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STRAUS v. PRUDENTIAL EMPLOYEE SAVINGS PLAN

March 24, 2003

HARVEY STRAUS, STANLEY BRODKA, CHARLES J. SANTILLI, LEONARD GOLDBERG, ROBERT W. CLARK, DENNIS VELASCO, DAVE KIEVIT, ANTHONY NAROISO, GERALD S. RASCOLI, AND SEYMOUR GOLDSTEIN, PLAINTIFFS, AGAINST PRUDENTIAL EMPLOYEE SAVINGS PLAN, PRUDENTIAL EMPLOYEE SAVINGS PLAN ADMINISTRATIVE COMMITTEE, AND PRUDENTIAL INSURANCE COMPANY OF AMERICA, DEFENDANTS.


The opinion of the court was delivered by: Raymond J. Dearie, United States District Judge

MEMORANDUM & ORDER

Plaintiffs, all of whom are participants in the Prudential Employee Savings Plan ("PESP" or the "Plan"), bring this action under Section 502 of the Employer Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132. Plaintiffs allege that defendants discriminated against them in violation of Section 510 of ERISA, 29 U.S.C. § 1140, by adopting and retroactively applying arbitrary limitations on their fight under the Plan to transfer funds from one investment option to another in unlimited amounts. Plaintiffs also claim that, in adopting these limitations, defendants violated ERISA by failing to follow the Plan modification procedures which govern Plan amendments. Finally, plaintiffs raise an estoppel claim based on their assertion that they reasonably relied on the language of the Plan, which said nothing about limiting trading amounts. Plaintiffs seek a preliminary injunction preventing defendants from enforcing the limitations and granting plaintiffs permission to conduct once daily fund transfers without any restrictions as to the amount of the transfer. Alternatively, plaintiffs seek expedited discovery. Defendants cross-move to dismiss the complaint on the grounds that plaintiffs have not stated a claim. For the reasons explained below, the Court denies plaintiffs' motion for a preliminary injunction and dismisses plaintiffs' claims under ERISA and the promissory estoppel theory.

BACKGROUND

A. The Prudential Employee Savings Plan

Plaintiffs are all current or former employees of defendant Prudential Insurance Company ("Prudential1). Prudential offers all of its employees the opportunity to participate in PESP, its employee benefit plan, which allows employees to set aside and invest income on a pre-tax and after tax basis. The Plan is flexible and provides several investment options. Under the Plan, each employee may invest in eleven different funds, including small cap mutual funds, international funds and money market funds. See Prudential Employee Savings Plan, Summary Plan Description, App. in Supp. at 31-32 ("SPD at ___"). The Plan also gives employees the fight to reallocate their contributions to a different fund and to transfer money into and out of these funds, but indicates that "[t]here may be restrictions on some transactions, as described throughout this PESP SPD." SPD at 18. The SPD sets out these rules as follows:

You can make or change your investment decisions for your current account balance or for your future contributions any business day in the following ways:
• Make or Change Allocation: You can make or change the investment allocation of future contributions to your account in multiples of 1%. You can make allocation changes for each account any business day. Changes will take effect as soon as administratively practicable after you request the change.
• Transfer Funds: You can change the investment of the money already in your account in multiples of 1%. You can make those transfers any business day, but they must be made by 4 p.m. Eastern time to be effective the same day. However, in certain situations (for example, excessive trading, etc.), there may be limitations regarding transfers. Please refer to the fund prospectus(es) and/or fact sheets for more information on any trading restrictions that may apply to the investment option(s) you choose, and to the online Terms and Conditions on the PESP Web site for more details.
Id. at 35. The SPD provides that employee investors may conduct such transactions via the Prudential intranet or the Internet, through an interactive voice response system, by speaking to a customer sales representative, or by written request through the mail. Id. at 54-55.

The fund prospectuses to which the above-quoted language refers, warn that frequent trading of shares in response to short-term market fluctuations, a practice known as "market timing, "may disrupt the management of the fund. See Decl. of Jonathan D. Sham ¶ 2 ("Sham Decl.___"). For example, the prospectuses explain that fund managers will often be forced to sell securities at inopportune moments in order to have enough cash available to redeem the shares of those engaging in market timing trades, thus damaging the overall health of the fund. See Prudential International Value Fund Prospectus, Shain Decl., Ex. 1. For this and other reasons, the prospectuses advise investors that fund managers reserve the right to refuse purchase orders and fund exchanges if the fund manager believes the transaction will have a disruptive effect on the portfolio. See id. In addition to the prospectuses, the Plan itself states that the Administrative Committee "may decline to implement investment instructions where it deems appropriate. . . ." Prudential Employee Savings Plan December 2001 Restatement § 15.03, App. in Supp. at 174 ("Plan Document ___"). The Plan Document, which contains this provision, is the full text of the Plan. The SPD, which is a summary of the main features of the Plan given to employee investors to provide them with key information about the Plan in a more easily understandable form see SPD at 13, does not contain this provision.

The SPD and the Plan Document also set out rules for amending the Plan. The SPD states:

The Company reserves the right — subject to applicable law — to amend, modify, suspend or terminate any part or all of the Plan at any time with or without notice or consent. Plan amendments, modifications, suspensions or termination may be made for any reason and at any time. Such amendments may be retroactive if necessary to meet statutory requirements or for any other reason. . . . .
The PESP Plan Document describes the procedures for amending or terminating the Plan and who may make amendments.
SPD at 58. The Plan Document also states that the Plan may be changed at any time, and gives the authority to modify the plan to the Prudential Board of Directors, the Compensation Committee of the Board of Directors, and the Prudential Executive Vice President of Human Resources. See Plan Document § 17.01. In a separate section, the Plan Document grants the PESP Administrative Committee (the "Administrative Committee"), as Plan Administrator, the authority to establish "rules and procedures" to govern the investment elections and directions of the Plan participants. See id. § 15.03.

B. Plaintiffs' Investment History

As Plan participants, plaintiffs educated themselves about the various investment options and developed strategies for maximizing the return on their investment. Plaintiffs acknowledge that they paid close attention to world events and market shifts in managing their investments. Indeed, plaintiffs explain that understanding the economic effects of the events of September 11, 2001, the tensions in the Middle East, and the Enron and Worldcom bankruptcies, to name a few, was critical to their strategy for protecting their retirement funds. In reaction to these events, many of the plaintiffs regularly transferred large amounts of money — sometimes in the hundreds of thousands of dollars — into and out of different Plan investment vehicles several times per month. Plaintiffs maintain that such transfers were permitted under the Plan, and that they had been investing in this manner very successfully for several years before Prudential began imposing restrictions on them. See Certification of Stanley Brodka ¶¶ 19-23 ("Brodka Certif. ___").

Beginning in September 2001, plaintiffs began receiving letters from Prudential warning them that they had conducted at least one trade that "violate[d] Prudential Retirement Services policies on frequent trading." Brodka Certif. ¶ 25, Ex. A. The letters stated that the policies were explained in the fund prospectuses. Plaintiffs maintain that they examined the prospectuses closely, but found no specific "frequent trading" policy limitations. Id. ¶ 25. Confused by the letters, several of the plaintiffs called PESP customer service representatives to inquire about the restrictions. According to plaintiff Brodka, the representative to whom he spoke informed him that his fund transfers were permitted under the Plan, and that he could continue to trade as he had in the past, but that Prudential was in the process of formulating a new policy. The last of these letters was sent to plaintiff Brodka on November 30, 2001. Hearing nothing further from Prudential, plaintiffs continued to trade as before.

Four months later, the Administrative Committee sent letters, dated March 15, 2002, to all plaintiffs, each of which stated that the particular plaintiff had "performed trades . . . that violate [PESP] policies on frequent trading in large amounts," and that, as a result, the Administrative Committee had suspended the plaintiffs ability to conduct trades electronically or by telephone for a period of thirty days. Letter of March 15, 2002, App. in Supp. at 72 ("March 15 Letter"). The plaintiffs retained the ability to submit requests for fund exchanges and transfers by letter, and that such requests would receive "expedited review for compliance with the policy." Id. After reminding plaintiffs that the Administrative Committee retained the authority to establish rules and procedures governing investment directions, the March 15 Letter advised plaintiffs that the Committee had determined that frequent, large-scale, "market timing" trading of the sort which plaintiffs conducted could have a detrimental impact on the Plan as a whole. The March 15 Letter explained that because PESP combines the trades of all its participants before processing investment directions, trading in large amounts by a few participants could cause the aggregate PESP trade to become so large that mutual fund managers might refuse to process the request, as described in the fund prospectuses. Thus, the March 15 Letter concluded that, in order to prevent fund managers from blocking the trades of all PESP participants for the impropriety of a very few, the Administrative Committee was restricting to written investment requests for a period of thirty days "those [participants] identified as repeat frequent traders in large amounts who have directed individual trades of more than $75,000 into and out of the same investment option multiple times in the past 30 days and who have received more than one warning letter from [Prudential]." Id.

In April, the Administrative Committee published a formal policy statement which tracked the language of the March 15 Letter, and which plaintiffs received on April 10. See "Administrative Committee Policy on Market Timing and Frequent Trading in Large Amounts Under the Prudential Employee Savings Plan," App. in Supp. at 74-75 ("April Policy"). The April Policy listed three criteria that had to be satisfied for the trades to be considered "Frequent Trades" prohibited by the "Market Timing Policy."

1. Specific Time Period: Trades occurring within a 30-day period.
2. Roundtrip: A series of at least two trades that include one or more transfers into an investment option AND one or more transfers out of the same investment option in either order (i.e., in/out, or outhn), regardless of any multiple transfers from or to other different investment options during the Roundtrip, and
3. Trade Amount: A trade of $75,000 or more.

Id. According to the April Policy, one violation would result in a warning letter. After two violations, the investor would receive a "Suspension Notification Letter" signifying the beginning of a thirty-day suspension period in which the ...


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