Pension Benefit Guar. Corp. v. Morgan Stanley Inv. Mgmt. Inc.

712 F.3d 705

PENSION BENEFIT GUARANTY CORP., on behalf of SAINT VINCENT CATHOLIC MEDICAL CENTER S RETIREMENT PLAN, Saint Vincent Catholic Medical Centers, Queensbrook Insurance Ltd., Plaintiffs–Appellants,

v.MORGAN STANLEY INVESTMENT MANAGEMENT INC., Defendant–Appellee.

Docket No. 10–4497–cv.

United States Court of Appeals, Second Circuit.

Argued: Jan. 24, 2012.

Decided: April 2, 2013.

Eric B. Fisher, Dickstein Shapiro LLP, New York, NY; (Israel Goldowitz, Chief Counsel; Charles L. Finke, Deputy Chief Counsel; Joel W. Ruderman, Assistant Chief Counsel; Kelly R. Cusick, Attorney; Scott Wagner, Attorney, on the brief), Office of Chief Counsel, Pension Benefit Guaranty Corporation, Washington, DC; (Judith Starr, General Counsel; Kenneth Cooper, Assistant General Counsel; Greg Matisoff, Attorney, on the brief), Office of General Counsel, Pension Benefit Guaranty Corporation, Washington, DC, for Plaintiffs–Appellants.

Richard A. Rosen (Andrew W. Amend, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendant–Appellee.

Before: CABRANES, STRAUB, and LIVINGSTON, Circuit Judges.

Judge STRAUB dissents in part and concurs in part in a separate opinion.

JOSÉ A. CABRANES, Circuit Judge:

In this appeal we consider the degree of factual detail needed in a complaint in order to present nonconclusory and plausible allegations that a pension plan administrator purchased and continued to hold certain mortgage-backed securities in violation of its fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq.

In an effort “to ensure that employees will not be left emptyhanded once employers have guaranteed them certain benefits,” ERISA imposes “a duty of care with respect to the management of existing trust funds, along with liability for breach of that duty, upon plan fiduciaries” who administer benefit-plan assets. Lockheed Corp. v. Spink, 517 U.S. 882, 887, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996). In particular, ERISA requires fiduciaries to use “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.” 29 U.S.C. § 1104(a)(1)(B).

Like many recent cases, this suit stems from the real-estate bubble and subsequent financial crisis that unfolded over the past decade. Plaintiffs-appellants Saint Vincent Catholic Medical Centers, Pension Benefit Guaranty Corp., and Queensbrook Insurance Ltd. (jointly, “Saint Vincent's”) allege that defendant-appellee Morgan Stanley Investment Management Inc. (“Morgan Stanley”)—the fiduciary manager of the fixed-income portfolio of the Saint Vincent Catholic Medical Centers Retirement Plan (“the Plan”)—violated its fiduciary duties under ERISA. In particular, Saint Vincent's alleges that Morgan Stanley disproportionately invested the portfolio's assets in mortgage-backed securities, including the purportedly riskier subcategory of “nonagency” mortgage-backed securities, despite warning signs that these investments were unsound.

The United States District Court for the Southern District of New York (P. Kevin Castel, Judge ) dismissed the suit under Rule 12(b)(6) of the Federal Rules of Civil Procedure, concluding that the Amended Complaint fails to allege facts supporting a plausible inference that Morgan Stanley knew, or should have known, that securities held in the Plan's portfolio were imprudent investments. In particular, the District Court explained that the Amended Complaint relies too heavily on facts known only in hindsight, and that its general allegations about warning signs relating to indistinct classes of securities do not give rise to a plausible inference that Morgan Stanley violated its fiduciary duty.

We agree. Although Saint Vincent's, as the fiduciary administrator of an ERISA-governed plan, was in a position to plead its claims with greater factual detail than is typically accessible to plaintiffs prior to discovery, and although it received two opportunities to amend its complaint, the Amended Complaint fails to plead sufficient, nonconclusory factual allegations to show that Morgan Stanley failed to meet its fiduciary responsibilities under ERISA. Accordingly, we affirm the District Court's judgment dismissing the Amended Complaint.

BACKGROUND

When the Amended Complaint was filed on February 17, 2010, ¹ Saint Vincent Catholic Medical Centers ² was a medical-care provider that operated St. Vincent's Hospital Manhattan and St. Vincent's Westchester, as well as other healthcare facilities in Brooklyn and Staten Island. As noted, Saint Vincent's was the sponsor and fiduciary administrator of the Saint Vincent Catholic Medical Centers Retirement Plan (the “Plan”), a defined-benefit pension plan for eligible retirees of Saint Vincent's.

Saint Vincent's hired Morgan Stanley to manage the Plan's fixed-income portfolio (“the Portfolio”), which comprised about 35% of the Plan's assets. ³ As manager of the Portfolio, Morgan Stanley was subject to the fiduciary duties imposed by ERISA. See29 U.S.C. § 1002(21).⁴

Saint Vincent's also provided Morgan Stanley with written investment guidelines (the “Guidelines”), specifying that the “primary investment objective for the Pension Plan shall be preservation of principal with emphasis on long-term growth to meet the future retirement liability of the Plan.” Am. Compl. ¶ 20. The Guidelines designated the Salomon Brothers Broad Bond Index (now called the Citigroup Broad Investment Grade Bond Index, or the “Citigroup BIG”) as “the applicable benchmark against which [Morgan Stanley's] performance as investment manager would be measured.” Id. ¶ 21. The Portfolio was expected to “track and modestly exceed the performance of the Citigroup BIG.” Id. ¶ 28. According to the Amended Complaint, “the selection of the Citigroup BIG index as a benchmark signaled to [Morgan Stanley] that, as an ERISA fiduciary, it was required to execute a low-risk, conservative investment strategy.” Id. ¶ 21.

In Count One, Saint Vincent's alleges that Morgan Stanley breached its fiduciary duties under ERISA by “deviat[ing] from the specified strategy and direct[ing] increasingly large amounts of the Plan's assets into high-risk investments including non-agency mortgage securities, thereby exposing the Plan to excessive risk.” Id. ¶ 22. The Amended Complaint explains in a footnote that “[n]on-agency mortgage securities are securities tied to mortgages that are not guaranteed by Fannie Mae or Freddie Mac (the ‘agencies') because the mortgages fail to meet the agencies' underwriting standards and criteria.” Id. ¶ 22 n. 2. According to the Amended Complaint, Morgan Stanley's investment decisions intentionally exceeded both the risk inherent in the Citigroup BIG and the “acceptable risk associated with the investment of a fixed-income portfolio.” Id. ¶ 31. In the same vein, Morgan Stanley allegedly “failed to properly diversify the fixed-income portfolio, achieving a disproportionate exposure to the risk of the mortgage securities markets.” Id. ¶ 32.

More particularly, the complaint alleges that during the fourth quarter of 2007, 12.6% of the Portfolio's value consisted of nonagency mortgage-backed securities, and during each quarter in 2008, the concentration of nonagency mortgage-backed securities exceeded 9%. By contrast, the Citigroup BIG apparently had “no exposure to non-agency mortgage securities.” Id. ¶ 28. Similarly, the Amended Complaint alleges that the Portfolio's overall exposure to mortgage-backed securities (that is, both agency and nonagency mortgage-backed securities) “generally exceeded that of the Citigroup BIG by approximately 10%.” ⁵Id. ¶ 24. According to the Amended Complaint, these investments were imprudent and exposed the Plan to a disproportionate risk of a decline in the mortgage-backed securities market.

Although it does not allege any facts regarding the process by which Morgan Stanley selected these securities, the Amended Complaint states that Morgan Stanley “knew or should have known that this overexposure to high-risk, mortgage securities was imprudent,” id. ¶ 34, because “[t]hroughout 2007 and 2008, there were warning signs that these securities were not appropriate for the fixed-income portfolio,” id. ¶ 35. Specifically, the Amended Complaint asserts that Morgan Stanley invested in “subprime mortgage securities issued by IndyMac, Bear Stearns, Washington Mutual and Countrywide, among others,” id. ¶ 36, and that these issuers suffered large, publicly disclosed losses in 2007 and 2008 due to the subprime mortgage crisis. It further alleges that analysts predicted in 2007 that Morgan Stanley's parent company ⁶ would “write down $6 billion” on the value of “similar securities,” id. ¶ 37, and that “[i]n December 2007, Standard & Poor's reduced its ratings on about $7 billion of Alt–A mortgage securities, [which are] loans considered a step above subprime,” id. ¶ 42.

In terms of damages, the Amended Complaint alleges that the Portfolio suffered significant losses in value as a result of Morgan Stanley's failure to meet its fiduciary duties. Specifically, the Amended Complaint alleges that the Portfolio's purported overconcentration in nonagency mortgage-backed securities caused it to underperform relative to the Citigroup BIG. During 2008, for example, the Portfolio lost 12% of its value, whereas the Citigroup BIG gained 7%. Id. ¶ 26. Moreover, “during the relevant period of time, damages to the Plan's assets exceeded $25 million in the fixed-income portfolio managed by [Morgan Stanley].” Id. ¶ 27.

The Amended Complaint also includes two counts relating to Morgan Stanley's alleged mismanagement of a separate insurance fund. When Saint Vincent's facilities were still in operation, plaintiff-appellant Queensbrook Insurance Limited (“QIL”), then a wholly-owned subsidiary of Saint...