Falberg v. The Goldman Sachs Group, Inc.

Background

Leonid Falberg, a participant in the Goldman Sachs 401(k) Plan, brought a proposed class action on behalf of the plan and similarly situated participants. He alleged that The Goldman Sachs Group, Inc., The Goldman Sachs 401(k) Plan Retirement Committee, and John Does 1-20 violated the Employee Retirement Income Security Act of 1974 (ERISA).

Falberg challenged the plan’s inclusion of five Goldman Sachs Asset Management mutual funds: the Mid Cap Value Fund, Large Cap Value Fund, High Yield Fund, Core Fixed Income Fund, and Short Duration Government Fund. He alleged that the defendants improperly retained underperforming and relatively expensive funds, failed to consider lower-cost investment vehicles, failed to obtain fee rebates or revenue sharing, and breached duties of loyalty and prudence. He also alleged that Goldman Sachs failed to monitor the Retirement Committee.

The defendants moved for summary judgment on all claims. Falberg separately moved for partial summary judgment on loss and loss causation. Falberg also moved to compel production of documents designated as privileged. The defendants moved to strike opinions from Falberg’s expert, Dr. Brian C. Becker, and to compel arbitration for certain class members.

Summary-judgment standard

The court explained that summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law. The court must view the evidence favorably to the party opposing summary judgment, but unsupported assertions, speculation, and conjecture are not enough to require a trial.

Duty of prudence

ERISA requires plan fiduciaries to act prudently under the circumstances existing when they make investment decisions. The court evaluates the fiduciary’s decision-making process, rather than judging the decision only by its later results or with hindsight.

The court held that Falberg’s prudence claim rested on the Retirement Committee’s failure to adopt a written investment policy statement. The court concluded that ERISA does not require such a document. Although Falberg’s experts described an investment policy statement as a best practice, the court noted that a best practice is not automatically a legal requirement.

The court also rejected Falberg’s argument that the lack of a written policy showed that the committee lacked a deliberative process. The record showed that the committee received reports and other information from Rocaton Investment Advisors, reviewed performance and fee information, heard presentations, evaluated alternatives, and eventually removed the challenged funds. The court found that the limited detail in meeting minutes did not establish that the underlying discussions did not occur or that the committee’s process was imprudent. The court therefore held that Falberg had not shown that a prudent fiduciary in the defendants’ position would have acted differently.

Duty of loyalty

ERISA’s duty of loyalty requires fiduciaries to act solely in the interest of plan participants. Falberg argued that the defendants had conflicts of interest, treated Goldman Sachs funds more favorably, retained allegedly inferior funds, selected other Goldman Sachs funds despite their ratings, and removed the challenged funds to reduce litigation risk.

The court rejected these arguments. It noted that a conflict of interest alone is not automatically a breach of the duty of loyalty. Falberg did not identify evidence that the committee acted for the purpose of benefiting Goldman Sachs or another party. The record also showed that committee members were trained to treat Goldman Sachs-managed funds like other funds and testified that they applied the same evaluation process to all investment options.

The court further concluded that the challenged funds’ ratings, costs, and performance did not establish disloyal conduct. The committee considered information beyond Rocaton’s ratings, and non-Goldman Sachs funds with similar or worse ratings also remained in the plan. The court found no legal basis for treating the delayed removal of underperforming funds, the selection of two other Goldman Sachs funds, or consideration of litigation risk as proof of a loyalty breach.

Prohibited-transaction claim

Falberg argued that the plan’s failure to receive revenue-sharing payments from Goldman Sachs-managed funds violated ERISA’s prohibited-transaction rules. The defendants relied on a Department of Labor exemption that applied when dealings with the plan were no less favorable than dealings with other shareholders.

The court held that the plan was treated the same as other plans that used Hewitt Associates as recordkeeper and had invested in the Goldman Sachs funds before April 1, 2009. Under the shareholder-services agreement, those plans were ineligible for the revenue-sharing payments. The fact that different plans received payments because they used another recordkeeper or opened accounts later did not show that this plan was treated on a less favorable basis. The prohibited-transaction claim therefore failed.

Duty to monitor

The court held that Falberg’s monitoring claim depended on an underlying breach by the Retirement Committee. Because the court found no underlying breach, the monitoring claim also failed. The court additionally stated that the record contained no evidence that the committee members were unqualified or failed to perform their duties.

Loss and loss causation

Falberg moved for partial summary judgment concerning whether the plan suffered losses and whether the defendants’ conduct caused those losses. The court held that loss and loss causation become relevant only after a breach of fiduciary duty is established. Because the court found no ERISA fiduciary breach, it denied Falberg’s partial-summary-judgment motion without reaching those issues.

Disposition

The court granted defendants’ motion for summary judgment and denied Falberg’s motion for partial summary judgment. The opinion’s initial disposition also states that Falberg’s motion to compel documents and defendants’ motions to strike expert opinions and compel arbitration were denied. In its conclusion, however, the court states that those motions were denied as moot. The clerk was directed to terminate the motions and close the case.