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Karthikeyan V. Veera v. Ambac Plan Administrative Committee

January 6, 2011


The opinion of the court was delivered by: Hon.Harold Baer, Jr., District Judge:


Plaintiff in this purported class action is a former employee of Ambac Financial Group, Inc. ("Ambac") who held Ambac stock as part of an employer-sponsored Savings Incentive Plan (the "Plan"). Plaintiff purports to represent a class of all Plan participants who held Ambac stock through the Plan between October 1, 2006 and July 2, 2008 (the "Class Period"). Ambac's publicly traded stock fell sharply during the Class Period, and Ambac filed for Chapter 11 bankruptcy on November 8, 2010. Plaintiff claims that the defendants breached their fiduciary duties under ERISA by continuing to offer Ambac stock as part of the Plan when they knew or should have known of Ambac's impending decline. Defendants move to dismiss. For the reasons described below, their motion is denied.


Ambac is a non-party financial services holding company whose main operating subsidiary, Ambac Assurance Corporation, sells insurance against default by issuers of public and structured finance obligations. Ambac offers an "eligible individual account plan" governed by ERISA to its employees. As part of the Plan the company agrees to match a portion of its employees' voluntary contributions. Among other options, Plan participants may, but need not, direct that their contributions be used to invest in Ambac stock.

The Plan's Administrative Committee was charged with the "the power and duty to take all actions and to make all decisions necessary or proper to carry out its responsibilities under the plan", including "to construe and interpret the terms and provisions of the Plan and all documents which relate to the Plan." Amended Class Action Complaint¶ 157-58. The Plan's Investment Committee had "exclusive responsibility and authority to control and manage the assets of the Plan in accordance with the terms of the Plan and of the Trust." Id. ¶ 154. The Compensation Committee was charged with the appointments to the two Plan committees. Id. ¶ 161. The individual named defendants were members of each of the three Plan committees.

Plaintiff contends that throughout the Class Period Defendants failed to take action to protect Plan assets from the devastation facing Ambac as a result of its heightened exposure to losses, and that Ambac was aware of its liabilities and exposure and failed to disclose those negative trends. Plaintiff alleges that between 2004 and 2007 Ambac made a fundamental change in its business strategy and loosened and lowered its underwriting standards, exposing itself to billions of dollars of losses on high-risk transactions. Plaintiff also alleges that Ambac improperly bolstered its reported financial results by overstating the value of its business and failing to properly mark-to-market Ambac's portfolio of high-risk securities, even as the market collapsed for the collateral underlying those securities.

A.Plaintiff's Claims

The Amended Complaint targets two categories of defendants, the Plan Investment Committee and Plan Administrative Committee and the individual members thereof, who allegedly violated their duty of prudence (the "Prudence Defendants"), and the Compensation Committee and the members thereof, who allegedly violated the duty of monitoring (the "Monitoring Defendants"). Count I alleges that the Prudence Defendants breached their fiduciary duties under ERISA when they "(1) continu[ed] to offer Ambac Stock as an investment option for the Plan when it was imprudent to do so; and (2) maintain[ed] the Plan's pre-existing heavy investment in Ambac Stock when it was no longer a prudent Plan investment." Count II alleges that the Monitoring Defendants breached their fiduciary duties by failing to adequately monitor the Prudence Defendants' performance.

Plaintiff seeks to recover (1) profits lost by investing in Ambac stock instead of other funds; (2) losses incurred by investing in Ambac stock when the price was artificially inflated; (3) losses caused by the decline in Ambac stock as the market learned the truth about Ambac's improper practices and financial problems, and (4) a constructive trust for amounts by which Plan fiduciaries benefitted as a result of their breaches.

B.Defendants' claims

The Defendants' principal position is that they were under no fiduciary obligation to remove or diversify the Ambac stock in the Plan. They argue that because the Plan required the offering of Ambac stock, they had no discretion to eliminate it; since they exercised no control over the offering of Ambac stock in the Plan, the inclusion of the stock in the Plan creates no fiduciary liability for them.


On a motion to dismiss, this Court accepts all material facts alleged in the complaint as true and construes all reasonable inferences in the plaintiff's favor. ECA Local 134 IBEW Joint Pension Trust Fund of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir.2009). A plaintiff must "plead enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A facially plausible claim is one where "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, 129 S.Ct. 1937, 1949 (2009). Where ...

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