Ferguson v. Ruane Cuniff & Goldfarb Inc.

Background

Michael L. Ferguson, Myrl C. Jeffcoat, and Deborah Smith sued individually and on behalf of the DST Systems, Inc. 401(k) Profit Sharing Plan. They brought claims under the Employee Retirement Income Security Act (ERISA), alleging breaches of fiduciary duty and other violations by Ruane Cuniff & Goldfarb Inc. (RCG), DST Systems, Inc., the Plan’s Advisory Committee, and DST’s Compensation Committee.

The plaintiffs alleged that RCG concentrated an enormous and imprudent amount of the Plan’s assets in Valeant Pharmaceuticals International Inc. stock. They alleged that the stock’s decline in 2015 caused the Plan to lose more than $100 million. They also alleged that the DST defendants failed to properly monitor RCG and failed to protect the Plan from RCG’s investment strategy.

The plaintiffs asked the court to certify a class consisting of participants and beneficiaries of the Plan from March 14, 2010, through July 31, 2016. The proposed class excluded the defendants and people who served as members of the Plan’s Advisory Committee, DST’s Compensation Committee, or other Plan fiduciaries during that period. The plaintiffs alleged that the class had more than 9,000 members.

Arbitration

The court considered arguments from arbitration claimants who contended that the arbitration agreement prevented class certification. The court held that the Second Circuit’s decision in a prior related proceeding established that the fiduciary-breach claims at issue were not covered by the arbitration agreement because they did not relate to the claimants’ employment.

The court also rejected the argument that the claims were individual claims involving losses to participants’ accounts. It explained that claims under ERISA section 502(a)(2), including claims involving impairment of the value of assets in an individual account, remain claims brought on behalf of the Plan. The court therefore concluded that the arbitration agreement did not prevent the plaintiffs from satisfying the class-certification requirements.

Class Certification

The court analyzed the requirements of Federal Rule of Civil Procedure 23. It found numerosity because the proposed class potentially included thousands of members. It found commonality because the case presented common questions, including whether the defendants were Plan fiduciaries, whether they breached their duties, whether the Plan and its participants were injured, and how any damages should be measured.

The court found typicality because the named plaintiffs and proposed class members alleged harm from the same conduct and would use similar legal arguments to establish liability. The court also found adequate representation because the plaintiffs’ interests were aligned with those of the class and the claims sought to recover for the Plan as a whole.

The court certified the class under Rule 23(a) and Rule 23(b)(1). It reasoned that separate lawsuits could produce inconsistent standards for the defendants and could prejudice the interests of other Plan participants. Because the class was certified under Rule 23(b)(1), the court described it as a mandatory class action and rejected arguments that class members had a right to opt out.

Motion to Amend

The plaintiffs sought permission to file a third amended complaint adding class allegations. Because the court granted class certification, it granted the plaintiffs leave to file the third amended complaint to the extent of adding those class allegations.

Settlement Approval

The plaintiffs also sought preliminary approval of class-action settlement agreements with the RCG and DST defendants. The court denied those motions. The proposed agreements included an injunction barring plaintiff releasors, the Secretary of Labor, people representing them, and participants excluded from the settlement class from bringing or prosecuting claims related to the conduct alleged in the complaint.

The court found that this provision was broader than a typical settlement bar order, which generally addresses contribution and indemnification among settling and nonsettling defendants. It held that the proposed injunction improperly sought to prevent nonparties, including the Secretary of Labor, from bringing claims. The court noted that ERISA gives the Secretary of Labor an independent right to bring a civil action for fiduciary breaches and that the plaintiffs had not identified authority approving such a broad provision.

Disposition

The court granted the plaintiffs’ motion for leave to file a third amended complaint, granted the motion for class certification, and denied the motions for preliminary approval of the class-action settlements. The court also denied an identical motion for preliminary approval in case number 20 CV 7092 for the same reasons.