The opinion of the court was delivered by: Jerome B. Simandle United States District Judge
This putative class action involving an allegedly mismanaged employee retirement plan is before the Court on three separate motions to dismiss [Docket Items 15, 17, & 19]. The motions, filed pursuant to Rule 12(b)(6), Fed. R. Civ. P., challenge each of the twenty-two counts contained in the 136-page Complaint.*fn1 As discussed in this Opinion, some but not all of the claims will be dismissed.
This case involves the alleged financial mismanagement of the Inductotherm Companies Master Profit Sharing Plan ("Plan"), a pension plan designed to provide retirement benefits to Inductotherm employees. (Compl. ¶ 54.) Plaintiffs and the putative class are or were participants in the defined contribution plan which is sponsored by Inductotherm Industries, Inc., also known as Indel Inc., "a privately owned company that acts as the management service company for a group of engineering and technology-based companies." (Compl. ¶ 12.) Contributions to the Plan are deposited into an investment fund that is invested under the supervision of the Plan's Trustees. The Complaint contains twenty-two claims, including sixteen claims under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 - § 1461 for breach of fiduciary duties and self-dealing, two common law claims of fraudulent concealment, three claims involving violations of federal and state laws regulating securities, and a federal claim under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1963.
There are three sets of named Defendants in this case. First, there are the Inductotherm Defendants, who constitute the company itself and the trustees to the Plan.*fn2 The second group is the FSC Defendants, entities who were allegedly involved in advising the Plan's trustees as to how to invest the Plan's assets: Financial Services Corporation, FSC Securities Corporation, and the Wharton Business Group. The third set of Defendants are the SunAmerica Defendants, who are related to the SunAmerica Money Market Fund in which Plan assets were invested. They are the American International Group (AIG), Sunamerica Asset Management Corp., Sunamerica Capital Services, Inc., and Sunamerica Fund Services, Inc.
According to Plaintiffs, the Inductotherm Defendants retained the assistance of the FSC Defendants around 2005 to invest the Plan assets, including the purchase of shares of the SunAmerica Money Market Fund. Plaintiffs allege that the investments performed poorly, partly because the fiduciaries failed to perform their duties, misled Plaintiffs about various aspects of the investments, failed to act in the interests of the Plan, and violated various securities laws and regulations. Each set of Defendants has filed a separate motion to dismiss. The factual allegations underlying each individual claim are discussed, as relevant, in the sections that follow.
The sufficiency of the pleadings for the non-fraud claims contained in this Complaint is governed by Rule 8, Fed. R. Civ. P., a rule that is designed to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).*fn3 The rule provides that "[a] pleading that states a claim for relief must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2).
The "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); Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009). The requirement to provide the grounds for relief "requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)).
In reviewing whether each count in the Complaint states a claim showing that the pleader is entitled to relief, the Court must "accept all factual allegations as true and construe the complaint in the light most favorable to the plaintiff." Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (quoting Pinker v. Roche Holdings Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002)).
On this procedural posture, "courts generally consider only the allegations in the complaint, exhibits attached to the complaint, matters of public record, and documents that form the basis of a claim." Lum v. Bank of America, 361 F.3d 217, 222 n.3 (3d Cir. 2004) (citation omitted). This Complaint relies, directly or indirectly, upon a number of public documents or documents referenced in the Complaint. The Court will consider these documents about which there is no dispute as to authenticity, and to the extent they contradict the Complaint's factual allegations, the documents will control.
ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 n.8 (3d Cir. 1994) ("Where there is a disparity between a written instrument annexed to a pleading and an allegation in the pleading based thereon, the written instrument will control.").
Plaintiffs' claims pursuant to 29 U.S.C. § 1104 and § 1106 require a showing that each Defendant subject to the claims was acting in a fiduciary capacity. 29 U.S.C. § 1104, § 1106; In re Unisys Corp. Retiree Medical Benefits ERISA Litigation, 579 F.3d 220, 228 (3d Cir. 2009). The Inductotherm Defendants do not dispute their role as fiduciaries, but the FSC Defendants argue that none of them played a fiduciary role.
ERISA provides three ways in which one can acquire fiduciary status: (i) exercising discretionary authority or control over management of the plan or disposition of its assets; (ii) rendering investment advice for a fee or other compensation, or having authority to do so; or (iii) exercising discretionary authority in the administration of the plan. 29 U.S.C. § 1002(21)(A). Under the investment advice prong, an individual may become a fiduciary by (1) providing individualized investment advice; (2) given pursuant to a mutual understanding; (3) on a regular basis; (4) that serves as a primary basis for investment decisions with respect to plan assets; (5) pertains to the value of the property or consists of recommendations as to the advisability of investing in certain property; and (6) is rendered for a fee.*fn4 29 C.F.R. § 2510.3-21(c); see Thomas, Head & Greisen Employees Trust v. Buster, 24 F.3d 1114, 1117 (9th Cir. 1994), cert. denied, 513 U.S. 1127 (1995).
If the factual allegations in a complaint do not sufficiently support a claim that a defendant was a fiduciary, then the claim may be dismissed on a Rule 12(b)(6) motion. See Pegram v. Herdrich, 530 U.S. 211 (2000). If, on the other hand, fiduciary status is based on disputed facts - which is often the case because of the functional nature of the test - then the issue cannot be decided on a motion to dismiss. See Smith v. Provident Bank, 170 F.3d 609, 613 (6th Cir. 1999). As explained below, accepting all factual allegations as true and construing the Complaint and documents upon which it is based in the light most favorable to Plaintiffs, the alleged facts are sufficient to establish that the Wharton Business Group and FSC Securities are fiduciaries, but not the Financial Services Corporation.
b. Allegations Regarding FSC Defendants
The Complaint alleges that in 2006 and 2007, the FSC Defendants, through the Wharton Business Group, caused the Plan's assets to be invested in various ways. (E.g., Compl. ¶¶ 130, 138.) The Complaint alleges that a letter sent to Plaintiffs from the Trustees of the Plan stated, "These funds are invested in various funds and equities that are recommended by the Wharton Business Group, a company which monitors to a high degree of precision the various investment opportunities." (Compl. ¶ 142.) Another letter stated that "the Plan is invested in accordance with the adopted investment policy statement between the Trustees and their professional investment advisor, the Wharton Business Group." (Compl. ¶ 145.)
The "Investment Policy Statement," referenced in the Complaint, is a December 2005 agreement between Wharton Business Group and Inductotherm regarding how the Plan's assets will be managed. (FSC Def. Ex. B; Compl. ¶ 79.) The five-page document sets out goals and objectives to guide decision-making with respect to investing the Plan's assets. It provides for a set overall asset allocation (i.e. income v. growth) as well as an adjustable specific asset allocation (i.e. bonds, large value U.S. stocks, emerging markets), and provides the authority for an outside financial manager to rebalance the portfolio based on agreed-upon ranges. By providing for the selection and control of investment managers outside Inductotherm, the document strongly implies that individuals at Wharton Business Group will be actively managing the Plan's assets and making specific investment decisions which will be reviewed by Inductotherm and its representatives. (FSC Def. Ex. B at 4-5.) This document does not mention Financial Services Corporation or FSC Securities.
Defendants also attach the "FSC Securities Corporation, Vision2020 Advisor, Investment Advisory Client Services Agreement." (FSC Defs. Ex. C.) It is a fourteen-page agreement between FSC Securities Corporation and the Inductotherm Companies Profit Sharing Plan. The document is a form contract with various check boxes and empty spaces with handwritten notations. FSC Securities is filled in for the space marked "Adviser," Inductotherm Companies Profit Sharing Plan is filled in for the space marked "Client," and Marc Hembrough, who Plaintiffs allege to be a member of Wharton Business Group working for FSC Securities, is filled in for the space "Investment Adviser Representative." The agreement opens an account with FSC Securities for the purpose of participating in the Vision2020 Advisor Program, through which a third party - in this case Marc Hembrough of Wharton Business Group - will manage the Plan's assets on behalf of FSC Securities.
In the Investment Agreement document, under "Trading," the section marked "non-discretionary" is checked. The section states (using the generic terms Adviser, Client, and Investment Adviser Representative):
[Mr. Hembrough] on behalf of [FSC Securities] will make recommendations to [Inductotherm] of load and no-load mutual funds, stocks and bonds, and will purchase or sell on behalf of [Inductotherm] such investments as [Inductotherm] directs. [Inductotherm] is under no obligation to accept any of [Mr. Hembrough's] recommendations, and [Inductotherm] retains sole discretion over the investments to be purchased and sold in the Program Account.
(FSC Defs. Ex. C. at 2-3.) The Agreement also provides for payment of an annualized advisory fee. Finally, it indicates that FSC Securities will not "accept the legal status of investment adviser or fiduciary for any assets of the client outside a program subject to an advisory agreement," the negative implication of which is that it will accept that designation for funds subject to this Investment Agreement. (FSC Defs. Ex. C. at 7.)
The final documentary support for the Complaint's allegations that FSC Securities, through Wharton Business Group, held responsibility for the Plan's investments are the Annual Return/Report of Employee Benefit Plan forms for the Inductotherm Profit Sharing Plan for years 2006 and 2007. (FSC Defs. Ex. L & M; Compl. ¶ 62.; Compl. ¶ 80.) Both IRS forms state that Financial Service Corp. served in the "Official plan position" of "Investment Management," for which it was paid $61,245 in 2006 and $64,865 in 2007, in fees and commissions. (Ex. L at 5; Ex. M at 5.) An attachment to Schedule H line 4i, "Did the Plan have assets held for investment?" lists Financial Service Corp. as a "borrower, lessor, or similar party," and the "description of the investment," is "funds managed by Wharton Business Group."
The explanation provided in the Complaint for the seeming interchangeable use of Wharton Business Group, FSC Securities, and Financial Services Corporation is that Wharton Business Group is just the front office for FSC Securities. Financial Services Corporation conducts all of its investment and advisory activities through FSC Securities, (Compl. ¶¶ 17, 87), which in turn uses branch offices like Wharton Business Group to transact business. (Compl. ¶ 19.) Employees of Wharton Business Group are employees of FSC Securities (Compl. ¶ 172). That is why FSC Securities is listed on all the relevant documentation as the entity providing financial advice for the Plan. (FSC Defs. Exs. B, C, L, M.)
c. Wharton Business Group May be Sued as a Fiduciary
The sum of these allegations and corroborating documents is that Wharton Business Group, on behalf of FSC Securities, rendered investment advice to the Trustees who had ultimate control over the investment decisions. These allegations make it plausible that Wharton Business Group was (1) providing individualized investment advice; (2) given pursuant to a mutual understanding; (3) on a regular basis; (4) that serves as a primary basis for investment decisions with respect to plan assets; (5) pertains to the value of the property or consists of recommendations as to the advisability of investing in certain property; and (6) is rendered for a fee. 29 C.F.R. § 2510.3-21(c).
The FSC Defendants ignore this prong of ERISA's definition of a fiduciary entirely, and attempt to show by case law that advice is never sufficient. The precedent cited by Defendants does not stand for the proposition that advice alone can never give rise to fiduciary status, a proposition of law which would contradict the plain language of the statute. 29 U.S.C. § 1002(21)(A)(ii) (providing that an individual is a fiduciary when "he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so."); see also Ellis v. Rycenga Homes, Inc., 484 F. Supp. 2d 694, 706 (W.D. Mich. 2007) ("Although it is certainly true that the possession of discretionary authority and control is generally the benchmark for fiduciary status under ERISA, it is also true that, in the special case of those providing investment advice, the existence of discretionary authority is not necessary to a finding of fiduciary status.").*fn5
The FSC Defendants also argue that because the Wharton Business Group is merely the trade name of several individuals acting as investment advisors, it cannot be sued as a fiduciary. Rule 17(b), Fed. R. Civ. P., governs whether an entity has the capacity to sue and be sued. It provides in relevant part:
Capacity to sue or be sued is determined as follows . . . [(3]] by the law of the state where the court is located, except that . . . (A) a partnership or other unincorporated association with no such capacity under that state's law may sue or be sued in its common name to enforce a substantive right existing under the United States Constitution or laws.
Defendants correctly argue that 17(b) only gives unincorporated associations the capacity to make and be subject to federal claims; it does not transform any particular group of individuals into an unincorporated association. Instead, such an association must be recognized as a legal entity by other law. Roby v. Corporation of Lloyd's, 796 F. Supp. 103, 110 (S.D.N.Y. 1992). However, federal law, not state law, determines whether a group is an unincorporated association for the purposes of 17(b)(3)(A). See Committee for Idaho's High Desert, Inc. v. Yost, 92 F.3d 814, 820 (9th Cir. 1996). Under federal law, an unincorporated association is a "voluntary group of persons, without a charter, formed by mutual consent for the purpose of promoting a common enterprise or prosecuting a common objective." Id.; Local 4076, United Steelworkers of America v. United Steelworkers of America, AFL-CIO, 327 F. Supp. 1400, 1402-03 (W.D. Pa. 1971). According to the allegations made by Plaintiffs, that Wharton Business Group operates as a branch office of FSC Securities Corporation, the federal definition of unincorporated association fits the Wharton Business Group. The motion to dismiss that entity as lacking the capacity to be sued will therefore be denied.
FSC Securities is a fiduciary because the individual investment advisors were direct representatives of FSC Securities. (Compl. ¶ 176.) FSC Securities is also named as the entity performing investment management services. (Compl. ¶ 80.) Although the Third Circuit has yet to directly address the issue,*fn6 most Circuits to have done so find that employer-employee agency applies to ERISA fiduciary duties. See Am. Fed'n of Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance Soc. of the U.S., 841 F.2d 658, 665 (5th Cir. 1988); Nat'l Football Scouting Inc. v. Continental Assurance Co., 931 F.2d 646, 648-650 (10th Cir. 1991); Hamilton v. Carell, 243 F.3d 992 (6th Cir. 2001); Crosley v. Composition Roofers' Union Local 30 Employees' Pension Plan, No. Civ.A. 04-5954, 2005 WL 2405979, at *7 (E.D. Pa. Sept. 29, 2005); Kling v. Fidelity Mgmt. Trust Co., 323 F. Supp. 2d 132, 146-47 (D. Mass. 2004) (collecting federal cases that applied employer-employee agency to ERISA breach-of-fiduciary-duty claims and then itself endorsing the theory). Indeed, without some theory of agency, an investment corporation would never be held liable for breaches of fiduciary duty since corporate liability is always ultimately a question of imputing liability to the entity based on the conduct of a human being.
e. Financial Services Corporation
Unlike FSC Securities, Financial Services Corporation neither directly employs the investment advisors nor is it named as the entity providing investment advice in the Agreement. And, counter to Plaintiffs' assertion, Financial Services Corporation is not made a fiduciary merely by being an "affiliate" of FSC Securities. According to the regulation, even if Financial Services Corporation constitutes an "affiliate" of a "rendering investment advice" fiduciary, it would still have to independently "render advice to the plan as to the value of securities or other property, or make recommendation[s] as to the advisability of investing in, purchasing, or selling securities or other property." 29 C.F.R. § 2510.3-21(c) (requiring that, to be deemed "rendering investment advice," a person must both render advice and "directly or indirectly (e.g., through or together with any affiliate)" control the investments or render advice meeting the six prongs discussed above).
Nor does the inclusion of Financial Services Corporation on the IRS tax filings make it a fiduciary or impute liability. As Plaintiffs themselves acknowledged, this entry was a likely typo, and in any case, listing the corporation as being involved in investment management is not enough to make it a fiduciary. This is especially clear when the same filings reveal that Wharton is the entity actually giving investment advice, and that neither entity is authorized to exercise discretionary control over investments. (Defs. Exs. L, M.)
The only way for Financial Services Corporation to be liable for the conduct of the investment advisors in this case is to impute liability based solely on the fact that they are the parent company of FSC Securities. Defendants' position is that a corporate parent can never be held responsible for the acts of a fiduciary subsidiary. Although this position goes beyond the precedent cited by Defendants,*fn7 it is true that veil-piercing would require something more than merely being the parent of the subsidiary corporation. See Confer v. Custom Eng. Co., 952 F.2d 34, 37 n.4 (3rd Cir. 1991) (citing Lowen v. Tower Asset Management, Inc., 829 F.2d 1209 (2d Cir. 1987)) (noting that where a corporation is a fiduciary, misuse of the corporate form ...