10-792-cv (L)
`Gearren v. McGraw-Hill Cos., Inc.
`UNITED STATES COURT OF APPEALS
`FOR THE SECOND CIRCUIT
`August Term 2010
`(Argued: September 28, 2010 Decided: October 19, 2011)
`Docket No. 10-792-cv (L) 10-934-cv(Con)
`
`------------------------------------------------------x
`PATRICK L. GEARREN, JAN DEPERRY, MARY SULLIVAN, HARVEY
`SULLIVAN, and CYNTHIA DAVIS, on behalf of themselves and
`all others similarly situated,
`Plaintiffs-Appellants,
`-- v. --
`THE MCGRAW-HILL COMPANIES, INCORPORATED, THE PENSION
`INVESTMENT COMMITTEE OF MCGRAW-HILL, MARTY MARTIN, THE
`BOARD OF DIRECTORS OF THE MCGRAW-HILL COMPANIES,
`INCORPORATED, WINFRIED BISCHOFF, DOUGLAS N. DAFT, LINDA
`KOCH LORIMER, HAROLD MCGRAW, HILDA OCHOA-BRILLEMBOURG,
`MICHAEL RAKE, JAMES H. ROSS, EDWARD B. RUST, KURT L.
`SCHMOKE, SIDNEY TAUREL, JOHN DOES 1-20, ROBERT J.
`BAHASH, HENRY HIRSCHBERG, ALEX MATURRI, JAMES H.
`MCGRAW, IV, DAVID L. MURPHY, JOHN C. WEISENSEEL,
`KATHLEEN A. CORBET, PHIL EDWARDS, ROBERT P. MCGRAW, and
`PEDRO ASPE,
`
`Defendants-Appellees.*
`------------------------------------------------------x
`B e f o r e : WALKER, CABRANES, and STRAUB, Circuit Judges.
`Plaintiffs-Appellants appeal from a decision of the District
`Court for the Southern District of New York (Richard J. Sullivan,
`Judge) granting defendants’ motion to dismiss plaintiffs’ class-
`
`The Clerk of Court is directed to amend the caption as set
`*
`forth above.
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`Gearren v. McGraw-Hill Cos., Inc.
`UNITED STATES COURT OF APPEALS
`FOR THE SECOND CIRCUIT
`August Term 2010
`(Argued: September 28, 2010 Decided: October 19, 2011)
`Docket No. 10-792-cv (L) 10-934-cv(Con)
`
`------------------------------------------------------x
`PATRICK L. GEARREN, JAN DEPERRY, MARY SULLIVAN, HARVEY
`SULLIVAN, and CYNTHIA DAVIS, on behalf of themselves and
`all others similarly situated,
`Plaintiffs-Appellants,
`-- v. --
`THE MCGRAW-HILL COMPANIES, INCORPORATED, THE PENSION
`INVESTMENT COMMITTEE OF MCGRAW-HILL, MARTY MARTIN, THE
`BOARD OF DIRECTORS OF THE MCGRAW-HILL COMPANIES,
`INCORPORATED, WINFRIED BISCHOFF, DOUGLAS N. DAFT, LINDA
`KOCH LORIMER, HAROLD MCGRAW, HILDA OCHOA-BRILLEMBOURG,
`MICHAEL RAKE, JAMES H. ROSS, EDWARD B. RUST, KURT L.
`SCHMOKE, SIDNEY TAUREL, JOHN DOES 1-20, ROBERT J.
`BAHASH, HENRY HIRSCHBERG, ALEX MATURRI, JAMES H.
`MCGRAW, IV, DAVID L. MURPHY, JOHN C. WEISENSEEL,
`KATHLEEN A. CORBET, PHIL EDWARDS, ROBERT P. MCGRAW, and
`PEDRO ASPE,
`
`Defendants-Appellees.*
`------------------------------------------------------x
`B e f o r e : WALKER, CABRANES, and STRAUB, Circuit Judges.
`Plaintiffs-Appellants appeal from a decision of the District
`Court for the Southern District of New York (Richard J. Sullivan,
`Judge) granting defendants’ motion to dismiss plaintiffs’ class-
`
`The Clerk of Court is directed to amend the caption as set
`*
`forth above.
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`action complaints for failure to state a claim upon which relief
`can be granted. Plaintiffs, participants in two retirement plans
`offered by The McGraw-Hill Companies, Inc. (“McGraw-Hill”),
`brought suit alleging breach of fiduciary duty under the Employee
`Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et
`seq. As in the companion Citigroup case, plaintiffs allege (1)
`that defendants acted imprudently by including employer stock as
`an investment option in the retirement plans and (2) that
`defendants failed to provide adequate and truthful information to
`participants regarding the status of employer stock. We hold
`that the facts alleged by plaintiffs are, even if proven,
`insufficient to establish that the defendants abused their
`discretion by continuing to offer Plan participants the
`opportunity to invest in McGraw-Hill stock. We also hold that
`plaintiffs have not alleged facts sufficient to prove that
`defendants made any statements, while acting in a fiduciary
`capacity, that they knew to be false. AFFIRMED.
`Judge STRAUB dissents for substantially the same reasons
`expressed in his dissent and partial concurrence in In re:
`Citigroup ERISA Litigation, No. 09-3804-cv (2d Cir. [DATE]).
`EDWIN J. MILLS, Stull, Stull &
`Brody, New York, NY (Michael J.
`Klein, Stull, Stull & Brody, New
`York, NY; Francis A. Bottini, Jr.
`Albert Y. Chang, Johnson Bottini,
`LLP, San Diego, CA, on the brief),
`for Plaintiffs-Appellants.
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`MYRON D. RUMELD, Proskauer Rose LLP,
`New York, NY (Russell L. Hirschhorn,
`Proskauer Rose LLP, New York, NY;
`Howard Shapiro, Proskauer Rose LLP,
`New Orleans, LA; Floyd Abrams, Susan
`Buckley, Tammy L. Roy, Cahill Gordon
`& Reindel LLP, New York, NY, on the
`brief), for Defendants-Appellees.
`MICHAEL SCHLOSS, Senior Trial
`Attorney
`(M.
`Patricia
`Smith,
`Solicitor of Labor, Timothy D.
`Hauser, Associate Solicitor for Plan
`Benefits
`Security,
`Elizabeth
`Hopkins, Counsel for Appellate and
`Special Litigation, on the brief),
`United States Department of Labor,
`Washington, DC, for amicus curiae
`Hilda L. Solis, Secretary of the
`United States Department of Labor.
`CAROL CONNOR COHEN, Arent Fox LLP,
`Washington, DC (Caroline Turner
`English, Arent Fox LLP, Washington,
`DC; Robin S. Conrad, Shane B. Kawka,
`National Chamber Litigation Center,
`Washington, DC), for amicus curiae
`Chamber of Commerce of the United
`States of America.
`JOSEPH
`M.
`MCLAUGHLIN,
`Simpson
`Thacher & Bartlett LLP, New York, NY
`(George S. Wang, Agnès Dunogué,
`Hiral D. Mehta, Simpson Thacher &
`Bartlett LLP, New York, NY; Ira D.
`Hammerman,
`Kevin
`M.
`Carroll,
`Securities Industry and Financial
`Markets Association, Washington,
`DC), for amicus curiae Securities
`Industry and Financial Markets
`Association.
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`PER CURIAM:
`Plaintiffs-Appellants Patrick L. Gearren, Jan Deperry, Mary
`Sullivan, Harvey Sullivan, and Cynthia Davis, on behalf of
`themselves and a putative class of persons similarly situated
`(“Plaintiffs”), appeal from a decision of the District Court for
`the Southern District of New York (Richard J. Sullivan, Judge)
`granting defendants’ motion to dismiss plaintiffs’ complaints for
`failure to state a claim upon which relief can be granted.1
`Plaintiffs, participants in two retirement plans offered by The
`McGraw-Hill Companies, Inc. (“McGraw-Hill”), brought suit alleging
`breach of fiduciary duty under the Employee Retirement Income
`Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. As in the
`companion Citigroup case, plaintiffs allege (1) that defendants
`acted imprudently by including employer stock as an investment
`option in the retirement plans and (2) that defendants failed to
`provide adequate and truthful information to participants regarding
`the status of employer stock. We hold that the facts alleged by
`plaintiffs are, even if proven, insufficient to establish that the
`defendants abused their discretion by continuing to offer Plan
`participants the opportunity to invest in McGraw-Hill stock. We
`also hold that plaintiffs have not alleged facts sufficient to
`
`The district court consolidated for resolution two
`1
`substantially identical complaints. All references in this
`opinion to the “Complaint” are to the complaint brought by
`plaintiffs Harvey and Mary Sullivan.
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`prove that defendants made any statements, while acting in a
`fiduciary capacity, that they knew to be false.
`BACKGROUND
`This case was argued in tandem with In re: Citigroup ERISA
`Litig., No. 09-3804-cv, which raised similar issues and which we
`decide by separate opinion filed today. The facts alleged by
`plaintiffs are substantially similar to those alleged in the
`Citigroup case. Plaintiffs are participants in one of two defined-
`contribution retirement plans offered by McGraw-Hill: the 401(k)
`Savings and Profit Sharing Plan of the McGraw-Hill Companies, Inc.
`and Its Subsidiaries (the “McGraw-Hill Plan”) and the Standard and
`Poor’s 401(k) Savings and Profit Sharing Plan for Represented
`Employees (the “S&P Plan”) (collectively, the “Plans”). Both Plans
`are eligible individual account plans (“EIAPs”), 29 U.S.C. §
`1107(d)(3)(A). The Plans allow McGraw-Hill employees to make pre-
`tax contributions from their salaries to individual retirement
`accounts. The employees are then able to allocate the funds within
`their accounts among a set of investment options. Each Plan was
`managed by Defendant Marty Martin, who served as McGraw-Hill’s Vice
`President for Employee Benefits and as each Plan’s name
`administrator, and by the Pension Investment Committee, which was
`responsible for selecting the investment options to be offered to
`Plan participants. The McGraw-Hill Stock Fund (the “Stock Fund”),
`which was “invested primarily in the Common Stock of [McGraw-
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`Hill],” remained an investment option in both Plans throughout the
`Class Period (December 3, 2006, through December 5, 2008), as
`mandated by the Plan documents.
`Plaintiffs filed their class action complaint on June 12,
`2009, following a drop in the price OF McGraw-Hill stock from
`$68.02 to $24.23 during the Class Period. The defendants are
`McGraw-Hill, Marty Martin, the Pension Investment Committee, and
`McGraw-Hill’s Board of Directors. Plaintiffs challenge the
`defendants’ management of the Plans and, in particular, the Stock
`Fund. They allege that McGraw-Hill became an imprudent investment
`option during the Class Period because its financial services
`division, Standard and Poor’s (S&P), knowingly provided inflated
`ratings to financial products linked to the subprime-mortgage
`market. The public’s discovery of these ratings practices,
`plaintiffs allege, led to the sharp drop in the price of McGraw-
`Hill stock.
`Count I of plaintiffs’ complaint alleges that the defendants
`breached their fiduciary duties by continuing to offer the Stock
`Fund as an investment option in the Plans throughout the Class
`Period, while “McGraw-Hill’s true adverse financial and operating
`condition was being concealed.” Compl. ¶ 86. Count II alleges
`that the defendants violated their duty of loyalty by making
`misrepresentations and nondisclosures regarding McGraw-Hill’s
`financial condition and S&P’s ratings practices. Compl. ¶ 93.
`
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`Counts III and IV are, in substance, derivative of Counts I and II.
`Count III alleges that the defendants violated their duty of
`loyalty by acting “in their own interests rather than solely in the
`interests” of the Plans’ participants. Compl. ¶ 102. Finally,
`Count IV alleges that the Board of Director defendants failed to
`properly appoint, monitor, and inform the members of the Pension
`Investment Committee.
`On February 10, 2010, the district court granted in full
`defendants’ motion to dismiss. See Gearren v. McGraw-Hill Cos.,
`Inc., 690 F. Supp. 2d 254 (S.D.N.Y. 2010). With respect to Count
`I, the district court held that the defendants were entitled to a
`presumption that their decision to offer the Stock Fund as an
`investment option was prudent. The court concluded that the facts
`alleged by plaintiffs were, if proven, insufficient to overcome the
`presumption. Id. at 265-70. The court also rejected Count II,
`finding that the defendants had no affirmative duty to disclose
`McGraw-Hill’s financial position to Plan participants and that any
`alleged misrepresentations were not made in the defendants’
`capacity as ERISA fiduciaries. Id. at 271-73. The court dismissed
`Counts III and IV because they depended on the success of Counts I
`and II. Id. at 273.
`Plaintiffs now appeal from the district court’s judgment
`dismissing the complaint.
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`DISCUSSION
`We review de novo the district court’s dismissal under
`Federal Rule of Civil Procedure 12(b)(6). Gallop v. Cheney, 642
`F.3d 364, 368 (2d Cir. 2011). “To survive a motion to dismiss,
`a complaint must contain sufficient factual matter, accepted as
`true, to ‘state a claim to relief that is plausible on its
`face.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting
`Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). We
`consider each of plaintiffs’ claims in turn and conclude that
`plaintiffs have failed to state a claim for relief.
`I. Count I: Inclusion of the McGraw-Hill Stock Fund as an
`Investment Option
`Plaintiffs first argue that the district court erred by
`dismissing their claims that the defendants acted imprudently by
`continuing to allow plan participants to invest in McGraw-Hill
`stock during the Class Period. We disagree. As we explain in
`the companion Citigroup opinion, we adopt the Moench presumption
`and review defendants’ decision to continue to allow Plan
`participants to invest in employer stock, in accordance with the
`Plans’ terms, for an abuse of discretion. See Moench v.
`Robertson, 62 F.3d 553, 571 (3d Cir. 1995) (“[A]n ESOP fiduciary
`who invests the assets in employer stock is entitled to a
`presumption that it acted consistently with ERISA by virtue of
`that decision.”). Plan fiduciaries are only required to divest
`
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`an EIAP or ESOP of employer stock where the fiduciaries know or
`should know that the employer is in a “dire situation.” Edgar v.
`Avaya, Inc., 503 F.3d 340, 348 (3d Cir. 2007). “Mere stock
`fluctuations, even those that trend downward significantly, are
`insufficient to establish the requisite imprudence to rebut the
`presumption.” Wright v. Or. Metallurgical Corp., 360 F.3d 1090,
`1099 (9th Cir. 2004).
`Here, we agree with the district court that even if we
`assume that plaintiffs’ allegations are proved, plaintiffs are
`unable to establish that defendants knew or should have known
`that McGraw-Hill was in a dire situation. Plaintiffs’
`allegations relate entirely to operations within the Credit
`Market Services group of S&P, which is one of McGraw-Hill’s three
`operating segments. More specifically, plaintiffs allege that
`Credit Market Services provided inflated ratings to two
`structured-finance products: collateralized debt obligations and
`residential mortgage backed securities. Even if the defendant
`fiduciaries were aware of these problems in the Credit Market
`Services group of S&P, the facts alleged do not support
`plaintiffs’ contention that defendants should have determined
`that McGraw-Hill itself was in a dire situation. Defendants
`could not reasonably have foreseen, based on the information
`alleged to have been available to them at the time, the sharp
`decline in the price of McGraw-Hill stock that occurred after the
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`problems with S&P’s ratings practices become public. Moreover,
`they were not compelled to conclude that McGraw-Hill was in the
`kind of dire situation that would have required them to limit
`participants’ investments in the Stock Fund.
`II. Count II: Misstatements and Omissions
`Plaintiffs also allege that defendants breached their
`fiduciary duty of loyalty both by failing to disclose information
`about McGraw-Hill’s financial condition to Plan participants and
`by making false or misleading statements about McGraw-Hill to the
`participants. In the Citigroup opinion, we explained why we
`reject the argument that fiduciaries have a duty to disclose
`nonpublic information about the expected performance of the
`employer’s stock. Accordingly, plaintiffs cannot state a claim
`for relief based on defendants’ failure to disclose to
`participants information regarding S&P’s rating practices and,
`more generally, McGraw-Hill’s financial strength.
`Plaintiffs’ claims that defendants made false or misleading
`statements or omissions regarding McGraw-Hill stock also cannot
`survive defendants’ motion to dismiss. The only specific false
`or misleading statements identified by defendants are those
`contained in SEC filings that were later incorporated into the
`Plans’ Summary Plan Descriptions (“SPDs”). ERISA, however, only
`holds fiduciaries liable to the extent that they were “acting as
`a fiduciary . . . when taking the action subject to the
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`complaint.” Pegram v. Herdrich, 530 U.S. 211, 226 (2000). Here,
`defendants who signed or prepared the SEC filings were acting in
`a corporate, rather than ERISA fiduciary, capacity when they did
`so. See Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 257
`(5th Cir. 2008) (defendants were not “acting in anything other
`than a corporate capacity” when preparing SEC filings).
`Therefore, in the circumstances presented here, these defendants
`may not be held liable under ERISA for misstatements contained in
`the SEC filings.
`Plaintiffs also argue that because the Plans’ SPDs
`incorporated the SEC filings, the SPDs contained the same
`misstatements as the SEC filings. Defendant Marty Martin, as the
`Plans’ administrator, was responsible for distributing the SPDs
`to participants. 29 U.S.C. § 1021(a)(1). We have held that a
`fiduciary may be held liable for false or misleading statements
`when “the fiduciary knows those statements are false or lack a
`reasonable basis in fact.” Flanigan v. Gen. Elec. Co., 242 F.3d
`78, 84 (2d Cir. 2001). Plaintiffs have not provided any specific
`allegations as to how Martin knew or should have known that S&P’s
`rating practices were improper or that, consequently, the SEC
`filings contained misstatements or omissions. While plaintiffs
`do allege in conclusory fashion that all of the defendants “knew
`or should have known of the material misrepresentations”
`contained in the SEC filings, Compl. ¶ 48, they provide no basis
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`for this conclusion, especially as it is applied to Martin, who
`served as McGraw-Hill’s Vice President for Employee Benefits.
`Accordingly, plaintiffs have not adequately alleged that Martin
`made any intentional or knowing misstatements to Plan
`participants by incorporating SEC filings into the SPDs.
`III. Plaintiffs’ Remaining Claims
`Finally, plaintiffs allege both that defendants failed to
`manage the Plans “solely in the interests of the Participants”
`and that the Board of Director defendants failed to properly
`appoint, monitor, and inform the members of the Plans’ Pension
`Investment Committee about the condition of McGraw-Hill stock.
`Compl. ¶¶ 103, 109. Before both the district court and this
`court, plaintiffs have conceded that these secondary claims fail
`if plaintiffs are unable to survive Rule 12(b)(6) as to their
`primary claims, addressed above. Gearren v. McGraw-Hill Cos.,
`Inc., 690 F. Supp. 2d 254, 273 (S.D.N.Y. 2010); Plaintiffs-
`Appellants’ Brief at 50. Accordingly, we affirm the district
`court’s dismissal of plaintiffs’ theories of secondary liability.
`CONCLUSION
`We have carefully considered all of appellants’ other
`arguments and found them to be without merit. For the foregoing
`reasons, the judgment of the district court is hereby affirmed.
`
`
`12
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