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In re Citigroup Erisa Litigation

August 31, 2009

IN RE CITIGROUP ERISA LITIGATION


The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge.

OPINION & ORDER

CONTENTS

I. BACKGROUND .......................................................................................................... 4

A. The Parties .............................................................................................................. 5

B. The Plans................................................................................................................. 6

C. This Action.............................................................................................................. 9

II. DISCUSSION ............................................................................................................. 10

A. Count I: Defendants Allegedly Offered Citigroup Stock as an Investment Option Even Though Defendants Knew that Citigroup Stock Was an Imprudent Investment............................................................................................................. 11

1. Defendants Had No Discretion to Eliminate Citigroup Stock as an Investment Option........................................................................................... 13

2. The Investment Committee Had No Discretion to Liquidate the Citigroup Common Stock Fund for the Purpose of Limiting Financial Losses.............. 14

3. The Investment and Administration Committees Had No Discretion to Use "Timing and Frequency" Limitations to Discourage Investment in Citigroup Stock ............................................................................................... 17

4. Defendants Had No Duty to Override the Plans' Terms ................................ 18

5. Citibank, as Trustee of the Citigroup Plan, Had No Discretion Regarding the Plan's Investment in Citigroup Stock ....................................................... 26

6. Plaintiffs Have Failed to Plead a Plausible Claim that Citibank and Citigroup, the Sponsor of the Citibuilder and Citigroup Plans, Respectively, Functioned as De Facto Fiduciaries................................................................ 27

7. Offering Citigroup Stock as an Investment Option Was Presumptively Prudent ............................................................................................................ 28

8. The Allegations in the Complaint Do Not Establish a Plausible Claim to Overcome the Presumption of Prudence......................................................... 31

9. Because Citigroup Stock Was a Prudent Investment, Plaintiffs Fail to Allege that Defendants Breached a Duty to Investigate ................................. 36

B. Count II: Defendants Allegedly Failed to Provide Plan Participants with "Complete and Accurate" Information About Citigroup's Financial Condition .. 37

1. Defendants Had No Affirmative Duty to Disclose Information About Citigroup's Financial Condition ..................................................................... 37

2. Neither Citigroup nor Prince Was "Acting as a Fiduciary" When Making Statements About Citigroup's Financial Condition........................................ 42

3. Plaintiffs Have Failed to Plead a Plausible Claim that the Administration Committee Knew of Citigroup's Alleged Financial Problems ....................... 46

C. Count III: Defendants Allegedly Failed to Monitor Plan Fiduciaries................... 48

D. Count IV: Defendants Allegedly Failed to Disclose Information to Co-Fiduciaries....................................................................................................... 49

E. Count V: Defendants Allegedly Performed Their Duties with Conflicts of Interest .............................................................................................................. 50

F. Count VI: Defendants Allegedly Face Co-Fiduciary Liability............................. 50

III. CONCLUSION........................................................................................................... 51 * * *

This is a putative class action brought pursuant to the Employment Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1132(a)(2)-(3). Plaintiffs are participants in two Plans covered by ERISA: the Citigroup 401(k) Plan and the Citibuilder 401(k) Plan for Puerto Rico. Plaintiffs allege that defendants were fiduciaries of the Plans and that defendants breached their fiduciary duties in several ways. Principally, plaintiffs claim that defendants breached their fiduciary duties by offering Citigroup stock as an investment option to Plan participants even though defendants knew, or should have known, that Citigroup stock was an imprudent investment (Count I). Plaintiffs also claim that defendants breached their fiduciary duties by failing to provide complete and accurate information about Citigroup's financial condition to Plan participants (Count II). Finally, plaintiffs claim that certain defendants breached their fiduciary duties by neglecting to monitor appointed fiduciaries (Count III), by failing to disclose necessary information to their co-fiduciaries (Count IV), by performing their duties while they had conflicts of interest (Count V), and by participating in the fiduciary breaches of others (Count VI).

Defendants have moved to dismiss each of plaintiffs' claims pursuant to Federal Rule of Civil Procedure 12(b)(6). That motion is granted for the following reasons:

First, plaintiffs have failed to state a claim that defendants breached their fiduciary duties by offering Citigroup stock as an investment option. The Plans unequivocally required that Citigroup stock be offered as an investment option, and thus defendants had no discretion-and could not have been "acting as fiduciaries"-with respect to the Plans' investment in Citigroup stock. Even if defendants did have discretion to eliminate Citigroup stock as an investment option, investment in Citigroup stock was presumptively prudent, and plaintiffs have failed to allege facts in support of a plausible claim to overcome that presumption.

Second, plaintiffs have failed to state a claim that defendants breached their fiduciary duties by failing to provide "complete and accurate" information to Plan participants. Defendants did not have an affirmative duty to disclose financial information about Citigroup because ERISA fiduciaries are not required to provide investment advice. To the extent that some defendants made statements to Plan participants regarding Citigroup's financial situation, those defendants were not acting as fiduciaries when making those statements or, alternatively, plaintiffs have failed to allege facts showing that defendants knew the statements were misleading.

Third, plaintiffs have failed to state a claim that Citigroup and its directors breached their fiduciary duties by failing to monitor Plan fiduciaries. Because plaintiffs' allegations against the appointed fiduciaries fail, plaintiffs cannot identify an instance of misconduct that Citigroup and its directors failed to detect.

Fourth, plaintiffs have failed to state a claim that Citigroup and its directors breached any duty to disclose information to Plan fiduciaries. The limited fiduciary responsibilities of Citigroup and its directors did not include a duty to disclose material, non-public information about Citigroup's financial situation to Plan fiduciaries.

Fifth, plaintiffs have failed to state a claim that defendants breached their fiduciary duties by performing their Plan duties while they had conflicts of interest. Plaintiffs allege only that defendants' compensation was tied to the performance of Citigroup stock and that certain defendants sold Citigroup stock during the class period. Those allegations are insufficient to set forth an actionable conflict of interest on defendants' part.

Sixth, and finally, plaintiffs have failed to state a claim based on the theory of cofiduciary liability. All of plaintiffs' other allegations fail, and thus plaintiffs have not identified a fiduciary breach on which to base a claim of co-fiduciary liability.

I. BACKGROUND

The following facts are taken from the complaint*fn1 or from documents attached to the complaint and referred to repeatedly in the complaint. See, e.g., ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (a court "may consider any written instrument attached to the complaint," as well as "statements or documents incorporated into the complaint by reference," in deciding a motion to dismiss).

A. The Parties

Plaintiffs are "current or former employees of Citigroup" and participants in the Citigroup 401(k) Plan and Citibuilder 401(k) Plan for Puerto Rico. (Compl. ¶¶ 2, 16-21.) Plaintiffs purport to represent all "persons who were participants in or beneficiaries of the Plans at any time between January 1, 2007 and January 15, 2008 . . . and whose Plan accounts included investments in Citigroup." (Id. ¶ 289.) At the end of 2006, the Citigroup Plan had 151,201 participants and the Citibuilder Plan had 2,225 participants. (Id. ¶ 290.)

Defendants are various individuals and entities associated with the Plans. The "Administration Committee" is a group of eight individuals who are charged with administrating the Plans, construing the Plans' terms, deciding participants' eligibility for benefits, and communicating with participants. (Id. ¶¶ 32, 62-68.) The Administration Committee manages both the Citigroup Plan and the Citibuilder Plan. (Id. ¶ 45.)

The "Investment Committee" is a group of ten individuals who are responsible for selecting the investment options offered to Plan participants. (Id. ¶¶ 33, 69-70.) Like the Administration Committee, the Investment Committee carries out its duties for both the Citigroup Plan and the Citibuilder Plan. (Id. ¶ 45.)

Citibank, N.A., "a subsidiary of Citigroup," is Citigroup's "consumer and corporate banking arm." (Id. ¶ 25.) Citibank is the "sponsor"-that is, the creator-of the Citibuilder Plan. (Id. ¶ 26.) Citibank also serves as the appointed "trustee" of the Citigroup Plan. (Id. ¶ 53.)

Citigroup, Inc., was "the world's largest bank by revenue as of 2008," employing "approximately 358,000 staff around the world" and holding "over 200 million customer accounts in more than 100 countries." (Id. ¶ 23.) Citigroup is the sponsor of the Citigroup Plan. (Id. ¶ 24.) It has authority under the Plans to appoint the trustee of the Citigroup Plan, to appoint the members of Administration and Investment Committees, and to "direct the trustee . . . to receive company stock in lieu of cash dividends" in conjunction with a dividend reinvestment plan. (Id. ¶¶ 46-48.) Plaintiffs also claim that Citigroup has "exercised de facto authority" over the members of the Administration and Investment Committees because Citigroup has had "authority and discretion to hire and terminate" the Committees' members. (Id. ¶¶ 49-50.)

Charles O. Prince and Robert E. Rubin were members of Citigroup's board of directors during the class period. Prince served as Citigroup's chief executive officer from 2003 to 2007 and as chairman of the board from 2006 to 2007. (Id. ¶ 28.) Rubin served briefly as chairman of the board in 2007. (Id. ¶ 29.) Plaintiffs allege that the Prince and Rubin were Plan fiduciaries insofar as Prince and Rubin, as members of Citigroup's board, had authority to appoint Plan fiduciaries. (Id. ¶¶ 58-59.) Plaintiffs also allege that Prince was a fiduciary because he "made numerous statements . . . to . . . Plan participants . . . regarding the Company . . . and the future prospects of the Company." (Id. ¶ 60.)

B. The Plans

The Citigroup and Citibuilder Plans each qualified as an "employee pension benefit plan" as defined by 29 U.S.C. § 1002(2)(A). (Id. ¶ 78.) In addition, each Plan was an "eligible individual account plan" ("EIAP") as defined by 29 U.S.C. § 1107(d)(3), and each Plan qualified for preferential tax treatment pursuant to I.R.C. § 401(k). (Id.)

Plan participants could contribute to the Plans "on a pre-tax basis through payroll deductions," and Citigroup made "matching contributions" in certain circumstances. (Id. ¶¶ 81-82.) Participants could invest their contributions in a number of "investment funds." The Citigroup Plan Agreement provided:

Investment Funds. In order to allow each Participant to determine the manner in which his Accounts will be invested, the Trustee shall maintain, within the Trust, the Citigroup Common Stock Fund and other Investment Funds. Each Participant's Accounts shall be invested in such Investment Funds in the proportions directed by the Participant in accordance with the rules and procedures established by the [Administration] Committee, including but not limited to any timing and frequency limitations approved by the Investment Committee. Pending investment or for other purposes of the Plan, including the payment of benefits hereunder, the Investment Funds may hold cash and short-term investments in accordance with guidelines prescribed by the Investment Committee. Any one or more of such Investment Funds may be eliminated, or new Investment Funds may be made available, at any time by the Investment Committee without consent by any Participant or Employer; provided, the Citigroup Common Stock Fund shall be permanently maintained as an Investment Fund under the Plan. Different Investment Funds may be made available to different groups of Participants, determined on an Employer-by-Employer basis, in the discretion of the Investment Committee. (Citigroup 401(k) Plan ("Citigroup Plan") § 7.01, Compl. Ex. E) The Citibuilder Plan Agreement contained similar-though not identical-language. (See Citibuilder 401(k) Plan for Puerto Rico ("Citibuilder Plan") § 7.01, Compl. Ex. D)

The Plans contained special provisions for the investment fund called the "Citigroup Common Stock Fund." The Plans defined the Fund as follows:

"Citigroup Common Stock Fund" means an Investment Fund comprised of shares of Citigroup Common Stock. Solely in order to permit the orderly purchase of Citigroup Common Stock in a volume that does not disrupt the stock market and in order to pay benefits hereunder, the Citigroup Common Stock Fund may hold cash and short-term instruments in addition to shares of Citigroup Common Stock, in accordance with guidelines prescribed by the Investment Committee.

(Citigroup Plan § 2.01; Citibuilder Plan § 2.01.) Further, in explaining the Investment Committee's responsibilities, the Plans provided:

The duties of the Investment Committee shall extend to the promulgation of any guidelines with respect to the amount of cash or any short-term investments that may be held by the Citigroup Common Stock Fund. In addition, notwithstanding the fact that provisions in the Plan mandate the creation and continuation of the Citigroup Common Stock Fund and provide that certain contributions to the Citigroup Common Stock Fund must remain invested in the Common Stock Fund for certain periods of time, if it is determined that there exists a duty on the part of any person (appointed under this Plan or otherwise) to determine whether such provisions should be modified, such duty shall be that of the Investment Committee. (Citigroup Plan § 7.09(e); Citibuilder Plan § 7.09(e).) Finally, the Citigroup Plan designated the Citigroup Common Stock Fund as an "employee stock ownership plan" ("ESOP") under ERISA:

ESOP Designation. The Plan shall consist of a component that is designated as an ESOP within the meaning of Section 4975(e)(7) of the Code, and a component that is not designated as an ESOP. The component designated as an ESOP shall consist of any amount invested in the Citigroup Common Stock Fund under the Plan. The component that is not designated as an ESOP shall consist of the remaining portion of the Plan.

Designed to Invest in Employer Securities. The component designated as an ESOP under the Plan is designed to invest primarily in Citigroup Common Stock, a qualifying employer security within the meaning of Section 409(l) of the Code. (Citigroup Plan §§ 15.01-.02.) While the Citibuilder Plan was an EIAP, the Citibuilder Plan did not designate the Citigroup Common Stock Fund as an ESOP.

C. This Action

According to plaintiffs, Citigroup investing extensively in subprime mortgages and securities related to subprime mortgages in the mid-2000s. (Compl. ¶ 7.)*fn2 Plaintiffs claim that, following the collapse of the subprime mortgage market (id. ¶¶ 114-129), Citigroup lost tens of billions of dollars in its subprime-mortgage-related investments (id. ¶ 134). As a result, the price of Citigroup stock allegedly fell fifty-two percent during the class period, from a high of $55.70 per share on January 1, 2007 to a low of $26.94 per share on January 15, 2008. (Id. ¶ 172.)

Plaintiffs claim that Citigroup knew of "the heavy losses which the Company would inevitably sustain from subprime loans" (id. ¶ 133) and used various methods to mislead investors regarding Citigroup's "subprime loan loss exposure" (id. ¶¶ 7, 136-183). Those methods, plaintiffs claim, included the use of "structured investment vehicles," which were allegedly designed to keep Citigroup's subprime mortgage exposure "off the Company's balance sheet." (Id. ¶¶ 176-182.)

In 2007, the Citigroup Plan held approximately $2.14 billion worth of Citigroup stock-one fifth of the Plan's total investments. (Compl. ¶ 88.) During the same period, the Citibuilder Plan held approximately $4.3 million of Citigroup stock-about one third of the Plan's total investments. (Id. ¶ 103.) Plaintiffs claim that, as a result of the Plans' investment in Citigroup stock, the Plans suffered substantial losses when the price of Citigroup stock fell during the class period. (Id. ¶ 281.)

Plaintiffs bring this action against defendants on the ground that defendants knew, or should have known, that Citigroup stock was an imprudent investment during the class period. Plaintiffs claim that ERISA required defendants to take steps to eliminate Citigroup stock as an investment option for Plan participants. Plaintiffs also claim that defendants should have informed Plan participants of Citigroup's financial condition and that defendants should have taken other steps-including monitoring Plan fiduciaries and disclosing necessary information to Plan fiduciaries-in an effort to limit the Plans' ...


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