Southwest Airlines Co Profit Sharing/401(K) Committee v. UBS Global Asset Management (Americas) Inc et alRESPONSEN.D. Tex.November 9, 2006IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION SOUTHWEST AIRLINES CO. PROFIT SHARING1401 (K) COMMITTE,E on behalf of the SOUTHWEST AIRLINES CO. PROFIT SHARING PLAN and the SOUTHWEST AIRLINES CO. 401 (K) PLAN, Plaintiff, UBS GL,OBAL ASSET MANAGEME,NT (AMERICAS), WC., fllda BRINSON PARTNERS, INC. and UBS GLOBAL ASSET MANAGEMENT TRUST COMPANY f/k/a BRINSON TRUST COMPANY, Defendants § § § § § § § § 5 CIVIL ACTION NO. 3-06CV-0747D § 9: § § § § § § PLAINTIFF'S RESPONSE IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SWPORT Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 1 of 21 PageID 350 TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INDEX OF AUTHORITIES iii . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. SUMMARY OF ARGUMENT 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. ARGUMENT AND AUTHORITIES " 2 A. Motions to Dismiss Are Not Favored, and Defendants Have Wholly Failed to Demonstrate That No Relief Could Be Granted to Plaintiff Under Any Set of Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 B. Plaintiff Has Sufficiently Pleaded a Claim for Breach of Fiduciary Duty IJnder ERISA Section 404(a)(l)(D) for Failure to Act in Accordance with . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan Documents. . 4 C. Plaintiff Has Sufficiently Pleaded a Claim for Breach of Fiduciary Duty Under ERISA Section 404(a)(l)(B) for Failure to Act Prudently. . . . . . . . . . . . . . . . . . . . . 5 1. Prudence is an inherently factual inquiry inappropriate for dismissal on the pleadings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . " 6 2. Plaintiff has alleged that Defendants acted imprudently based on facts that existed at the time the challenged investments were made and is not relying solely on "hindsight" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . " 6 3. Defendants cite no authority for the proposition that Plaintiff must pkd how Defendants acted imprudently in light of "modern portfolio theory" . . . . 8 D. Plaintiff Has Sufficiently Pleaded That Defendants' Breaches of Fiduciary Duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Caused a Loss to the Southwest Plans 10 E. Plaintiff Has Sufficiently Pleaded a Claim for Breach of Fiduciary Duty Under ERISA Sections 404(a)(l)(A) and 406 Related to Defendants' Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1. Defendants' argument that Plaintiffs' conflict-of-interest allegations "make 3, no sense must fail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7 -. Defendants mischaracterize the prohibitions in ERISA section 406 13 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 2 of 21 PageID 351 F . Because Plaintiff Has Sufficiently Pleaded Claims for Breach of Fiduciary Duty Under ERISA. Plaintiff Has Sufficiently Pleaded a Claim for Co-Fiduciary Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Under ERISA Section 405 14 I11 . PRAYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CERTIFICATE OF SERVICE 16 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 3 of 21 PageID 352 INDEX OF AUTHORITIES CASES Basic I I I ~ 11 . Leiji~i.son, 485 U S . 224 (1988) . . . . . . . . . . . . . . . . . . . Brandt IJ . Grounds. 687 F.2d 895 (7th Cir .. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Chao 11 Stuart. No Civ . H.04.1115. 2005 WL 1693939 (S.D. Tex July 20, 2005) . . . . . . . . . 14 Collim 11, A4orgar1 Stanlejl Dean Wtter. 224 F.3d 496 (5th Cir . 2000) . . . . . . . . . . . . . . . . 2. 5. 12 Cor7cha 11 L.OII&II. 62 F.3d 1493 (9th Cir . 1995). cert dislil 'd. 517 U.S. 11 83 (1996) . . . . . . . . 3 DeBruyne 11 Equitable L f e As.sura~ice Soc j, ojihe U S , 720 F . Supp . 1342 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (N.D. Ill . 1989), aff'd, 920 F.2d 457 (7th Cir . 1990) 5 Dolloilnn 11 Cu~~ni~igl ia~n. 716 F.2d 1455 (5th Cir . 1983). cert denied. 467 U.S. 125 1 (1 984) . . . . . . . . . . . . . . . . . . Franlu v Prudential Health Care Plan. hc. . 164 F . Supp . 2d 865 (W.D. Tex . 2001) . . . . . . . . " 2 Harlejl 12 A4i11nerota A4ining & Aqg Co.. 42 F . Supp . 2d 898 (D . Minn . 1999) . . . . . . . . . . . . . . . 6 111 re Dyleg~i lnc ERISA L.itig.. 309 F . Supp . 2d 861 (S.D. Tex . 2004) . . . . . . . . . . . . . 3,8,9, 10 111 re General A4otol-s ERISA Litig., No . . 05-71 085. 2006 WL 897444 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (E.D. Mich . Apr . 6, 2006) 3, 10 117 re A4cKess011 HBOC. Inc ERISA Lifig.. 391 F . Supp. 2d 812 (N.D. Cal . 2005) . . . . . . . . . . . . 6 Keane IT . Fox Te1evi.sio11 Stations, 61c , 297 F . Supp . 2d 921 (S.D. Tex . 2004). q f d , 129 Fed . Appx . 874 (5th Cir.), cert denied, 126 S . Ct . 426 (2005) . . . . . . . . . . . . . . . . . 13 Laboren Not 'I Pension Fund 11 Norther11 n u s t Qua~ztitatiiw .Advi. son, I I I ~ , 173 F.3d 313 (5th Cir.), cert denied. 528 U.S. 967 (1999) . . . . . . . . . . . . . . . LAC h7i~estnle1it.s, hzc . 1) First Fidelifli Bmik. N.A , No . 92 Civ . 7584 MBM, 1997 WL . 528283 (S.D.N.Y. Aug . 27, 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 4 of 21 PageID 353 Nelsoii I J Brinsoi? Partners. Ii7c .No . 0.3 C 6446. 2004 WL 178180 (N.D. I11 . Jan . 16, 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h4cDoimld 17. Provident Znden~nity L f e hzs . Co , 60 F.3d 234. 237 (5th Cir . 1995). cerf denied, 516 U..S. 1174 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 d40virz 11 . Firsf Nar '1 Bank of Chicago, 148 F.3d 760 (7th Cir . 1998) . . . . . . . . . . . . . . . . . . . . . . 10 SiIi~eni1ai7 12 Mztfual Benejf L f e Ills Co , 138 F.3d 98 (2d Cir . 1998) . . . . . . . . . . . . . . . . . . . 10 Soo Lhie R . R C o 11. S f Loziir Soufkivesterii Raihvaj~ Co., 125 F.3d 481 (7th Cir . 1997) . . . . . . 13 Sivierkiewicz 11 . Sorema N A . 5.34 TJS . 506 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 9, 10 Fifillefr 11. Blue Cross &Blue Shield ojAla.. 953 F .. 2d 1335 (1 lth Cir . 1992) . . . . . . . . . . . . . . . 10 STATUTES AND RULES 29 U.S.C. 1004(a)(I) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 29 U.S.C. 5 1 104(a)(l)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 U.S.C. 5 1104(a)(l)(D) 4 29U.S.C.s 1105(a) 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29U.S.C.. $ 1106(b)(l) .. I ? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FE.D .R . CIV P 8(a)(2) 3 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 5 of 21 PageID 354 Comes now Plaintiff Southwest Airlines Co. Profit Sharing/40l(k) Committee ("Plaintiff' or the "Committee") and submits its Response to Defendants' Motion to Dismiss Under Federal Rule of Civil Procedure 12(b)(6) ("Defendants' Motion to Dismiss") and Brief in Support and would respectfully show the Court as follows: I. SUMMARY OF ARGUMENT Defendants pay no attention to the standards applicable to motions to dismiss under Federal Rule of Civil Procedure 12(b)(6). They ignore the fact that Plaintiff need only provide "notice" of its claims tluough its pleading and need not plead evely single fact that it will ultimately need to prove to succeed on its claims. Defendants seek to impose pleading requirements on Plaintiffs ERISA claims that simply do not exist, and they assert arguments that are more appropriately considered only after there has been an opportunity for discovery. Defendants also ignore the specific allegations contained in Plaintiffs Original Complaint - allegations that must be taken as true for purposes of a motion to dismiss Specifically, they ignore Plaintiffs allegations as to what "governing Plan documents" Defendants disregarded in violation of their fiduciary duties. They ignore Plaintiffs allegations about Defendants' lack of prudence. They n~ischaracterize Plaintiffs allegations about Defendants' conflicts of interest Plaintiff'is bringing claims on behalf of the Southwest Airlines Co. Profit Sharing Plan and the Southwest Airlines Co. 401 (k) Plan (collectively referred to herein as the "Southwest Plans"). These claims involve Defendants' numerous breaches of fiduciary duty with respect to these Plans. Defendants should not be allowed to cut Plaintiff (and the Southwest Plans) oTf before Plaintiff ever has any opportunity to conduct discovery as to Defendants' actions with respect to the Southwest PLAINTIFF'S RESPONSE IN OPPOSlTION TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SUPPORT- Page 1 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 6 of 21 PageID 355 Plans. Motions to dismiss are not vehicles for precluding plaintiffs from determining exactly how and to what extent their rights have been violated, particularly by those that owe them fiduciary duties. Defendants' Motion to Dismiss should be denied. 11. ARGUMENT AND AUTHORITIES A. Motions to Dismiss Are Not Favored, and Defendants Have Wholly Failed to Demonstrate That No Relief Could Be Granted to Plaintiff Under Any Set of Facts. In their Motion to Dismiss, Defendants effectively ignore the standard on a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). As the Supreme Court has stated, "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief.''' Moreover, con~plaints "must be liberally co~istrued in favor of the plaintiff, and all facts pleaded in the complaint must be taken as true "' Accordingly, dismissal under Rule 12(b)(6) is "viewed with disfavor and is rarely granted."' Motions to dismiss under Rule 12(b)(6) must also be considered in light of the "notice pleading" requirements of Federal Rule of Civil Procedure 8(a).l "[Tlhe Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim."5 Rather, a con~plaint must only include "a short and plaint statement of the claim showing that the 'Cordql 1, Gibror~, 355 U S 41 ,4546 (1957) (emphasis added). 'CoNirtr s Adorgari S tar~ lq~ Dean M'iuer, 224 F 3d 496,498 (5th Cir 2000) (emphasis added) 'Id ; see also Franks 11 PI oderirial Health Car e Plan, Iric , 164 F Supp Zd 865, 871 (W D Tex 2001) "See, e g , Conley, 355 U S at 47 *Id PLAINTIFF'S RESPONSE IN OPPOSITION TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SUPPORT- Page 2 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 7 of 21 PageID 356 pleader is entitled to rel idWb "This simplified notice pleading standard relies on liberal discovery rules and summary judgment n~otions to define disputed facts and issues and to dispose of unmeritorious claims."' All of the arguments raised in Defendants' Motion to Dismiss either seek to require some sort of heightened pleading standard or are more appropriately summary judgment arguments asserted prematurely, or both. However, there is no heightened pleading standard in ERISA cases.8 Fur.thermore, the distinction between the 12(b)(6) motion to dismiss stage ofa case and the sununary judgment stage of the case is "crucial. "' Plaintiff has more than provided Defendants with sufficient "notice" of the claims being asserted against them, and Plaintiff is entitled to conduct discovery based on such allegations to support and further pursue such claims.'0 The Federal Rules simply do not permit a defendant to cut off the process before a plaintiff has any opportunity to conduct discovery on properly asserted breach of fiduciary duty claims." 'Slvier liielivc: 1, Sorenia N A , 534 U S 506, 512 (2002) 'See, e g , Coricha 11 Lor~dori, 62 F 3d 1493. 1502 (9th Cir 1995), cerr dirnr'd, 517 U S 1183 (1996); 111 re Djviegy, Irlc ERISA Lrlrg , 309 F Supp 2d 861, 867 (S D Tex 2004) 'See h i re Gerieral Malor r ERISA Lrrrg , No 05-71085,2006 WL 897444, at *5 (E D Mich Apr 6,2006) "See rd at * I0 ("Plaintifis' burden is only to put Defendants on notice of a viable claim for relief, and they need not allege every specific fact that must be proven in furtherance of their claim ") ""[Tlhe circumstances surrounding alleged breaches of fiduciary duty may frequently defy particular.ized identification at the pleading stage Where a fiduciary exercises discretionary control over a plan, and assumes responsibilities that this control entails, the victim of his misconduct often will not, at the time he files his complaint, be in a position to describe with particularity the events constituting the alleged misconduct These facts will frequently be in the exclusive possession of the breaching fiduciary.'' Coriclm, 62 F 3d at 1503 PLAIN TIFF'S RESPONSE IN OPI'OSITION r 0 DEFENDANTS 310TlO.V TO DlSRllSS UNDER FEDERAL R1II.E OF CIVIL. 1'KOCEDlJRE 1L(b)(6) AND BRIEF 1Y SIJPI'OIIT- Etge 3 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 8 of 21 PageID 357 B. Plaintiff Has Sufficiently Pleaded a Claim for Breach of Fiduciary Duty Under ERISA Section 404(a)(l)(D) for Failure to Act in Accordance with Plan Documents. ERISA section 404(a)(l)(D) provides that an ERISA fiduciary "shall discharge his duties with respect to a plan . . . in accordance with the documents and instruments governing the plan.,"'2 Defendants maintain that Plaintiffhas failed to assert a cause of action under this section of ERISA because "the governing plan documents explicitly allowed the investments about which Plaintiff con~plains, "both in terms of the type of investments (loan participations and bonds) and credit quality (A2/P2)."" One of the prohlen~s with Defendants' argument is that Defendants refer to the YMA Investment Policy" as the only relevant "governing plan docun~ent."'~ Plaintiff specifically alleges in its Original Complaint the existence of other "governing" plan documents and that Defendants' actions in conjunction with the two Emon investments violated such docunlents and the guidelines contained therein. For example, in Paragraph 14, Plaintiff alleges: "[Tlhe Brinson Trust Company Policy Manual, Policy No. 512C, required that 'LPCs [loan participations] must have signed documentation approved by the legal staff of the Fund's advisor,"' and illat "Defendants did not follow this policy before purchasing and holding the Enron loan participation " Further, in Paragraph 12, Plaintiff alleges that the Enron bond purchase "violated the Brinson Fund's restrictions on purchases of inslruments with a maturity date in excess of ninety-one days."" "Defendants' Motion to Dismiss at 6 "See also Original Complaint 7 I0 ("Defendants' internal rules governing Brinson Fund investments were also designed to exclude risky instruments, to ensure the investigation and documentation of the investigation of investment decisions, and to require high-level internal approval prior lo the making of any investment the risk attributes of which PL:tINTIFF'S RESPONSE IN OPI'OSITION T O DICFENDANTS MOTION T O DISMISS UNDER FEDERAL RULE O F CIS'IL PROCEUURE IZ(b)(G) S U D BRl1.F IN SL:PPOIIT-- P;~ge .I Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 9 of 21 PageID 358 Defendants offer no explanation as to why the "Policy Manual" and other "internal investn~ents restrictions" that govern Brinson Fund investments are not "governing Plan doc~nlents."~' Plaintiff alleges that they do qualify as such and that Defendants violated them, allegations that for the purpose of the Motion to Dismiss are taken to be true l 7 Accordingly, Plaintiff has stated a claim for breach of fiduciary duty under ERISA section 404(a)(l)(D), and Defendants' Motion to Dismiss should he Denied C. Plaintiff Has Sufficiently Pleaded a Claim for Breach of Fiduciary Duty Under ERISA Section 404(a)(l)(B) for Failure to Act Prudently. Defendants make two arguments in support of their claim that Plaintiffs have failed properly to allege a claim that they violated ERISA's duties of prudence. The first is that Plaintiff's claim rests solely, and improperly, on hindsight.18 The second is that Plaintiff' has failed to make allegations specifically with regard to Defendants' "broade~ investment strategy" in light o f modem portfolio tl1e0ry."'~ Neither of these arguments provides a basis for dismissal under Rule 12(b)(6). might possibly conflict with the Brinson Fund's objectives "); id 7 15 ("Defendants also violated other internal investment restrictions, including those limiting the amount of Enron debt to 3% of the portfolio, tliose requiring that the Enron paper he sold when Defendants' internal credit rating plummeted, and those requiring co~nrnittee approval ") "See, e g , DeBr71yne 11 Eqriilable L.fe Arr~iranceSoc) of the U S , 720 F Supp 1342, 1347 O\I D. 111 1989) (addressing the plaintiffs' claim that the fiduciaries' conduct did not cornport with "prospectuses" concerning the Plan and finding that "defendants' management of the Fund's portfolio fully complied with the reports and prospectuses that plaintiffs characterize as plan documents"), a f d , 920 F 2 d 457 (7th Ci r 1990) In fact, Defendants do not even address these specific references in the Original Complaint, but simply characterize Plaintiffs allegations as being only "conclusory al1egations"that the investments "were 'not consistent with the [Cash Management Fund's] objectives." See Defendants' Motion to Dismiss at 6 Clearly, Plaintiff has provided more than vague references to violated "objectives" by identifying the more specific violations as described above 17 See, e g , Collir?~, 224 F 3d at 498 "See Defendants' Motion to Dismiss at 7-9 PL.AINTIFF'S RESPONSE IN OPPOSITlON TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SUPPORT- Page 5 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 10 of 21 PageID 359 I. Prudence is arr irrhererrtl)~ factrial irrquiry inappropriate for dis~~zisml on tire pleadings. - Section 404(a)(l)(B) of E,RISA requires that Plan fiduciaries act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and faniliat with such matters would use in the conduct of an enterprise of a like character and with like aims."'0 In looking at the "prudent man" rule, courts are to review "the fiduciary's independent investigation of the merits of a particular investnlent," and the "adequacy of a fiduciruy's investigation is to be evaluated in light of the 'character and aims' of the particular type of plan he serves."" Thus, any evaluation of an ERISA fiduciary's prudence will involve a myriad of factors. As all of the factors will necessarily be fact-intensive, the issue ofprudence is inherently a question of fact and, thus, one that should not be resolved on a motion to dismiss before a plaintiff has even had the opportunity to conduct any discovery." 2. Plaintiff alleged that defendant,^ acted in~prride~~tly based on facts tlrat existed at tlre titwe tlre cl~allenged investnw~ts were itlade and is not relying solely or1 "Irirtdsiglrt. " - Defendants ignore the factual nature of any prudence determination as well as the numerous factors that must necessarily be considered with respect to any such determination. They simply make the factual "conclusio~~" that because "the market" was purportedly "unaware of Enron's weakness at "See Do1701'ari s Czr~~rlingl~ani, 716 F Ld 1455, 1467 (5th Cir 1983), c e ~ t deuied, 467 U S 1251 (1984) In this case, Plaintiff has alleged that the "aim" of the portions of the Southwest Plans managed by Defendants was to seek safety ofprincipal, and it is with this aim in mind that the prudence of Defendants' actions must be judged See Original Complaint 7 10 "See 117 re A4cKesro1l HBOC, I17c ERISA Litig , 391 F. Supp 2d 812,841 (N D Cal 2005) (recognizing that a fiduciary's argument that it acted "reasonably" is "better suited for resolution at summary judgment or trial practice, not a motion to dismiss"); c f Harley 11 A4ir1r~eroto A4ining & A@ Co , 42 F Supp 2d 898, 907 (D Minn. 1999) ("Typically, whether a fiduciary acted prudently - or in otlier words as reasonably prudent fiduciary - is a question of fact."). PLAINTIFF'S RESPONSE IN OPPOSITION TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(G) AND BRIEF IN SUPPORT- Page 6 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 11 of 21 PageID 360 the time the investments were made," they could not have been imprudent in failing to heed the many different "warnings" identified by Plaintiff in the Original C~rn~la in t . '~ Defendants' unsupported factual assertion will be shown to have no merit, but in any event cannot support a dismissal under Rule 12(l1)(6).'~ How "the market" viewed Enron at the time Defendants made the cllallenged investments can certainly be a factor that can be considered as part of any prudence analysis. However, "the market" is not a fiduciary, and has no duty of prudence with which it must comply. Moreover, the Supreme Court has stated that "[alny approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding . , . must necessarily be overinclusive or underinclusi~e."~~ Thus, Defendants' approach of considering only how "the market" viewed the Enron investments at the time they were made must be rejected. Moreover, Plaintiff-s Original Complaint specifically identifies that ai the time ihe Enrol? in~wtnie17fs were made there were warnings that a prudent fiduciary would have l~eeded.'~ Plaintiff further alleges that: "[t]he E,nron investments that ultimately defaulted were placed in the Brinson Fund without proper and prudent credit analysis"" and "Defendants perfomled no investigation as I3See Defendantsi;' Motion to Dismiss at 8-9 '"Defendants made this same "hindsight" argument in another case involving its management of the Brinson Fund, and the dishict court rejected the argument as premature "because the present lawsuit has not yet reached the summary judgment stage'' Nelsori 1, Bririson Parttiem, ltic, No 03 C 6446, 2004 WL 178180, at *4 (N.D Ill Jan 16,2004) (denying Defendants' motion to dismiss under Rule 12(b)(6)) Notably, one of the primary cases upon which Defendants rely -DeBri~wev Eqirirable L.ifeAssirrarice Soc yj~ of the U S -was, as the court in Nelsori pointed out, a cased decided ori rzrnla~ar:)~,jirdgtrienr Nelron, N o 03 C 6446,2004 WL. 178180, at *4; seeDefendants2 Motion to Dismiss at 7 (relying upon DeBrz!)vie) '*Barrc litc a Le~snsori, 485 U S 224, 236 (1988) (addressing the issue of materiality in the context of securities fraud claims and rejecting a bright-line rule that would establish when merger d~scussions become material) "See Original Complaint 7 17 "Id 11 PLAINTIFF'S RESPONSE IN OPPOSITION TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SUPPORT- Page 7 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 12 of 21 PageID 361 to the merits and rislcs of the Enron investn~ents prior to using the assets of the Southwest Plans to make such investments."" Moreover, Plaintiff has alleged that Defendants were miwe of the "red flags," and that they had heeded /lien7 ii>ith respect to their oiiJii i m ~ e s t ~ i v ~ f s in Enro17.'~ For example, while Enron was collapsing throughout 2001, Defendants reduced their own Enron exposure by approximately $400 million. Indeed, approximately 30 days before Defendants purchased the Emon investments for the Brinson Fund, they began to characterize Enron as a "MELTDOWN" situation, put a "redlight" on Defendants' own Enron lending, and threatened to terminate their "Master Agreement" with Enron due to its financial condition. IVhiIe Dej%ridant.s heeded the red ,jrag,s that existed prior to October 3, 2001 with respect to the im~e.stri7erit of their 011~17 1iio17e)i they ig~iored thein ii~iih respect to /lie Brinson Ftmd and iiisteadpurchased risky Enron debt j0 There is simply no basis for suggesting, based on the specific facts alleged in the Original Complaint, that "it appears bejlo~id oubt that [Pllaintiff can prove no set ofjirct,~ in support of [its] claim" that Defendants breached their fiduciary duty of prudence when they purchased the two Enron investments at issue." Defendants' Motion to Dismiss must be denied. 3. Deferrdnrrts cite no nrrtlrority for tlre propo.sitiorr that Plaintiff rrrrrst k d /row Defefrdaf~tsactedirftpr~~defrt~ i 1 liglrtof"rizoder~~portfolio t11eofy."- Defendants also claim that any prudence determination must "recogniz[e] the sole of [the challenged] investments in the Fund's broader investment strategy."" Then, they assert that because Plaintiffhas failed to allege facts with "See id 7 11 (" Brinson Partners's credit analyst had doubts about Enron's credit worthiness "); id 7 17 ''Id , 19 (emphasis added) "See Cordeji 355 U S at 45-46; see also 117 re Dyiegp, Inc ERISA Litig , 309 F Supp 2d at 866 ("The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims ") "Defendants' Motion to Dismiss at 10 PLAINTIFF'S RESPONSE IN OPPOSITlON TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SUPPORT- Page 8 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 13 of 21 PageID 362 regard to this broader investment strategy, they are entitled to disn~issal under Rule 12(b)(6)" However, Defendants cannot and do not offer any authority whatsoever that would require an ERISA plaintiff toplead facts related to how a particular challenged investment is or is not prudent in light of "modern portfolio theory." The only case Defendants cite with regard to a "modern portfolio theory" analysis is a case that was decided by the court after a bench /rial.'"l~us, the plaintiff was given the opportunity to develop its allegations, conduct discovery, and attempt to present el~idf97ce to the court that there had been a violation "of a fiduciary duty required by the prudent investor and modern portfolio standards of ERISA."" Defendants seek to deny Plaintiff a similar opporhmity. As the Supreme Court held in Swierkiewicz, a plaintiff is not required to allege facts that support every element of aprima facie case." This is true in the ERISA context as well?' Similarly, Plaintiff does not have to allege facts that will address every potential factor that will be exanlined under a prudence analysis. To require otherwise would be an utter abandomnent of the liberal pleading requirements of Rule 8(a).j8 Instead, Plaintiff must be given the opportunity to develop prudence-related factors tlrough discovery, and Defendants will be free to seek summary ,judgment if they believe they can establish prudence as a matter of law based on "modern portfolio theory" '"See L obor el I Nor 'IPensror~ Fundo No! !he, 11 7i I I S ~ Qeo~~litafh'e A~I'ISOIS, 111c 173 F 3d 3 l3,3 15 (5th Cir ), cetr denied, 552 8 S 967 (1999) "See In re Q~11egv, l r ~ ElUSA L.ifig , 309 F Supp Zd at 88 1-82 '"ee rrrp1 o notes 4-7 and surrounding text PLAINTIFF'S RESPONSE IN OPPOSITXON TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SUPPORT- Page 9 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 14 of 21 PageID 363 once discovery has been completed.39 Until then, Defendants' argument is premature and unfounded, and their Motion to Dismiss should be denied. D. Plaintiff Has Sufficiently Pleaded That Defendants' Breaches o f Fiduciary Duty Caused a Loss to the Southwest Plans. Defendants again seek to place a pleading burden on Plaintiff' that does not exist with their "loss causation" arg~ment.~' "Loss causation" can arise as an issue for proof as to Plaintiffs breach of fiduciary duty claims, but illat does not mean that Plaintiff must allege facts at this early stage of the litigation that would fully explain how Defendants' breaches caused the loss to the Soutl~west Plans 4 1 Defendants offer no authority to the cont~ary?' I9See 111 re Genet a1 Motor s ERISA Lrttg , No 05-71085, 2006 WL 897444, at *I3 ("Whether Plaintiffs can provide proof oitheir allegations is an issue for another day, nfiet discovery has developed a factual record ")(emphasis added) "See Defendants' Motion to Dismiss at 11-13 "SeeSitw liieivic:, 534 U S at 51 1 (rejecting the notion that a plaintiffmustpleodfacts to support every single element of a prima facie case) At t~ial , once Plaintiff has established a prima facie case of loss to the Southwest Plans, the "burden of persuasion [will] shift[] to the [Defendants] to prove that the loss was not caused by [their] breach of duly " AkDor7nld 1, Provident Itidenirii~y Life Ins Co , 60 F j d 234, 237 (5lh Cis 1995) cert denied, 516 U S. I1 74 (1996); see also111 re Djviegl! lric ERISA Litig , 309 F. Supp ?d at 872 In light of the ultimate burden that will lie with Defendants, it makes even less sense to suggest dismissal before Plaintiff has had any opportunity to conduct discovery. "The cases cited by Defendants do not address any pleading requirement that would require dismissal of Plaintiffs claims., Siliwr~~inri 11 A41rtiral Be174fit L$e Iris Co and M'illett 1,. Blire Cro,ss & Blite Shield ofAln, were cases decided on sirnrrrtmj~ jirdgr~re~it See Sili~ertrinn, I38 F 3 d 98, 100 (2d Cir. 1998); IVillett, 953 F.2d 1335, 1338 (I lth Cir 1992) A.lovitr 1, First Not 'I Batik of Clzicngo involved reversal of a jury verdict. See A.lovi/r, 148 F 3 d 760,761 (7th Cir 1998) Of the cases upon whicl~ Defendants rely for their causation argument, only Brnndt ir G~oirrzds involved a motion to dismiss See B~otidt, 687 F Zd 895,895-96 (7th Cir 1982). However, in Brmidt, the issue was the plaintiffs failure to allege any h a m was caused by an act taken by the defendant in its fiduciary capacity. Id at 897 The defendant bank was a fiduciary only to the extent it provided investment advice, but the harm alleged resulted from the defendant's allowing the witl~drawal ofplan funds by an embezzling trustee, and it liad nothing to do with any investment advice provided by the defendant Id at 898 Because the act of which the plaintiff complained was not n fidircinry act, the hann alleged coitld not hmw reszrlted from any fiduciary breach by the defendant, and dismissal was appropriate Id There is no such causal disconnect in this case. The breaches alleged by Plaintiffrelale to Defendants' investment decisions, and the Southwest Plans were harmed by the improper investments. PLALNTIFF'S RESPONSE IN OPPOSITION TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SUPPORT- Page 10 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 15 of 21 PageID 364 Fwthermore, Defendants' argument that the only "cause" of the loss to the Southwest Plans is "Enron's massive fraud" is equally ~navailing."~ Even assuming Defendants' factual assertion that Enron's total collapse due to fraud was a11 "unanticipated event," it would not absolve Defendants' of their responsibility for safeguarding the assets of the Southwest Plans.44 Defendants had a duty to act as reasonably prudent fiduciaries to protect the assets of the Soutl~west Plans from imprudent investments, under all applicable facts and circumstances, including, without limitation, the specific guidelines and restrictions in place to protect the Plans from risk (for example, the limit placed on the Brinson Fund to limit its total investment in any one issuer to 3% of the Fund's assets4'). The "risk" at issue is that an investment will turn out to be a bad one, and the guidelines and restrictions in place were designed as a protection against this very risk. It does not matter that the guidelines were not designed specifically to detect "massive fraud" or that the specific reason the investment turned out to be "bad" was unexpected (like Enron's fraud)."' In any event, what is "foreseeable" is clearly a fact issue that deserves development tluougll discovery before Defendants ca1 be allowed to escape liability for their failure to safeguard the interests of the ERISA Plans with which they had been entrusted. Defendants' Motion to Dismiss should be denied. "See Defendants' Motion to Dismiss at 12 "See L.NC1in~erm~eiits. 111c 1, FII st Fidelity Bark N A , N o 92 Civ 7584 MBM, 1997 WL 528283, at *31 ( S D N Y Aug 27, 1997) "'See Original Complaint 7 15 ' ~ N C I i ~ i ~ e r ~ i i ~ e ~ ~ t r , No 92 Civ 7584 MBM, 1997 WL 528283, at $30 (quoting the REsTAi EMENT(SECOND) Or Tonls 5 4420 an t b) PLAINTIFF'S RESPONSE IN OPPOSITION TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SUPPORT- Page 11 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 16 of 21 PageID 365 F,. Plaintiff Has Sufficiently Pleaded a Claim for Breach of Fiduciary Duty Under ERISA Sections 404(a)(l)(A) and 406 Related to Defendants' Conflicts of Interest. I . Defenrlnnts ' nrgurtrerrt that Plnirrtiffs' conflict-of-irzteresi allegatiorrs "mnke rro set~re"mr~sf fnil. -ERISA section 404(a)(l) provides that plan fiduciaries "shall discharge [their] duties with respect to a plan solely in the interest of the participants and benefi~iaries."~' In other words, ERISA fiduciaries cannot place their own interests ahead of what is best for the Plan. Plaintiff has alleged that Defendants did precisely what they were not allowed to do with respect to the challenged Emon investments: Defendants were seeking during the relevant time period to become a "Tier-] Bank" to Enron at the urging ofAndy Fastow. The reason Defendants wanted to become a "Tier-1 Bank" was because Enron would only "do business" with those who extended it credit. The business Defendants wanted to "do" with Enron was projected at between $10 and $50 million in investment banking fees per year. It is not a coincidence, and is fair to conclude, that Dqfiridants "bent " (or disregarded) their 0 1 4 ~ internal rules for 17andling of the Brirwon Fund tofi17d ways to szpporf Ewon. For example, the so-called independent analysts who were responsible for deciding whether to invest in Enron 01. extend credit to it, had their compensation linlced to the profitability of the Defendants, which was impacted by the Enron business relationsl~ip.~~ Defendants' response to these allegations is to claim that they do not make sense." They point to the fact that the Complaint alleges that Defendants reduced their own Enron holdings, and they question how Plaintiff "seriously contend[s] that defendants hoped to curry favor wit11 Enron" while reducing their own investments in E n r ~ n . ~ ' Actually, Plaintiffs allegations are not "Original Complaint tj 18 (emphasis added) Again, for purposes of a motion to dismiss, Plaintiifs allegations are presumed to be true See Collim, 774 F 3d at 498 .'9SeeDefendants' Motion to Dismissat 14. Defendanis alsosuggest that t lq: in fact, had no interest in currying favor with E,nron See Motion to Dismiss at 14. However, illis claim is not to be resolved at the motion to dismiss stage of the case, when Plaintiffs allegations are presumed to be h.Ue See Collbis, 274 F :d at 498, PLAINTIFF'S RESPONSE IN OPPOSITION TO DEFENDANTS MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6) AND BRIEF IN SUPPORT- Page 12 Case 3:06-cv-00747-D Document 38 Filed 11/09/06 Page 17 of 21 PageID 366 inconsistent?' It could be argued that Defendants wanted to "curry favor" with Enron, but were not willing to do so when their own assets were involved. However, when they were investing other people's iiioney, they were willing to use otl~ers' h d s to try to win favor with Enron. Moreover, Defendants' strategy for trying to curry favor with Enron need not have been a good one or likely to succeed in winning Emon's favor to make the use by the Defendants of the Southwest Plans' funds as part of t l is strategy a breach of fiduciary duty. It is Defendants' motii~ation that violates the conflict-of-interest prohibition in ERISA, not whether Defendants ultimately were (or were liltely to be) successful in getting ihe benefit they were trying to get for tl~emselves by using Plan l k ~ d s . ~ ' 2. Defer~dnr~ts ~#isclrnrncterize tlre proltibitior~s in ERISA section 406. - ERISA section 406 sets forth certain transactions that are strictly prohibited under ERISA." Such transactions fall into two different categories. Plaintiff does not claim that Defendants entered into a transaction with a "party in interest" prohibited by ERISA section 406(a). What Plaintiff claims is that Defendants improperly "deal[t] with the assets of the [Southwest Plans] in [their] own interest or for [their] own account."54 As described above, Defendants wanted to "get in good" with Enron, "The casescited by Defendants offer signiticantly differcnlesmplesof pleadir~g'~inconsistcncy " SwSoo1111? R R Co I , 9 Lorric Sorrtl~~wrrer~r Rarl~tm.Co , 125 F 3d 481. 483 (7111 Cir 1997) ( f i n d m ~ the plaintiff had judicially adrnined that it did "provide services" to the defendant such that the plaintiff could not then argue that the statute of limitations related to seeking recovery of charges for "services" was inapplicable to its claims); Keam o Fox Televi,siort Srations, I m , 297 F Supp. 2d 921,930 (S D T e x 2004) ("Keane's ad~nirted lack of actual use belies his allegations that he created extensive goodwill and public recognition in 'American Idol,' thereby derailing his unfair competition claims ") (internal quotation marks omitted and emphasis added) , affd, I29 Fed Appx. 874 (5th Cir ), cell denied, 126 S Ct 426 (2005); see ako id at 941 ("Keane's additional factual assertion that he advertised his 'American Idol' concept on the Internet entirely eviscerates his ability to characterize that concept as a trade secret or as an idea that was conveyed in confidence to a select group ") "SeeNelsori, No 03 C 6446,2004 WL 178 180, at *3 ("By alleging Brinson's desrr e to support Emon at a time when other investors were losing confidence in the energy trading h n , [Nelson] has advanced enough requisite facts to support an allegation that Brinson breached its fiduciary duty of loyalty ") (emphasis added) I'L.4INTIFF'S RESPONSE IN OPPOSITION 'TO DEFEND4NTS MOTION TO DISMISS UNDER FEDERAL RULE OF CI\'IL PROCEDlII