PBGC Loses Suit Against Morgan Stanley

April 8, 2013 (PLANSPONSOR.com) – A federal appellate court denied the Pension Benefit Guaranty Corporation’s (PBGC’s) attempt to recover retirement plan losses from Morgan Stanley.

The 2nd U.S. Circuit Court of Appeals affirmed a United States District Court for the Southern District of New York ruling that the amended complaint fails to allege facts supporting the plausible inference that Morgan Stanley knew, or should have known, that the particular mortgage-backed securities in the relevant portfolio were imprudent investments. In particular, the complaint relies on the decline in the market price of mortgage-backed securities generally, without specifying the securities at issue or presenting any facts to suggest that a reasonable investor would have viewed those securities as imprudent investments.   

The appellate court said a decline in market price of a type of security does not, by itself, give rise to a reasonable inference that it was imprudent to purchase or hold that type of security.  

The 2nd Circuit agreed with the district court that the amended complaint relies too heavily on facts known only in hindsight, and that its general allegations about warning signs relating to indistinct classes of securities do not give rise to a plausible inference that Morgan Stanley violated its fiduciary duty.  

The PBGC sought $25 million in damages from Morgan Stanley Investment Management Inc. over risky pension investments it made for New York’s Saint Vincent Catholic Medical Centers’ pension plan (see “PBGC Seeks Restitution of Plan Losses from Morgan Stanley”). In a brief filed with the 2nd U.S. Circuit Court of Appeals, the PBGC argued that the district court got it wrong by misreading the complaint and overlooking key facts about the high concentration of investments in mortgage-backed securities in 2007 and 2008, even while the firm was aware those investments were risky and contrary to Saint Vincent’s instructions.   

The PBGC took on Saint Vincent’s pension plan covering more than 9,500 workers in September 2010.  

The 2nd Circuit’s opinion is here.