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Fox v. Herzog

December 27, 2005

PATRICIA FOX AND MARIA CARDENO, PLAINTIFFS,
v.
HERZOG, HEINE, GEDULD, INC., EMANUEL E. GEDULD, IRWIN GEDULD, JOHN E. HERZOG, STATE STREET BANK & TRUST CO. AND MERRILL LYNCH ESOP, DEFENDANTS.



The opinion of the court was delivered by: Martini, District Judge

OPINION

THIS MATTER comes before the Court on Defendants' motion for summary judgment, Plaintiffs' cross-motion for partial summary judgment, and Plaintiffs' motion to strike testimony. There was no oral argument. Fed. R. Civ. P. 78. For the reasons set forth below, Defendants' motion is GRANTED and Plaintiffs' motions are DENIED. Plaintiffs' second amended complaint is DISMISSED WITH PREJUDICE.

I. Procedural Background

This action arises from the July 2000 acquisition by Merrill Lynch & Co., Inc. ("Merrill") of Herzog, Heine, and Geduld, Inc. ("HHG"), a privately-held NASDAQ market maker. Plaintiffs were formerly employees of HHG and participants in the HHG Employees' Stock Ownership Plan ("HHG ESOP" or "the ESOP"), an employee pension benefit plan covered by the Employee Retirement Income Security Act ("ERISA" or "the Act"). Plaintiffs filed this action in April 2001 pursuant to ERISA §§ 502(a)(2) and 502(a)(3) on behalf of the HHG ESOP. Plaintiffs request monetary damages under ERISA § 409 as well as other equitable relief.

Plaintiffs filed their original complaint in April 2001 and amended the complaint in July 2001. In October 2002, on motion by Defendants, this Court dismissed Plaintiffs' amended complaint without prejudice. Plaintiffs' filed a second amended complaint in May 2003, alleging ERISA violations against the following defendants: (1) HHG, (2) Emanuel Geduld ("E. Geduld"), former President and CEO of HHG and fiduciary of the HHG ESOP, (3) Irwin Geduld ("I. Geduld"), former Board member of HHG and fiduciary of the HHG ESOP, (4) John Herzog ("Herzog"), former Board member of HHG and fiduciary of the HHG ESOP,*fn1 (5) SSB, Trustee of the HHG ESOP, and (5) the Merrill Lynch Employees' Stock Ownership Plan ("Merrill ESOP"). Defendants have now moved for summary judgment arguing that Plaintiffs cannot meet the requisite elements of their ERISA claims.

II. Factual Background

The HHG ESOP was a "leveraged ESOP" in that it had borrowed money to purchase its holdings, which consisted exclusively of HHG stock. Under the terms of the ESOP, HHG had an obligation to pay into the ESOP, which in turn used these funds to repay the loan. As the ESOP repaid its debt, the ESOP released HHG shares from a suspense account and allocated the shares into participants' accounts. Any unallocated shares continued to be held in the suspense account.

In March 2000, the HHG Board appointed State Street Bank ("SSB") Trustee of the ESOP.*fn2 On June 5, 2000, the Board amended the Trust Agreement such that SSB would have independent authority to decide whether to sell the HHG shares held by the ESOP in the face of a tender offer. On or about June 26, 2000, Merrill made a tender offer for HHG shares. In response, SSB made the decision to sell the ESOP's 30.5% stake in HHG. Merrill eventually acquired 93% of HHG shares.

In exchange for tendering all HHG shares it held, the ESOP received over 5.2 million Merrill shares worth approximately $354 million. Thus, allocated and unallocated HHG shares were converted into allocated and unallocated Merrill shares, respectively, and the unallocated shares continued to be held in the suspense account. At the time of the acquisition, close to 5,000 shares, or 27% of the ESOP's holdings, remained unallocated.

Following the acquisition, sometime around November 2000, Merrill announced its intention to merge the HHG ESOP into the Merrill ESOP. Merrill effected this merger in July 2001 and explained that the Merrill ESOP would allocate any future releases of Merrill shares to all participants in the Merrill ESOP, including to Merrill employees who had never worked for HHG. As a result, unallocated Merrill shares that were previously held in the HHG ESOP are now dispersed to a wider pool of employees than if the merger had not occurred, essentially diluting the number and value of shares that would have gone to the HHG employees absent the merger.

Plaintiffs sued under ERISA, alleging breaches of fiduciary duty. Plaintiffs argue that HHG and the HHG executives breached their fiduciary duties in negotiating and approving the Merrill merger without safeguarding HHG employees' rights to the unallocated shares. They also argue SSB breached its fiduciary duty as Trustee by tendering the ESOP's shares without first attempting prepay the loan so as to allocate to HHG employees any HHG shares that remained unallocated. Plaintiffs do not allege any liability against the Merrill ESOP, but name it as a defendant for the purposes of recovering funds from it.

III. Standard of Review

Federal Rule of Civil Procedure 56 provides that summary judgment may be granted if the materials submitted to the Court show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56;Hersh v. Allen Prods. Co., 789 F.2d 230, 232 (3d Cir. 1986); Lang v. New York Life Ins. Co., 721 F.2d 118, 119 (3d Cir. 1983). Where the facts are not in dispute and the issues contested in a summary judgment motion are legal issues, the court may proceed to decide the legal issues and rule accordingly on the summary judgment motion. See Ingram v. County of Bucks, 144 F.3d 265, 267 (3d Cir. 1998) (when there ...


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