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Leber v. Citigroup

March 17, 2010


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


Plaintiffs, two Citigroup employees, bring this putative class action pursuant to the Employee Retirement Income Security Act ("ERISA" or "the Act"), 29 U.S.C. § 1001 et seq., against their employer, Citigroup, as well as the Administrative Committee and the Investment Committee of Citigroup's 401(k) retirement plan and the individual members of those committees (collectively, "committee defendants"). The amended complaint alleges the committee defendants, all of whom were fiduciaries of Citigroup's 401(k) retirement plan ("the Plan"), breached duties owed to the plaintiffs by failing to act in the best interests of the Plan and by putting the interests of Citigroup ahead of those of the Plan in at least two ways: first, the committee defendants selected Citigroup or Citigroup-affiliated mutual funds as investments for the Plan that allegedly performed less well and charged higher advisory fees than comparable funds offered by other companies ("mutual fund" claims); second, the committee defendants selected a Citigroup-affiliated service provider, CitiStreet, to provide management services for the Plan ("management services" claims). Plaintiffs allege that the above conduct violated both section 404 of the Act, which imposes broad duties of loyalty and care on plan fiduciaries and section 406, which prohibits specific conduct or transactions involving plan assets. 29 U.S.C. §§ 1104, 1106. Finally, plaintiffs allege that Citigroup itself, while not a fiduciary, is liable for knowingly participating in each of the alleged breaches.

Defendants have moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6), contending, first, that the action is barred by ERISA's statute of limitations, and alternatively, that if not time barred, plaintiffs' complaint fails to state a claim upon which relief can be granted. In particular, defendants argue that both the mutual fund and management services claims cover conduct specifically exempted from section 406's prohibitions by statutory or administrative provisions; that plaintiffs' remaining allegations against the committee defendants, including claims brought pursuant to section 404, fail to state a plausible claim to relief; and finally, that plaintiffs' claims against Citigroup similarly fail to allege with specificity knowledge of wrongdoing by it.

Plaintiffs, in response, contend the amended complaint satisfies the pleading requirements as construed in Bell Atl. V. Twombly, 550 U.S. 544 (2007) and that defendants' specific objections-including the applicability of the statute of limitations or statutory or administrative exemptions to ERISA-are affirmative defenses which turn on information not contained in the complaint and are, accordingly, unsuitable for resolution on this Rule 12(b)(6) motion.

Because the Court finds that plaintiffs validly state a plausible claim to relief pursuant to section 404 insofar as they allege the committee defendants acted imprudently by steering Plan assets to Citigroup affiliated mutual funds with higher investment advisory fees than those of competing funds, the motion to dismiss the complaint is denied with regard to those claims. While the ultimate survival of those claims will turn in part on resolution of the timeliness of the action, the Court agrees with plaintiffs that the issue cannot be resolved upon this Rule 12(b)(6) motion. However, because none of plaintiffs' other allegations-including plaintiffs' remaining section 404 claims, all of plaintiffs' section 406 claims, and plaintiffs' claims against non-fiduciary Citigroup-states a plausible claim to relief under any section of ERISA, defendants' motion to dismiss the complaint in those respects is granted.


Unless otherwise noted, all of the following facts are taken from the amended complaint ("complaint") and are presumed to be true:

A. The Parties

Citigroup, a Delaware corporation, sponsors a 401(k) retirement plan for its employees. (Am. Compl. ¶ 16.) The Plan, which is available to all eligible Citigroup employees, is an "employee benefit plan" within the meaning of ERISA and, accordingly, is subject to the restrictions and regulations imposed on covered plans by the Act. (Id. ¶¶ 8, 21), 29 U.S.C. § § 1002(3), 1003. Citigroup, as the Plan's sponsor, is a "party in interest" to the Plan within the meaning of the Act. (Am. Compl. ¶ 16); 29 U.S.C. § 1002(14).

The Plan is managed by two committees, an Administrative Committee responsible for the overall operation and administration of the plan, and an Investment Committee responsible for evaluating and selecting the investment options from which plan participants are able to choose. (Id. ¶¶ 17-18, 21.) Pursuant to ERISA, members of both committees are fiduciaries of the Plan. (Id. ¶¶ 33-37), 29 U.S.C. § 1002(21)(A).

The complaint does not name any of the committee defendants nor does it specify their roles at or relationships with Citigroup. Instead, it states simply that the "Committee Defendants are officers, employees, or agents of Citigroup" and that the "Administrative Committee and the Investment Committee are internal committees created and staffed by Citigroup." (Id. ¶¶ 1, 39.)

Plaintiffs Marya J. Leber and Sara L. Kennedy are Citigroup employees and plan participants. (Id. ¶¶ 12, 14.) During the class period-defined by the complaint only as "2001 to present" (the complaint was filed in October 2007)-plaintiffs each invested in at least one of the mutual funds alleged to have been chosen because of its affiliation with Citigroup and, in Kennedy's case, despite the affiliated fund's allegedly excessive management fees. (Id. ¶¶ 12, 14, 29, 51.)*fn1 Both plaintiffs contend they had no knowledge of any of the relevant facts underlying this litigation until October 2007.*fn2

B. ERISA's Statutory Requirements and Defendants' Alleged Violations

ERISA imposes a series of requirements on all plan fiduciaries, defined broadly by the Act as any person who "exercises discretionary authority or discretionary control respecting management of" a plan. 29 U.S.C. § 1002(21)(A). In particular, those meeting that definition are subject to broad fiduciary duties and are restricted from engaging in specified prohibited transactions. Section 404 of the Act imposes on plan fiduciaries a responsibility to "discharge his duties . . . solely in the interest of" plan participants, "for the exclusive purpose of providing benefits to the participants," and "with the care, skill, prudence, and diligence under the circumstances" of a "prudent man" acting in like capacity. 29 U.S.C. § 1104(a)(1)(A)-(B).

Section 406 supplements the requirements of section 404 by specifically prohibiting plan fiduciaries from engaging in certain transactions. Section 406(a) prohibits certain transactions between the plan and a party in interest such as the "furnishing of goods [or] services . . . between the plan and a party in interest," while section 406(b) prohibits a fiduciary from engaging in certain forms of self-dealing, including acting "on behalf of a party . . . whose interests are adverse to the interests of the plan" in any transaction. 29 U.S.C. § 1106(a)-(b).

Despite those broad general duties to put the interests of the plan and its participants first and to avoid transactions between the plan and a party in interest, plaintiffs contend the committee defendants-who are fiduciaries-"put Citigroup's interests ahead of the 401(k) Plan's interests" in violation of section 404 (Am. Compl. ¶ 2) and engaged in transactions prohibited by section 406 in two ways: first, the committee defendants caused the Plan to invest assets in affiliated mutual funds rather than comparable independent or unaffiliated funds, and second, the committee defendants selected an affiliated service provider, CitiStreet, to manage the fund.

1. The "Mutual Fund" Allegations

In a defined contribution plan such as the one offered by Citigroup, a plan's administrators are responsible for selecting a series of investment options to make available to plan participants who are then free to choose among the selected options when investing their own assets. (Id. ¶ 22.) In selecting those investment options, plan administrators-as fiduciaries-are bound to adhere to the general fiduciary duties of Section 404 as well as being constrained by the more specific prohibitions contained in Section 406.

In this case, the responsibility to choose investment options for the Plan fell on the committee defendants. (Id. ¶ 27.) Plaintiffs contend that, over the course of the class period, the committee defendants routinely selected funds run by Citigroup or one of its affiliated entities ("affiliated funds") in lieu of funds run by outside groups ("unaffiliated funds"). (Id. ¶¶ 40-42.) They did so, plaintiffs allege, because directing plan assets to affiliated funds generated income for Citigroup in the form of investment advisory fees, whereas investments in unaffiliated funds did not. (Id. ¶ 4.)

Further evincing the committee defendants' preference for affiliated funds, plaintiffs allege that on several occasions during the course of the class period, the committee defendants shifted plan assets from unaffiliated funds to affiliated ones, doing so, in at least one instance, only after the affiliated fund was sold to an outside company. (Id. ¶¶ 43, 45-46.) As a result of the committee defendants' investment choices, during the course of the class period, nearly $2.5 billion in plan assets were invested annually in affiliated funds. (Id. ¶ 30.)

Plaintiffs contend that the committee defendants' preference for affiliated funds caused injury to the Plan and its participants in two ways: first, the affiliated funds charged higher investment advisory fees than comparable unaffiliated funds, and second, during the course of the class period, those comparable, unaffiliated funds outperformed the affiliated ones selected by the committee defendants. (Id. ¶ 4.)

Specifically, with respect to the investment advisory fees, plaintiffs contend that during the class period, the committee defendants caused the Plan to invest in the Smith Barney U.S. Government Securities fund, an affiliated fund which they aver charged fees 111 percent higher than those associated with a "comparable" unaffiliated Vanguard fund. (Id. ¶ 51.) Similarly, plaintiffs allege the committee defendants caused the Plan to invest in the Salomon Brothers Investment Fund and the Salomon Brothers High Yield Bond Fund which charged fees 62 percent and 227 percent higher fees, respectively, than those associated with comparable Vanguard Funds. (Id.) In total, plaintiffs point to at least eight specific affiliated funds selected by the committee defendants for Plan investment, all of which charged fees at least 24 percent higher than those associated with comparable unaffiliated Vanguard funds. (Id.)

With respect to the performance of the affiliated funds, plaintiffs assert generally that the committee defendants overlooked many "better-performing" funds, and that the Plan's investments in affiliated funds "substantially under-performed" in comparison to "similar products available from unaffiliated investment managers." (Id. ¶ ¶ 4, 32.) While plaintiffs provide no specific factual allegations in support of that claim, they do make the following indirect allegations: first, during the class period, the Plan was "by far" the largest investor in the relevant affiliated funds and "exceeded 50%" of the total investments in some of those funds. (Id. ¶ 50.) Accordingly, plaintiffs conclude that "the large pension plan market did not favor [the] Affiliated Funds," and by implication, therefore, it was a poor investment choice for the Plan. (Id.) Second, as noted, plaintiffs allege that, on occasion, the committee defendants terminated participation in affiliated funds once those funds were sold off and thus were no longer affiliated with Citigroup, ostensibly because the committee defendants concluded those funds were no longer the best investment choices for the Plan. Accordingly, plaintiffs would have the Court conclude that those investments were never the best investment choices, but that the committee defendants failed to conduct an appropriately searching review of those same funds when they were affiliated-that is, when the Plan's investment in them "was generating fees for Citigroup." (Id. ¶ 49.)

As a result, over the course of the class period, plaintiffs contend the Plan "invest[ed] billions of dollars in Affiliated Funds" and "suffered millions of dollars a year in losses" due to the combination of the higher fees charged by the affiliated funds and their allegedly comparatively lower performance. (Id. ¶¶ 55.)

2. The "Management Services" Claims

In addition to selecting funds for plan participants to invest in, the committee defendants, and, in particular, the administrative committee and its members, had responsibility for selecting and monitoring service providers for the Plan. (Id. ¶ 37.) In so doing, the committee defendants were bound by both fiduciary duties and specific prohibitions contained in the Act.

Plaintiffs allege that, during the course of the class period, certain of the Plan's administrative and recordkeeping services were provided by CitiStreet-a joint venture between Citigroup and State Street Bank & Trust. (Id. ¶ 29.) Plaintiffs contend the committee defendants selected CitiStreet to provide those services and retained it throughout the class period solely because of its connection to Citigroup, thereby putting the interests of Citigroup ahead of those of the Plan and its participants while also engaging in a prohibited transaction between the Plan and a party in interest.

While plaintiffs contend the committee defendants "should have known" that similar administrative services were available from unaffiliated entities (id. ΒΆ 53), they do not allege the services provided by CitiStreet were deficient in any respect or that the fees paid to CitiStreet for those services were excessive, unwarranted, or unreasonable. Plaintiffs also do not allege any specific losses stemming ...

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