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Moreno v. Deutsche Bank Americas Holding Corp.

United States District Court, S.D. New York

September 5, 2017

RAMON MORENO, et al., Plaintiffs,
v.
DEUTSCHE BANK AMERICAS HOLDING CORP., et al., Defendants.

          OPINION AND ORDER

          LORNA G. SCHOFIELD, UNITED STATES DISTRICT JUDGE.

         Plaintiffs[1] bring this putative class action, alleging Defendants, [2] fiduciaries of the Deutsche Bank Matched Savings Plan (the “Plan”), mismanaged the Plan in violation of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. Plaintiffs move to certify a class with respect to their claims asserted on behalf of the Plan. For the following reasons, the motion is granted.

         I. BACKGROUND Familiarity with the procedural history and underlying allegations is assumed. See Moreno v. Deutsche Bank Americas Holding Corp., No. 15 Civ. 9936, 2016 WL 5957307, at *1-3 (S.D.N.Y. Oct. 13, 2016).

         A. The Plan

         The Plan is a defined contribution plan, or 401(k) plan, for eligible employees of Defendant Deutsche Bank Americas Holding Corp. (“DBAHC”) and its affiliates. The Plan entitles eligible employees to contribute a certain portion of their earnings into individual investment accounts. Plaintiffs are five current or former participants in the Plan.

         From December 2009 through today, the Plan has offered its roughly 22, 000 participants a menu of around 20 to 30 “core investment options.” The Plan has also offered a “mutual fund window, ” i.e., a self-directed brokerage account (“SDBA”), which gives participants access to thousands of mutual funds, as well as stocks and bonds. Only a small percentage of participants have invested through the SDBA, which is designed for sophisticated investors.

         DBAHC is the Plan sponsor. It manages the Plan through, among others, a Plan Administrator, Defendant the Deutsche Bank Matched Savings Plan Investment Committee (“Investment Committee”) and Defendant the Deutsche Bank Americas Holding Corp. Executive Committee (“Executive Committee”). The Investment Committee[3] sets the menu of core investment options and recommends investment policies to the Executive Committee. The Executive Committee[4] appoints members to the Investment Committee and evaluates its performance. These Committees are comprised exclusively of DBAHC managers or executives. The Plan Administrator, who has been Defendant Richard O'Connell since 2011, has the day-today responsibility for the Plan's operations and administration.

         B. Defendants' Alleged Mismanagement of the Plan

         1. Preference for DBAHC-Affiliated Mutual Funds

         As of December 2009, the start of the proposed class period, the Plan offered participants 22 core investment options, ten of which were DBAHC-affiliated mutual funds (the “proprietary funds”). The proprietary funds charge investment management fees and administrative fees that are paid to DBAHC's subsidiaries.

         The Third Amended Complaint (“Complaint”) alleges that Defendants mismanaged the Plan by favoring high-cost proprietary funds to benefit Defendants at the expense of participants. Citing the report prepared by their proposed expert, Dr. Steven Pomerantz, which was filed in support of this motion, Plaintiffs contend that three of the 10 proprietary funds offered by the Plan were passive “index” funds that consistently charged higher fees than non-proprietary funds that tracked the same index. The Plan retained these proprietary index funds until February 2013, even though a third-party investment advisor alerted the Investment Committee of lower-fee alternatives in 2011. Approximately $502 million was invested in the index proprietary funds when they were removed as investment options. Dr. Pomerantz avers that the average investment fee for the three proprietary index funds was more than five times the fee charged by non-proprietary index funds in the same investment style.

         For the Plan's other seven proprietary funds, which were actively managed, Plaintiffs assert that these funds charged higher fees and performed worse than available alternatives. Dr. Pomerantz avers that that the amount invested in these seven proprietary funds peaked at $483 million, and the average fee percentage was almost 70% higher than the fees paid by the average similarly-sized 401(k) plan for similar investments.

         Plaintiffs adduce evidence they contend shows the Investment Committee ignored the Plan's Investment Policy Statement (“IPS”), which advised that poorly performing investment options be placed on either a “Special Review List” or “Termination Review List.” As of 2010, four proprietary funds were on the Special Review List and one was on the Termination Review List. In 2011, the Investment Committee stopped using the lists in contravention of the IPS until the IPS was amended in 2016 to remove any reference to the lists. Around the time the Investment Committee allegedly ceased using the lists to track fund performance, it also stopped including in its minutes details regarding the performance of specific funds.

         2. Failure to Consider Cheaper Share Classes or Mutual Fund Alternatives

         Plaintiffs assert that Defendants failed to minimize investment management expenses in two other ways for proprietary and non-proprietary mutual funds. First, Defendants did not consider including lower-cost “R6” share classes of the proprietary and non-proprietary mutual funds when such share classes became available in August 2014 and June 2015, respectively. The Plan instead retained the institutional share classes, which Plaintiffs contend offer the same investment product as the R6 share class but charge higher investment management fees. Second, Defendant failed to consider the use of alternatives to mutual funds, such as separate accounts and collective investment trusts, which have lower fees but were in the same investment style.

         3. Failure to Control Recordkeeping Expenses

         According to Plaintiffs, Defendants also failed to control recordkeeping expenses. In 2012, at least some Defendants were advised that the “benchmark rate” for such expenses was $55 per participant. As of February 2013, the Plan paid recordkeeping fees to ADP equal to approximately $100 per participants.

         C. Plaintiffs' Class Claims under ERISA

         The Complaint alleges four counts under ERISA. Count One asserts that Defendants, who allegedly are Plan fiduciaries, breached their duties of care and loyalty in selecting, retaining and monitoring the Plan investments. See 29 U.S.C. § 1104(a)(1). Counts Two and Three allege prohibited transactions. Count Two alleges that the inclusion of the proprietary funds caused the Plan to engage in prohibited transactions with parties in interest, which includes DBAHC's subsidiaries that received fees for investment services rendered to the proprietary funds. See Id. § 1106(a)(1). Count Three asserts that DBAHC engaged in prohibited self-dealing transactions because it caused the Plan to pay investment management fees and expenses to DBAHC's subsidiaries. See Id. § 1106(b)(1). Count Four alleges that DBAHC, O'Connell and the Executive Committee breached their fiduciary duties by failing to monitor the decision-making process of the Investment Committee.

         Plaintiffs seek class certification for their claims brought on behalf of the Plan under Federal Rule of Civil Procedure 23 and 29 U.S.C. § 1132(a)(2), which permits participants to seek relief under 29 U.S.C. § 1109. Section 1109(a) provides that any fiduciary who breaches ERISA-imposed duties shall “make good to such plan any losses to the plan resulting from each such breach” and “be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.” 29 U.S.C. § 1109(a).

         Sections 1109(a) and 1132(a)(2) permit a participant in a defined-contribution plan to seek “recovery for fiduciary breaches that impair the value of plan assets in [that] participant's individual accounts.” LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248, 256 (2008). Such claims are derivative in nature -- they are not “made for individual relief, but instead are brought in a representative capacity on behalf of the plan.” L.I. Head Start Child Dev. Servs., Inc. v. Econ. Opportunity Comm'n of Nassau Cty., Inc., 710 F.3d 57, 65 (2d Cir. 2013) (internal quotation marks omitted). Thus any monetary recovery is awarded to the Plan, not the participants. See LaRue, 552 U.S. at 262 n.* (Thomas, J. concurring) (“[A] participant suing to recover benefits on behalf of the plan is not entitled to monetary relief payable directly to him; rather, any recovery must be paid to the plan.”); L.I. Head Start, 710 F.3d at 66 (“[T]he fact that damages awarded to the Plan may provide plaintiffs with an indirect benefit . . . does not convert their derivative suit into an action for individual relief.” (internal quotation marks omitted)).

         The Complaint requests, among other relief, an order “compelling Defendants to personally make good to the Plan all losses that the Plan incurred as a result of the breaches of fiduciary duties and prohibited transactions” alleged in the Complaint. It also seeks equitable relief, including the “appointment of an independent fiduciary or fiduciaries to run the Plan; transfer of Plan assets out of imprudent investments into prudent alternatives; and removal of Plan fiduciaries deemed to have breached their fiduciary duties and/or engaged in prohibited transactions.”

         Plaintiffs move for certification of the following proposed class: “All participants and beneficiaries of the Deutsche Bank Matched Savings Plan at any time on or after December 21, 2009, excluding Defendants, any of their directors, and any officers or employees of Defendants with responsibility for the Plan's investment or administrative function.” Plaintiffs seek appointment as Class Representatives and Plaintiffs' counsel be designated Class Counsel.

         II. ...


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