Claims Survive Dismissal in Allianz Self-Dealing Suit

A district court’s decision allowing self-dealing accusations against Allianz to proceed offers some important points of consideration for plan officials, especially as it pertains to documentation and pleading standards under ERISA.  

The U.S. District Court for the Central District of California has mainly denied a motion from Allianz Asset Management to dismiss a self-dealing Employee Retirement Income Security Act (ERISA) lawsuit—but the motion was not entirely unsuccessful.

Plaintiffs in the case originally leveled a host of complaints against two sets of defendants overseeing the Allianz Asset Management 401(k) plan, suggesting the “total plan cost of 0.77% is outrageously high for a defined contribution plan with over $500 million in assets.”

Named in the complaint are Allianz Asset Management of America (both AAM-LP and AAM-LLC), as well as “the Committee of the Allianz Asset Management of America, L.P. 401(k) Savings and Retirement Plan … [Chief Operating Officer and Managing Director of AAM] John Maney … and John Does 1 to 30 … who improperly managed Plan assets for the benefit of themselves and their affiliates instead of the Plan and its participants.” Several participating employers and companies within the Allianz family are also named in the complaint.

Lead plaintiffs Aleksandr Urakhchin and Nathan Marfice filed their claims in the U.S. District Court for the Central District of California, seeking an order for Allianz and company “to remedy breaches of fiduciary duties and unlawful self-dealing.” Plaintiffs seek to recover the financial losses suffered by the plan through improper fees and self-dealing, and to obtain injunctive and other equitable relief from the defendants, as provided by ERISA. Allianz quickly moved with a motion to dismiss the complaint, leading to the current decision.

In making her decision, District Court Judge Josephine Staton cites an impressive list of precedents established by, among other cases, Daniels-Hall v. National Education (2010); Bell Atlantic Corp. v. Twombly quoting Papasan v. Allain, (1986); Harris v. Amgen, Inc. (2013) quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd. (2007); Starr v. Baca (2011); Chandler v. State Farm Mutual Auto Insurance Co. (2010); and United States v. Alcan Electrical & Engineering Inc (1999).

Also informative is the list of evidence and exhibits offered up by Allianz to the court, urging the rejection of all charges: “Defendants requested that the Court take judicial notice of six exhibits: (1) a copy of the 2012 Restatement of the Allianz Asset Management of America L.P. 401(k) Savings and Retirement Plan and amendments thereto (the “Plan Document”), (2) excerpted  copies of Form 5500s for the Plan, which were publicly filed with the Department of Labor, (3) excerpted copies of annual reports and prospectuses for the funds at issue, which were publicly filed with the SEC, (4) an excerpted copy of A Close Look at 401(k) Plans, a document prepared by the Investment Company Institute, (5) an excerpted copy of The Study of 401(k) Plan Fees and Expenses, a document prepared by the Department of Labor, and (6) Morningstar web pages regarding certain funds at issue in this action.”

NEXT: Incorporation by reference  

As Judge Staton explains in her written opinion, “Generally, a court may not consider material beyond the complaint in ruling on a motion to dismiss, via Intri-Plex Techs Inc. v. Crest Group (9th Circuit 2007). However, courts may consider certain materials—documents attached to the complaint, documents incorporated by reference in the complaint, or matters of judicial notice—without converting the motion to dismiss into a motion for summary judgment, via United States v. Ritchie (9th Cir. 2003).”

Under the “incorporation by reference” doctrine, the decision explains, courts may take judicial notice of a document where “the plaintiff’s claim depends on the contents of a document, the defendant attaches the document to its motion to dismiss, and the parties do not dispute the authenticity of the document, even though the plaintiff does not explicitly allege the contents of that document in the complaint … Under Federal Rule of Evidence 201, a fact is appropriate for judicial notice if it is not subject to reasonable dispute in that it is (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned … A court must take judicial notice if a party requests it and the court is supplied with the necessary information.”

In explaining her ruling, Staton first observes the plaintiffs take no issue with the first and fifth documents, “documents which were incorporated by reference into the complaint and were attached to the plaintiffs’ complaint … The Court therefore takes judicial notice of these documents. As for the second, third, and fourth requests, plaintiffs acknowledge that courts may and often do take judicial notice of such documents, but they argue that defendants’ proposed application of the documents is improper. As to these documents, the Court takes judicial notice solely of the existence of these matters of public record, and it does not take judicial notice of one party’s opinion of how a matter of public record should be interpreted or for the truth of the matter asserted therein,” the decision states.

“Finally, the court addresses the defendants’ sixth request. Attached to the complaint are Morningstar reports that analyze the performance of certain funds at issue in this litigation. Defendants argue that for the purpose of completeness, the court should consider Morningstar web pages that subjectively rate the expense level of each fund in the plan. The court finds that Defendants improperly seek judicial notice of disputed issues of fact. Accordingly, the court DENIES the Request for Judicial Notice as to these webpages.”

NEXT: Defendants side of the picture 

In their own motion, defendants rely on three securities fraud cases where, “to the extent the named plaintiffs did not own the securities at issue, the claims were dismissed.”

“These cases are inapposite,” the judge writes. “Claims under sections 11 and 12 of the Securities Act require allegations of a defendant’s material misrepresentation or nondisclosure when selling securities. Thus, because of the unique factual nature of these claims, courts have consistently found that plaintiffs suffer no injury from offerings which they did not purchase. However, courts have declined to apply the above bright-line rule when addressing ERISA claims for breach of fiduciary duties.”

According to Judge Staton, it does not matter, at least for the purpose of constitutional standing, that the plaintiff had not invested in certain funds being considered in the case. Rather, courts look to the nature of the claims and allegations to determine whether the pleaded injury relates to the defendants’ management of the plan as a whole.

“Here, the crux of plaintiffs’ claims involves the defendants’ alleged practice of selecting and retaining Allianz-affiliated investments solely to benefit the Allianz family, rather than considering lower cost, unaffiliated options for the benefit of plan participants,” the decision says. “Due to this alleged misconduct, plaintiffs were unable to select low-cost options when investing in the plan. Thus, as in Walsh and Glass Dimensions, the plaintiffs here allege an injury rooted in defendants’ conduct in managing all the funds as a group … For this reason, this case is distinguishable from the remaining cases cited by defendants.”

The decision goes on to cite Fuller v. SunTrust Banks (2012). In Fuller, Judge Staton writes, the plaintiff provided nothing more than a “bare assertion that a breach of fiduciary duty harms all plan participants … Here, in contrast, the non-speculative harm plaintiffs allegedly suffered relates to the defendants’ plan management and fund selection process as a whole rather than the unique factual nature of individual funds. Accordingly, plaintiffs adequately allege constitutional standing as to all the challenged funds in the plan at issue, including funds in which plaintiffs did not invest. The motion to dismiss is therefore DENIED on this basis.”

NEXT: Role of the statute of limitations

Considering statute of limitations issues raised by defendants in their motion, the complaint concludes the following: “Defendants argue that information regarding the fees and expenses of alternative plans were publicly available before 2013, but they do not point to any judicially noticeable documents indicating that pre-2013 fees, expenses, or cost percentages of alternative plans were the same or lower than the 2013 or 2014 figures alleged in the complaint. Nor do any of the plaintiffs’ allegations raise any such inference. Accordingly, because this affirmative defense is not ‘obvious on the face of the complaint, dismissal is not warranted on this basis at this stage in the litigation.”

Judge Staton concludes the plaintiffs “adequately allege a conflict of interest and improper fiduciary acts that breach the above duties to plan participants. Contrary to defendants’ assertions, these allegations adequately question whether the fiduciary used appropriate methods to investigate the merits of the transaction.”

The ruling actually finishes by granting one significant aspect of the motion to dismiss as it relates to plaintiffs’ seeking certain forms of equitable relief: “Plaintiffs fail to allege that any of the money sought to be disgorged can be traced to particular funds or property in the defendants’ possession. In their opposition brief, plaintiffs assert they will be able to trace the exact transactions and entities related to each fiduciary breach, and thus the property is sufficiently traceable for purposes of an equitable restitution claim. However, plaintiffs fail to make any such allegations in their operative complaint, and they may not amend their [complaint] through an opposition brief. Plaintiffs also argue there is a ‘limited exception’ to the traceability requirement ‘for an accounting for profits, a form of equitable restitution’ wherein a plaintiff may ‘recover profits produced by defendant’s use of plaintiff’s property, even if they cannot identify a particular res containing the profits sought to be recovered.”

Seeking an accounting of profits against fiduciaries is generally considered equitable relief, Judge Staton observes, “while a suit seeking the identical relief against a non-fiduciary would normally be a suit at law, thereby characterizing the relief sought as legal rather than equitable … Given that this third claim is alleged against non-fiduciary defendants, the ‘limited exception’ to the traceability requirement does not apply here … Accordingly, for the above reasons, plaintiffs fail to state a claim for equitable relief under § 1132(a)(3). The Motion is therefore GRANTED as to this claim, which is DISMISSED WITHOUT PREJUDICE.”

Full text of the decision is here