Gearren v. McGraw-Hill Cos., Inc.
(Argued: September 28, 2010)
Before : WALKER, CABRANES, and STRAUB, Circuit Judges.
Plaintiffs-Appellants appeal from a decision of the District 35 Court for the Southern District of New York (Richard J. Sullivan, 36 Judge) granting defendants' motion to dismiss plaintiffs' class- 1 action complaints for failure to state a claim upon which relief 2 can be granted. Plaintiffs, participants in two retirement plans 3 offered by The McGraw-Hill Companies, Inc. ("McGraw-Hill"), 4 brought suit alleging breach of fiduciary duty under the Employee 5 Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et 6 seq. As in the companion Citigroup case, plaintiffs allege (1) 7 that defendants acted imprudently by including employer stock as 8 an investment option in the retirement plans and (2) that 9 defendants failed to provide adequate and truthful information to 10 participants regarding the status of employer stock. We hold 11 that the facts alleged by plaintiffs are, even if proven, 12 insufficient to establish that the defendants abused their 13 discretion by continuing to offer Plan participants the 14 opportunity to invest in McGraw-Hill stock. We also hold that 15 plaintiffs have not alleged facts sufficient to prove that 16 defendants made any statements, while acting in a fiduciary 17 capacity, that they knew to be false.
18 Judge STRAUB dissents for substantially the same reasons 19 expressed in his dissent and partial concurrence in In re: 20 Citigroup ERISA Litigation, No. 09-3804-cv (2d Cir. [DATE]).
Plaintiffs-Appellants Patrick L. Gearren, Jan Deperry, Mary 3 Sullivan, Harvey Sullivan, and Cynthia Davis, on behalf of 4 themselves and a putative class of persons similarly situated 5 ("Plaintiffs"), appeal from a decision of the District Court for 6 the Southern District of New York (Richard J. Sullivan, Judge) 7 granting defendants' motion to dismiss plaintiffs' complaints for 8 failure to state a claim upon which relief can be granted.*fn2
9 Plaintiffs, participants in two retirement plans offered by
10 McGraw-Hill Companies, Inc. ("McGraw-Hill"), brought suit
11 breach of fiduciary duty under the Employee Retirement
12 Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. As in
13 companion Citigroup case, plaintiffs allege (1) that
14 acted imprudently by including employer stock as an
15 option in the retirement plans and (2) that defendants failed
16 provide adequate and truthful information to participants
17 the status of employer stock. We hold that the facts alleged
18 plaintiffs are, even if proven, insufficient to establish that
19 defendants abused their discretion by continuing to offer
20 participants the opportunity to invest in McGraw-Hill stock.
21 also hold that plaintiffs have not alleged facts
prove that defendants made any statements, while acting in
2 fiduciary capacity, that they knew to be false.
4 This case was argued in tandem with In re: Citigroup ERISA 5 Litig., No. 09-3804-cv, which raised similar issues and which we 6 decide by separate opinion filed today. The facts alleged by 7 plaintiffs are substantially similar to those alleged in the 8 Citigroup case. Plaintiffs are participants in one of two defined- 9 contribution retirement plans offered by McGraw-Hill: the 401(k) 10 Savings and Profit Sharing Plan of the McGraw-Hill Companies, Inc. 11 and Its Subsidiaries (the "McGraw-Hill Plan") and the Standard and 12 Poor's 401(k) Savings and Profit Sharing Plan for Represented 13 Employees (the "S&P Plan") (collectively, the "Plans"). Both Plans 14 are eligible individual account plans ("EIAPs"), 29 U.S.C. § 15 1107(d)(3)(A). The Plans allow McGraw-Hill employees to make pre- 16 tax contributions from their salaries to individual retirement 17 accounts. The employees are then able to allocate the funds within 18 their accounts among a set of investment options. Each Plan was 19 managed by Defendant Marty Martin, who served as McGraw-Hill's Vice 20 President for Employee Benefits and as each Plan's name 21 administrator, and by the Pension Investment Committee, which was 22 responsible for selecting the investment options to be offered to 23 Plan participants. The McGraw-Hill Stock Fund (the "Stock Fund"), 24 which was "invested primarily in the Common Stock of [McGraw- 5 1 Hill]," remained an investment option in both Plans throughout the 2 Class Period (December 3, 2006, through December 5, 2008), as 3 mandated by the Plan documents.
4 Plaintiffs filed their class action complaint on June 12, 5 2009, following a drop in the price OF McGraw-Hill stock from 6 $68.02 to $24.23 during the Class Period. The defendants are 7 McGraw-Hill, Marty Martin, the Pension Investment Committee, and 8 McGraw-Hill's Board of Directors. Plaintiffs challenge the 9 defendants' management of the Plans and, in particular, the Stock 10 Fund. They allege that McGraw-Hill became an imprudent investment 11 option during the Class Period because its financial services 12 division, Standard and Poor's (S&P), knowingly provided inflated 13 ratings to financial products linked to the subprime-mortgage 14 market. The public's discovery of these ratings practices, 15 plaintiffs allege, led to the sharp drop in the price of McGraw- 16 Hill stock.
17 Count I of plaintiffs' complaint alleges that the defendants 18 breached their fiduciary duties by continuing to offer the Stock 19 Fund as an investment option in the Plans throughout the Class 20 Period, while "McGraw-Hill's true adverse financial and operating 21 condition was being concealed." Compl. ¶ 86. Count II alleges 22 that the defendants violated their duty of loyalty by making 23 misrepresentations and nondisclosures regarding McGraw-Hill's 24 financial condition and S&P's ratings practices. Compl. ¶ 93.
Counts III and IV are, in substance, derivative of Counts I and II. 2 Count III alleges that the defendants violated their duty of 3 loyalty by acting "in their own interests rather than solely in the 4 interests" of the Plans' participants. Compl. ¶ 102. Finally, 5 Count IV alleges that the Board of Director defendants failed to 6 ...