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F.W. Webb Co. v. State Street Bank and Trust Co.

August 12, 2010


The opinion of the court was delivered by: Richard J. Holwell, District Judge


As the tremors of what became the Great Recession coursed through the real estate market in the years and months before the crisis broke in late 2007, the Yield Plus Fund ("YPF") held fast to a strategy of investing in securities backed by mortgage loans. This was like camping on the beach while an earthquake shakes the ocean floor. Eventually the tidal wave came in, and now there is litigation over the losses. It is banal to observe that those who managed the YPF are not liable to investors simply because the mortgage bets turned bad. Plaintiffs, a 401(k) plan and its named fiduciaries, have a more nuanced theory: they allege that defendants, ERISA service providers closely related to the entity that managed the YPF, misrepresented the YPF's mortgage-heavy investment strategy to plaintiffs in violation of fiduciary duties arising under the Employee Retirement Income Security Act (ERISA).*fn1 The central question on this motion to dismiss is whether plaintiffs have adequately alleged that defendants, who provided mainly ministerial and administrative services to the 401(k) plan, in fact owed any such fiduciary duties under ERISA.


(i.) Parties

The F.W. Webb Company is a plumbing and heating distributor based in Bedford, Massachusetts. It is plaintiff in this action, together with the F.W. Webb 401(k) Plan (the "Plan"), the F.W. Webb Savings & Profit Sharing Plan Committee (the "Plan Committee"), and individual Plan Committee members. (Compl. ¶ 7.) The Plan offers its beneficiaries, F.W. Webb employees, a menu of investment options, or "investment menu," from which the beneficiaries select their desired investments. (Id. at ¶¶ 30, 37.)

Defendants are three entities-two subsidiaries of State Street Corporation and one company that spun off from State Street Corporation in 2000-that provided services to the Plan. The State Street entities are State Street Bank and Trust Company ("SSBT"), a trust company, and State Street Global Advisors ("SSgA"), an investment management company. SSBT served as the Plan's directed trustee between 1996 and 2008. In this role, SSBT maintained custody over the Plan's assets and executed investment instructions from the Plan Committee. A Master Trust Agreement governed SSBT's service relationship with plaintiffs. (Id. at ¶¶ 72-73; Skinner Decl. Ex. I (Trust Agreement).) In addition, SSBT also provided recordkeeping and administrative services to the Plan from 1996 through April 2000, as set forth in an Administrative Services Agreement ("ASA") between it and F.W. Webb. (Prussia Aff. Ex. A (ASA) at 5-7.)

SSgA assisted in the provision of these services, which included plan drafting, report preparation, and other ministerial tasks.*fn2 (Id.)

Aside from listing the administrative services State Street agreed to provide, the ASA also imposed an important obligation on plaintiffs: it required them to "select the investment options to be offered under the Plan from among those made available by State Street." (Id. at 2.) In other words, plaintiffs could only place a fund on the Plan's investment menu if State Street made that fund available to them. The Complaint does not explain how State Street decided which investment options to "make available," but the parties have presumed in their arguments to the Court that the set of options State Street made available to plaintiffs was generic-rather than selecting options specifically for the F.W. Webb plan, State Street offered plaintiffs the same set of options it offers to all of its clients-and consisted simply of every State Street-managed fund and every fund that shared fees with State Street. See infra at 10-11.

The third defendant is CitiStreet LLC, a retirement plan service provider formed as a joint venture between State Street Corporation and CitiGroup in April 2000. (Compl. ¶ 38.) Soon after its formation, CitiStreet replaced State Street as recordkeeper and administrative provider under the ASA, though the contract itself was never amended to reflect the change. (Id. at ¶¶ 38-39; 56-58.) State Street did not provide any administrative services after CitiStreet assumed these duties in April 2000, but State Street did continue to serve as directed trustee under the Trust Agreement until 2008.

(ii.) Dealings Between the Parties

The State Street entities' relationship with plaintiffs began in 1996, when plaintiffs decided to move the Plan's assets to SSBT from their previous ERISA provider. (Id. at ¶ 15.) Neither service contract between the parties-the ASA or the Trust Agreement-anticipated that State Street would provide plaintiffs with investment advice, but the Complaint alleges nonetheless that all three defendants-first the State Street entities, and then CitiStreet after it assumed State Street's administrative duties in 2000-counseled plaintiffs about which of the available funds to include on the Plan's investment menu. (Id. at ¶ 34.) Defendants' representatives met with plaintiffs periodically-once or twice a year normally-"to discuss the performance of the [] Plan's various investments, to recommend new funds for F.W. Webb's consideration, and to address any relevant changes in the industry that might affect the [] Plan." (Id. at ¶ 40.) Defendants provided plaintiffs with literature, such as fact sheets and fund profiles, describing the available investment options, including the YPF. (Id. at ¶¶ 26-27, 50, Ex. A, Ex. E.) And defendants also performed data analytics for the Plan, producing reports showing the percentage of plan assets invested in particular categories of funds and comparing the Plan's diversification to that of other retirement plans. (Id. at Ex. C, Ex. D.)

Some of the investment advice defendants allegedly gave to plaintiffs concerned the YPF. In 1996, soon after the parties' relationship began, State Street representatives touted the YPF as a safe but also profitable investment: "[State Street] representatives repeatedly stated to Plaintiffs that the Yield Plus Fund was as stable as a money market fund but would provide better returns." (Id. at ¶ 23.) State Street representatives also told plaintiffs they would "be 'crazy' not to select the Yield Plus Fund as an investment option for the [] Plan because of the slightly higher returns [as compared to a money market fund]." (Id. at ¶ 25.) Accordingly, plaintiffs believed the YPF was a truly excellent investment-tantamount to a money market fund in risk, but offering higher returns-and they decided to include it as an option on the Plan's investment menu. (Id. at ¶ 29.) The YPF remained on the menu for 12 years, where it became the Plan's most popular investment option. By April 2007, more participants invested in the YPF than any other fund on the menu, and many participants chose to invest in the YPF exclusively. (Id. at ¶ 52.) For many years, this proved a successful investment strategy: until mid-2007, the YPF performed well, earning plan participants the type of "satisfactory" returns that encourage more and more investment. (Id. at ¶¶ 40, 52.) But in the third quarter of 2007, as the real estate sector nosedived, the YPF's run of good returns ended abruptly. The fund lost 13.34% of its value in 2007, causing approximately $2.7 million in losses to plan participants. (Id. at ¶¶ 69-70.) The YPF was liquidated in May 2008. See Yu, 686 F. Supp. 2d at 372.

Plaintiffs' core allegation is that defendants misled them, mainly by omission, about the risks of investing in the YPF. Plaintiffs do not quibble with the accuracy of State Street's description of the YPF in 1996 (when they described it as a money market fund that achieved higher returns). (See 4/26/10 Argument Tr. at 35:14-21.) Rather, plaintiffs allege that the YPF's investment strategy changed dramatically in 2000 or 2001, when the fund abandoned its conservative, low risk-strategy and began speculating in "high-risk, low-quality mortgage-backed investments," and that defendants never informed them of this new strategy and the heightened risks it entailed. (Compl. ¶¶ 47- 48.) Moreover, plaintiffs allege that CitiStreet actively misled them about those risks on at least one occasion. In 2006, after the YPF had shifted to its high-risk strategy, CitiStreet provided plaintiffs with a thick booklet containing an analysis of the Plan's investments. The analysis indicated that the Plan's investment menu contained a money market option and that 13% of the Plan's assets were invested in a "Stable Value/Money Market"-type fund. (Id. at ¶¶ 42-43, Ex. C, Ex. D.) Because no other option on the investment menu resembled a money market fund, plaintiffs contend that these statements referred to the YPF and, by extension, affirmatively misrepresented the YPF as having the attributes of a money market fund. (Id. at ¶¶ 41-43.)*fn3

Plaintiffs' claim contains a factual weakness that appears in the record even at this early stage in the litigation: State Street and CitiStreet expressly distinguished the YPF from a money market fund in various documents that were either given to or made available to plaintiffs. Beginning in 1999, the YPF's public prospectus stated "unlike a money market fund, the price of the Yield Plus Fund will fluctuate because of the fund may invest [sic] in securities with higher levels of risk and different maturities." (Prussia Aff. Ex. C at 3.) The same or similar language appeared in every subsequent prospectus. Moreover, a fact sheet included in the booklet CitiStreet prepared for plaintiffs in 2006- the same booklet that contained the allegedly misleading comparisons between the YPF and a stable value/money market fund-made a similar statement: "Unlike a money market fund, the price of the Yield Plus Fund will fluctuate because the Fund may invest in securities with higher levels of risk and different maturities." (Id. at Ex. D.)*fn4

Plaintiffs argue that these disclosures, which they claim not to have read, did not remedy defendants' misleading statements and omissions. Because defendants were their fiduciaries-because plaintiffs relied on defendants to recommend investment options in face to face meetings-plaintiffs contend defendants had a duty to explain the YPF's changed strategy to them directly, rather than relying on written statements buried in public prospectuses and thick booklets.

The Complaint states claims for breach of fiduciary duty under ERISA and various causes of action under Massachusetts law, including fraud, negligent misrepresentation, and violation of the Massachusetts Uniform Securities Act.


To survive a Rule 12(b)(6) motion to dismiss, a complaint must allege "enough facts to state a claim to relief that is plausible on its face." Starr v. Sony BMG Music Entertainment, 592 F.3d 314, 321 (2d Cir. 2010) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, -- U.S. --, 129 S.Ct. 1937, 1949 (2009). If the factual averments permit no reasonable inference stronger than the "mere possibility of misconduct," the complaint should be dismissed. Starr, 592 F.3d at 321 (quoting Iqbal, 129 S.Ct. at 1950). In applying this standard of facial plausibility, the Court accepts all factual allegations as true and draws all reasonable inferences in plaintiffs' favor, but it does not credit "mere conclusory statements" or "threadbare recitals of the elements of a cause of action." Iqbal, 129 S.Ct. at 1949. On a motion to dismiss, the Court may properly consider documents referenced in or integral to the complaint, as well as public filings with the Securities and Exchange Commission ("SEC"). In re IAC/Interactivecorp, 478 F. Supp. 2d at 585.


I. ERISA Fiduciary Status

ERISA aims to protect employee pension and retirement plans by establishing "certain general fiduciary duties applicable to the management of [such] plans." Harris Trust and Savings Bank, 302 F.3d 18, 26 (2d Cir. 2002) (quoting Varity Corp. v. Howe, 516 U.S. 489, 496 (1996)). The threshold issue in this case, like in any ERISA case, is whether and to what extent defendants were fiduciaries under the statute. Unless defendants' alleged misrepresentations and nondisclosures about the YPF fell within the scope of fiduciary responsibilities that they owed to the Plan, plaintiffs have no claim under ERISA. See id. at 28; Pegram v. Herdrich, 530 U.S. 211, 226 (2000) ("[T]he threshold question is . . . whether [the defendant] was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint.").

"Congress intended ERISA's definition of fiduciary to be broadly construed." LoPresti v. Terwilliger, 126 F.3d 34, 40 (2d Cir. 1997) (quotations omitted). The statute provides for two types of fiduciaries: (1) "named fiduciaries," or entities that are named as fiduciaries in the plan documents; and (2) "functional fiduciaries," or entities that are fiduciaries by virtue of the services they perform for the plan. In re Lehman Bros., 683 F. Supp. 2d 294, 298-99 (S.D.N.Y. 2010). Plaintiffs do not allege that defendants were named fiduciaries; to the contrary, it is undisputed that the Plan's only named fiduciaries were plaintiffs themselves (the Plan Committee, its members, and the Company). The question is whether defendants acquired functional fiduciary status through the services they provided to the Plan.

ERSIA identifies three separate bases for functional fiduciary status:

[A] person is a [functional] fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to ...

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