Deutsche Bank Self-Dealing ERISA Suit Partly Dismissed

The mixed ruling grapples with binding circuit court guidance and reaches quite different conclusions regarding various allegations of prohibited transactions and fiduciary breaches.

The U.S. District Court for the Southern District of New York has issued a mix-bag opinion in a lawsuit filed by employees of Deutsche Bank, alleging self-dealing within the company’s qualified retirement plan.

The partial decision for summary judgement comes after the district court first ruled the lawsuit claims, filed in December 2015, would not be time-barred by ERISA’s various statutes of limitation. Subsequent to that decision, the court approved class action status for the complaint in September 2017, leading to the present matter.

In sum, the underlying allegations are that Deutsche Bank and other defendants violated their fiduciary duties by offering in the company 401(k) plan proprietary, high-cost investments that profited the bank. According to the plaintiffs’ complaint, the Deutsche Bank Matched Savings Plan, as of 2009, had roughly $1.9 billion in assets and offered participants 22 “designated investment alternatives,” 10 of which were “proprietary Deutsche Bank mutual funds.” The core of the complaint’s allegations concerns the inclusion of Deutsche Bank proprietary mutual funds among the plan’s offerings. According to the complaint, “Deutsche Bank earned millions of dollars in investment management fees by retaining [these proprietary mutual funds] in the plan.”

Technically speaking, this new decision comes in response to defendants’ motion for partial summary judgment pursuant to Federal Rule of Civil Procedure 56. Defendants seek summary judgment with respect to Counts II and III in their entirety, the decision explains, and with respect to Counts I and IV only to the extent that they are predicated on the investment options included in the plan’s core lineup. Defendants do not seek summary judgment with respect to Counts I and IV to the extent they are predicated on failures to mitigate ADP recordkeeping expenses.

As the decision lays out, the motion is granted in part and denied in part.

Based on circuit court guidance, denied is the motion for summary judgement against plaintiffs’ suit based on the generic allegation that there is a dispute of material fact as to whether defendants breached their various fiduciary duties. In particular, defendants seek summary judgment on the ground that plaintiffs cannot establish “loss causation,” but the argument is roundly rejected. Thus, defendants’ motion for summary judgment on the breach of fiduciary duty claims is denied.

The court’s reasoning is explained this way: “Defendants ask essentially for a determination that [plaintiffs’ experts’] statistical analyses are fundamentally flawed to the point of being invalid as a matter of law. No such determination is appropriate at the summary judgment stage. Even if it were appropriate to weigh the competing expert opinions now on this summary judgment motion—rather than at the bench trial scheduled to begin shortly—the cursory seven-paragraph rebuttal of [plaintiffs’ experts’] work is not sufficiently persuasive to justify that rejection. Accordingly, there is a dispute of material fact as to whether plaintiffs sustained recoverable losses caused by defendants. The motion for summary judgment [on these claims is thus] denied.”

The decision goes on to grapple further with binding guidance from the U.S. Circuit Court of Appeals for the Second Circuit, concluding that defendants’ argument is, at its core, “a request to ignore the ‘but for’ Second Circuit test for determining compensable, and therefore actionable, losses in favor of the ‘objective prudence’ test adopted in another circuit.” This effort is made because, as the court explains, the objective prudence test “requires plaintiffs to demonstrate that, even if a breach occurred, that breach resulted in investments that were objectively imprudent.”

“This argument fails for two reasons,” the district court explains. “First, the Second Circuit’s binding precedent cannot be ignored. … Second, infusing the loss analysis with questions of ‘objective prudence’ is analytically messy.”

Ultimately, the district court reaches a skeptical conclusion: “Defendants are not arguing that they are entitled to summary judgment on the question of whether their actions breached the duty of care. Instead, they attempt to attach the objectively prudent test to the investments that may have resulted from imprudent conduct. In this circuit, there is no legal basis to do so.”

The defendants seem to have had at least a little more success on their other arguments for summary judgement.

Looking at plaintiffs’ claim that, by offering the plan proprietary mutual funds, defendants engaged in prohibited transactions with a party in interest in violation of ERISA’s prohibited transaction rules—these have fallen flat. As the district court decision states, summary judgment is “granted with respect to the prohibited transaction claims, because the transactions are exempt under Department of Labor Prohibited Transaction Exemption 77-3.”

Consequently, the opinion does not address defendants’ other arguments in support of summary judgment on these claims. However, the decision grapples in detail with the requirements that must be satisfied in order for the 77-3 exemption to apply.

The full text of the decision is available here.