Martin J. Walsh v. Ruane, Cunniff & Goldfarb, Inc.

Background

Martin J. Walsh, the United States Secretary of Labor, brought the action under the Employee Retirement Income Security Act of 1974, a federal law governing employee benefit plans. Martin J. Walsh replaced Eugene Scalia as the named plaintiff because of a change in the federal officeholder. The defendants included Ruane, Cunniff & Goldfarb, Inc. (RCG); Robert D. Goldfarb; DST Systems, Inc.; two DST committees; and individual committee members.

DST sponsored and administered a 401(k) Profit Sharing Plan. RCG served as the investment manager for the plan’s profit-sharing component and managed all of that component’s assets. RCG used a stated strategy of investing in a small number of securities and holding them for extended periods. The complaint alleged that the plan became heavily invested in Valeant Pharmaceuticals International, Inc.; in July 2015, Valeant stock made up 45.4 percent of the profit-sharing component’s assets.

The Secretary alleged that the defendants were fiduciaries and breached duties of diversification, loyalty, and prudence by using the concentrated investment strategy. The Secretary also alleged that the DST defendants failed to monitor RCG and the investments, failed to establish a written investment policy required by the plan document, and were liable as co-fiduciaries for RCG’s alleged breaches.

Defendants’ Arguments

The defendants moved to dismiss under Rule 12(b)(6), which tests whether a complaint plausibly states a legal claim. They argued that the claims were barred by ERISA’s six-year statute of repose and three-year statute of limitations. RCG separately argued that the complaint improperly attributed DST’s decision to place all of the profit-sharing assets with RCG to RCG itself and did not plausibly allege that RCG’s investment strategy violated ERISA. Hager argued that the complaint did not plausibly connect his role on the DST Advisory Committee to the alleged losses because his committee service ended before some of the alleged events.

Court’s Analysis

The court rejected the statute-of-repose argument at the motion-to-dismiss stage. It explained that the complaint did not rely only on DST’s initial decision in the 1970s to hire RCG. Instead, it alleged continuing breaches, including RCG’s continued use of the concentrated strategy, failures to adjust investments as they became overly concentrated, failures by DST defendants to monitor the assets and RCG, and the failure to create a written investment policy. The court concluded that the complaint alleged breaches occurring within the relevant six-year period.

The court also declined to dismiss the claims under the three-year actual-knowledge limitation. Under ERISA, actual knowledge requires actual awareness of the material facts necessary to understand that a fiduciary breached a duty; merely receiving or having access to documents is not necessarily enough. The defendants argued that the Secretary had actual knowledge through annual Forms 5500 filed by DST. The court held that discovery was needed to determine whether those filings gave the Secretary actual knowledge, so the claims could not be dismissed on that basis at this stage.

As to RCG, the court read the complaint as alleging that RCG breached its duties by concentrating the profit-sharing assets in individual stocks through its non-diversification strategy, rather than as alleging that RCG had to decide what percentage of the plan’s assets it would manage. The court stated that investment prudence is assessed in relation to the portfolio as a whole and that RCG remained responsible for its fiduciary obligations even if DST knew about RCG’s strategy. The court therefore held that the Secretary’s fiduciary-breach claims against RCG survived dismissal.

As to Hager, the court concluded that the complaint alleged breaches by omission that continued over several years, including failures to monitor and correct the investments and failure to establish the required written investment policy. Because those alleged omissions continued during Hager’s time on the Advisory Committee, the court did not dismiss the claims against him.

Disposition

The court denied the defendants’ motions to dismiss. It directed the clerk to terminate the identified motions and to substitute Martin J. Walsh, the United States Secretary of Labor, as the named plaintiff. The order addressed only whether the complaint could proceed; it did not decide whether any defendant ultimately breached ERISA or was liable for losses.