 3798260, at *2.
Because of the rebound, had Jamesley and the Investment Committee
divested the Plans of Company stock, “they would have deprived
21

$15); Slaymon, 2012 WL 6684564, at *1 (a low of $8.89 from a high
of $57.98); In re Bank of Am., 756 F. Supp. 2d at 354 (83% drop
with a low of $5).
Despite the considerable problems in the financial sector
during the Class Period, Morgan Stanley demonstrated several
indicia of viability.

Although net revenues were down, in the

first three quarters of 2008, Morgan Stanley earned a profit,
with net revenues of $22.9 billion.

See Fisher, 469 Fed. App’x

at 59-60; see also In re Am. Exp., 762 F. Supp. 2d at 628 (“[T]he
company continued to have earnings and income and the stock price
has subsequently rebounded significantly.”); Wise Decl. Ex. D.
The Company also paid dividends in each quarter of 2008.

In re

GlaxoSmithKline, 2012 WL 3798260, at *2; Wise Decl. Ex. D.
Additionally, in September 2008, Mitsubishi Bank made a $9
billion investment in the Company, which is further indication
Morgan Stanley would remain viable.

See In re Lehman Bros., 2011

WL 4632885, at *5 n. 42; see also In re UBS AG, 2012 WL 1034445,
at *8, aff’d 2013 U.S. App. LEXIS 4016, at *7-9; Compl. ¶ 193.

Plan members of that rebound,” and given the rebound their
“decision not to divest . . . was not so extreme as to be
contrary to . . . ‘how a prudent fiduciary would operate.’” In
re Bear Stearns, 763 F. Supp. 2d at 574. Accordingly, they
“would almost certainly be sued for having overridden the plan
terms.” In re Citigroup ERISA Litig., No. 07 Civ. 9790, 2009 WL
2762708, at *13 (S.D.N.Y. Aug. 31, 2009); In re Bank of Am., 756
F. Supp. 2d at 355 n. 2.
22

Moreover, Morgan Stanley’s circumstances during the Class
Period were wholly unlike those circumstances in which courts
have found sufficient to overcome the Moench presumption.

See In

re Fannie Mae, 2012 WL 5198463, at *4-5 (determining the
defendants knew of a 99% decline in the value of the plan’s
assets and “all of [Fannie Mae’s] assets were in the housing
market”); In re AIG, Inc. ERISA Litig. II, No. 08 Civ. 5722, 2011
WL 1226459, at *7 (S.D.N.Y. Mar. 31, 2011) (determining the
defendants knew of various circumstances that warranted further
investigation before the stock fell 99%);

Veera v. Ambac Plan

Admin. Comm., 769 F. Supp. 2d 223, 229–30 (S.D.N.Y. 2011)
(determining the defendants knew of the dire circumstances due to
a 99% price drop and
company’s demise).

public announcements detailing the
Since no dire circumstances existed during

the Class Period, Defendants did not breach their duty of
prudence by maintaining investment in Company stock.
b.

Funding the Plans with Company Stock

Plaintiffs claim Morgan Stanley, MS & Co., the MS & Co.
Board, and Mack breached their duty both with the 2007 and 2008
Plan contributions when they chose to fund the Plans with Company
stock rather than cash.

However, Plaintiffs make no allegations

that the Company was in dire circumstances before September 15,
2008, and since the decision to fund Company contributions in
23

Company stock for the 2007 Plan year was made in January 2008,
Morgan Stanley, MS & Co., the MS & Co. Board, and Mack did not
breach their duty.

Moreover, the alleged breach occurred before

the Class Period began.

With respect to the 2008 Plan

contribution, which was made on December 31, 2008, Plaintiffs
make no allegations that the Company, save reporting its fourth
quarter loss on December 17, 2008, was in dire circumstances in
December 2008.9

(Compl. ¶ 211.) Accordingly, Morgan Stanley, MS

& Co., the MS & Co. Board, and Mack did not breach their duty of
prudence by funding the Plans with Company stock rather than
cash.

C.

Whether Plaintiffs Adequately Pled a Disclosure Claim

Plaintiffs claim that Morgan Stanley and Jamesley breached
their duty of loyalty by (1) failing to provide complete and
accurate information regarding Morgan Stanley’s subprime exposure
and impending problems and (2) disseminating inaccurate,
incomplete, and materially misleading statements to participants
of the Plans.

(Compl. ¶¶ 240-51.)

9

As discussed above, Morgan Stanley never was in dire
circumstances during the Class Period; therefore, Plaintiffs
claim against Morgan Stanley, MS & Co., the MS & Co. Board, and
Mack fails.
24

1.

Duty to Provide Information

Although ERISA sets forth a “comprehensive set of ‘reporting
and disclosure’ requirements,” Curtiss-Wright Corp. v.
Schoonejongen, 514 U.S. 73, 83 (1995) (citing 29 U.S.C. §§ 10211031), ERISA does not require fiduciaries “to provide
participants with information regarding the expected future
performance of [company] stock.”

Citigroup, 662 F.3d at 142.

ERISA does not “create a duty to provide participants with
nonpublic information pertaining to specific investment options.”
Citigroup, 662 F.3d at 143; Gearren, 660 F.3d at 610.
Accordingly, Plaintiffs’ allegation that Morgan Stanley and
Jamesley breached their duty of loyalty by not communicating the
Company’s subprime exposure and the Company’s future outlook
fails because they had no duty to communicate such information.
See Gearren, 660 F.3d at 610.
2.

Alleged Misstatements

Plaintiffs allege Morgan Stanley and Jamesley communicated
with Plan participants through “SEC filings, annual reports,
press releases and Plan documents . . . , which included and/or
reiterated these statements.”

(Compl. ¶ 243.) The SEC filings

were incorporated into the SPDs and Form S-8 registration
statements.

(Compl. ¶ 243.) These communications, Plaintiffs

allege, were actionable misstatements.
25

(Compl. ¶¶ 245-47.)

With respect to Morgan Stanley, Plaintiffs’ argument fails
because the Company was not “a Plan administrator responsible for
communicating with Plan participants, [and] therefore [did not]
act[] as a Plan fiduciary when making the statements at issue.”
Citigroup, 662 F.3d at 143-44; Gearren, 660 F.3d at 611 (holding
defendants were not liable under ERISA because the alleged
misstatements were made while “acting in a corporate, rather than
ERISA fiduciary, capacity”); Fisher, 469 Fed. Appx. at 60.
Accordingly, Morgan Stanley cannot be held liable under ERISA for
those alleged misstatements.
Jamesley, as the Plan Administrator for the 401(k) Plan and
the ESOP, was responsible for communicating with the Plans’
participants.

(Compl. ¶¶ 25-26, 44.) Plaintiffs do not allege

that Jamesley was responsible for the alleged misstatements but
rather that those statements and omissions are actionable because
she incorporated them by reference in communications with the
Plans’ participants.

(Compl. ¶ 243; Pls.’ Opp’n 27-30.) Simply

because the SPDs and Form S-8 registration statements
incorporated the communications in question does not “give rise
to ERISA liability absent allegations supporting the inference
that individual Plan administrators made ‘intentional or knowing
misstatements . . . by incorporating SEC filings into the SPDs.’”
In re GlaxoSmithKline, 2012 WL 3798260, at *3 (quoting Gearren,
26

660 F.3d at 611); Slaymon, 2012 WL 6684564, at *2.

Plaintiffs do

not allege Jamesley knew or should have known about “Morgan
Stanley’s financial or operational health and future prospects”
or that the SEC filings, annual reports, and press releases did
not “provide complete and accurate information regarding Morgan
Stanley’s exposure to the subprime market.”

(Compl. ¶¶ 245,

247.) Since, as applied to Jamesley, Plaintiffs provide no basis
for their bald conclusions, Plaintiffs have not adequately stated
a claim for relief based on the alleged misstatements.
Citigroup, 662 F.3d at 144-45; Gearren, 660 F.3d at 611; Slaymon,
2012 WL 6685464 at *2.

D.

Whether Plaintiffs Adequately Pled a Duty to Avoid
Conflict of Interests Claim

Plaintiffs claim Defendants breached their duty to avoid
conflicts of interest by failing to engage timely third parties
to make independent judgments concerning Plan investments and by
placing their own interests over those of the Plans’
participants.

(Compl. ¶¶ 252-59.) These alleged conflicts of

interest existed because Defendants had significant personal
investments in Company stock and were compensated based on the
stock’s performance.

(Compl. ¶ 223, 255-56.)

27

The Second Circuit has explained, “[We] refuse[] 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.”

Citigroup, 662 F. 3d at 146 (citing In re

Polaroid ERISA Litig., 362 F. Supp. 2d 461, 477 (S.D.N.Y. 2005);
In re WorldCom, Inc. ERISA Litig., 263 F. Supp. 2d 745, 768
(S.D.N.Y. 2003)).

Accordingly, since Plaintiffs “do not allege

any specific facts suggesting that” Defendants’ investments in
Morgan Stanley “prompted [them] to act against the interests of
Plan participants,” Citigroup, 662 F. 3d at 145, Plaintiffs
failed to state a claim for relief on this count.

E.

Plaintiffs’ Remaining Claims of Secondary Liability

Plaintiffs also claim that (1) Morgan Stanley, MS & Co., the
MS & Co. Board, and Mack failed to properly monitor other
fiduciaries and (2) all Defendants are liable as co-fiduciaries.
(Compl. ¶¶ 260-79.) “[T]hese secondary claims fail if plaintiffs
are unable to survive Rule 12(b)(6) as to their primary claims.”
Gearren, 660 F.3d at 611.

Because, as explained above,

Plaintiffs’ primary claims fail, they have failed to state a
claim under their two theories of secondary liability.

28

III. CONCLUSION
For the forgoing reasons, Defendants’ Motion to Dismiss
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure
is GRANTED.

Plaintiffs may file a second amended complaint that

presents adequate allegations of their disclosure claim against
Jamesley and their theories of secondary liability.

All other

claims are dismissed with prejudice because Plaintiffs are
“unable to demonstrate that [they] would be able to amend [their]
complaint in a manner which would survive dismissal.”

Beachum v.

Awisco New York Corp., 459 Fed. App’x 58, 59 (2d Cir. 2012)
(quoting Hayden v. County of Nassau, 180 F.3d 42, 53 (2d Cir.
1999).
Any amended complaint shall be filed within 45 days of the
date of this Order. Failure to do so shall result in dismissal of
this case in its entirety without further Order of the Court.
SO ORDERED.
Dated:

New York, New York
March 28, 2013

29