The opinion of the court was delivered by: Hon. Jerome B. Simandle
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 2
II. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . 3
A. The Defendants. . . . . . . . . . . . . . . . . . . . 3
B. The Plan .. . . . . . . . . . . . . . . . . . . . . . 6
C. The Claims .. . . . . . . . . . . . . . . . . . . . . 7
III. DISCUSSION . . . . . . . . . . . . . . . . . . . . . . . 15
A. Inductotherm's Motion for Partial Summary Judgment. 15
1. Standard of Review.. . . . . . . . . . . . . . 15
2. Count I - Failure to Adopt a Trust Agreement.. 16
3. Count XXIV - Failure to Investigate. . . . . . 24
B. Daubert Motions.. . . . . . . . . . . . . . . . . . 28
1. Standard of Review.. . . . . . . . . . . . . . 29
2. Defendants' Daubert Motion.. . . . . . . . . . 31
3. Plaintiffs' Daubert Motion.. . . . . . . . . . 42
C. Class Certification.. . . . . . . . . . . . . . . . 44
1. Standard of Review.. . . . . . . . . . . . . . 44
2. Numerosity.. . . . . . . . . . . . . . . . . . 47
3. Adequacy.. . . . . . . . . . . . . . . . . . . 48
4. Commonality and Typicality.. . . . . . . . . . 52
5. Rule 23(b)(1). . . . . . . . . . . . . . . . . 60
6. Classwide Damages. . . . . . . . . . . . . . . 61
IV. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . 63
This matter is before the Court on four separate but interconnected motions. First, Plaintiffs Boris Goldenberg, Reinaldo Pacheco, and Andrew Loew have moved [Docket Item 160] to certify four separate sub-classes of similarly situated participants in a profit-sharing plan for employees created by the Inductotherm Companies, which is known as the Inductotherm Companies Master Profit Sharing Plan ("the Plan").
All remaining Defendants oppose class certification. In addition, one group of Defendants (the Inductotherm Defendants) also filed a motion for partial summary judgment as to certain counts in Plaintiffs' Amended Complaint [Docket Item 182].
Additionally, the parties have also filed dueling Daubert motions with respect to proposed class certification expert testimony. All Defendants joined in filing a motion to preclude Plaintiffs' expert, Dr. Steven Pomerantz, Ph.D. [Docket Item 183], and Plaintiffs filed a cross-motion to preclude Defendants' expert, Ms. Lucy Allen [Docket Item 185].
Plaintiffs seek damages and injunctive relief on behalf of the Plan pursuant to the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., for the alleged mismanagement of the Plan by the Defendants. Plaintiffs and the members of the putative sub-classes 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." Second Amended Compl. ("SAC") ¶ 10.
The Defendants in this action fall into three categories. The first category of Defendants are the administrators and trustees of the Plan (the "Inductotherm Defendants"). This group of Defendants includes Indel, Inc. (also known as Inductotherm Industries, Inc. and Inductotherm Corp.), the corporate entity that sponsors the plan. Also included are the trustees of the Inductotherm Plan ("the Trustees"),*fn1 members of the Committee to the Plan ("the Committee members"),*fn2 and the members of the Board of Directors of Indel and Inductotherm Corp. ("the Board of Directors").*fn3 The Board of Directors appoint the Committee members to manage the administration of the Plan. SAC ¶ 12.
The second group of Defendants are the FSC Defendants. These entities were hired by the Inductotherm Defendants to provide investment advice for the Plan. On December 12, 2005, the Inductotherm Defendants retained the services of Defendant Wharton Business Group, which is alleged to be a branch office of Defendant FSC Securities Corporation. SAC ¶ 54. Wharton replaced the previous investment advisory firms of Hewitt Investment Group, Charlotte Capital LLC and State Street Global Advisors. SAC ¶ 53. FSC employees Marc Hembrough and B.J. Webster were the primary investment advisory representatives of Wharton. Id. ¶ 54. Notably, Defendant FSC Securities Corp. is a wholly owned subsidiary of Defendant American International Group, Inc. ("AIG"). Id. ¶ 15, 58-59.
The third group of Defendants are the SunAmerica Defendants. The principal Defendant in this group is Defendant AIG. Also included are Defendants SunAmerica Asset Management Corp., SunAmerica Capital Services, Inc., and Sunamerica Fund Services, Inc., which are all wholly owned subsidiaries of AIG. These entities are primarily related to the action due to their affiliation with and management of the SunAmerica Money Market Fund (SAMMF), which is a particular fund that FSC/Wharton advised the Plan to invest more than $7 million of Plan assets beginning in 2005, rather than in a money market fund managed by Vanguard. SAC ¶ 106-07; 122-33. Plaintiffs allege that by investing Plan assets in the SAMMF rather than the Vanguard fund, the FSC Defendants caused the Plan to pay unnecessarily high management fees and suffer from inferior returns. Id. ¶ 122-141.*fn4
All Defendants in both the FSC/Wharton group and the SunAmerica group are represented by the same counsel, and filed their briefs in the instant motions jointly; accordingly, the Court will refer to them collectively as the FSC/SunAmerica Defendants.
The Inductotherm Companies Master Profit Sharing Plan is a defined contribution pension plan governed by ERISA, and is sponsored by Inductotherm Corp. and Indel, Inc. SAC ¶ 31. Defendant Inductotherm created the plan in 1956 by investing a percentage of company profits into a fund for the benefit of employees who chose to participate in, and invest in, the Plan. McShane Cert. ¶ 3. The company's contributions to the Plan are discretionary, but generally are in an amount equal to approximately 15% of salaries and wages. Id. ¶ 4. Over the more than fifty years of contributions, the company has invested more than $70 million into the Plan. Id. ¶¶ 3-4. Employees also are permitted to invest their own after-tax income into the Plan, up to 10% of their salary. Barndt Cert. ¶ 2.
The Plan is not a 401(k) plan or a defined benefit plan. Employees are not required to invest in the Plan, and the employee participants have no ability to select particular investment options for their contributions to the Plan. Barndt Cert. Ex. B, Plan § 4.4. Indeed, participants to the Plan do not hold individual assets in their accounts; their "accounts" merely reflect the participant's individual fractional interest in the Plan's assets. Id. § 5.1. Therefore, investment decisions made on behalf of the Plan are, necessarily, made for the benefit of all participant/shareholders in the Plan, which includes most of the approximately 250 employees of Indel/Inductotherm.
Once an employee/participant in the Plan reaches the age of 55, he or she can withdraw cash equal to 15% of the employee's share of the Plan per year. Plan § 6.12. Participants can also request withdrawals for other approved purposes such as education, medical care, or hardship. Id. §§ 6.10, 6.11. When an employee retires or is terminated from employment, he or she must withdraw the balance of his or her account. Id. § 6.1.
Over the life of the Plan, it has paid out more than $138 million to employees, and, as of December 31, 2008, total Plan assets were approximately $55 million. McShane Cert. ¶ 5. As of February 29, 2012, Plan assets were approximately $68 million. Krupnick Cert. ¶ 7.
Plaintiffs allege that the Defendants have violated several different provisions of ERISA in several different ways through their alleged mismanagement of the Plan. In at least two previous Opinions, this Court has already dismissed or granted summary judgment against several of Plaintiffs' counts, so the Court here only describes those counts still active in the action.
Plaintiffs seek damages and injunctive relief for several different forms of alleged wrongdoing from each of the different Defendants.*fn5 The Court will briefly describe the different counts in the chronological order in which Plaintiffs allege they occurred.
First, in Count I, Plaintiffs allege that the Inductotherm Defendants breached their fiduciary duties by failing to adopt a Trust Agreement in accordance with the Plan. Plaintiffs allege that this violates ERISA § 404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D), which states that a fiduciary must discharge his duties with respect to the plan in accordance with the documents and instruments governing the plan.
Plaintiffs allege that the 2002 Plan document refers, in several places, to the existence of a "Trust Agreement" that would provide guidance for investment decisions regarding the Plan. Plaintiffs allege that there is no such Trust Agreement, and that its absence constitutes the Inductotherm Defendants' breach of their duty to abide by Plan documents.
Second, In Count XXVI, Plaintiffs allege that in 2005, the Inductotherm Defendants breached their fiduciary duties by failing to adequately investigate the experience and competence of the Wharton Group and its employees/advisors prior to retaining their services in December of 2005; and further breached their fiduciary duties by actually hiring them when a prudent fiduciary, who had done a competent investigation, would not have. Plaintiffs allege that this failure to investigate and subsequent hiring decision violates § 1104(a)(1)(B), the requirement that a fiduciary act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." Plaintiffs allege that the Inductotherm Defendants (Trustees, primarily) failed to inquire into the experience of the Wharton Group managers, and failed to inquire into whether the FSC/Wharton Defendants had the appropriate licenses, registrations, and had not previously been accused of failing to properly manage/advise similar funds. Further, the Plaintiffs allege, had the Trustees so inquired, they would have discovered that FSC/Wharton were ill suited to the job and would not (if acting prudently) have hired them.
Plaintiffs seek to remedy these alleged breaches of fiduciary duty pursuant to ERISA §§ 409 and 502(a)(2), 29 U.S.C. §§ 1109 and 1132(a)(2). SAC Count I ¶ 13, Count XXVI ¶ 14. Section 409(a) of ERISA establishes fiduciary liability for breaches of such duty for "any losses to the plan resulting from such breach. . ." 29 U.S.C. § 1109(a).
These two claims are the subject of the Inductotherm Defendants' pending motion for partial summary judgment [Docket Item 182]. As will be discussed below, these first two claims also constitute the sole two counts that comprise the alleged wrongdoing in the proposed sub-class one.
Next, Plaintiffs allege that the FSC/Wharton and SunAmerica Defendants violated several provisions of ERISA when, beginning in 2006, the FSC/Wharton Defendants invested Plan assets in the SAMMF instead of a comparable Vanguard money market fund. Plaintiffs allege that this investment was a breach of fiduciary duty by the FSC/Wharton Defendants for both failing to act with skill and prudence of a prudent fiduciary (§ 1104(a)(1)(B)), and for violating a duty of loyalty to the plan participants (§ 1104(a)(1)(A)). These claims are contained in Counts V, VI, and
XXIII. Plaintiffs seek, pursuant to §§ 1109 and 1132(a)(2), both the return of management fees and damages for inferior returns due to these alleged violations. The Court granted Defendants' motion for summary judgment as to the fees portion only of Counts V and VI in its June 27, 2012 Opinion. The Counts are still active as to Plaintiffs' claims for damages for inferior returns.
Plaintiffs also alleged, in Counts III and XI, that the transactions by FSC/Wharton violated § 1106(b), which prohibits fiduciaries from engaging in various acts of self-dealing with plan assets, and sought the return of management fees from both FSC/Wharton and the SunAmerica Defendants under these counts. The Court granted summary judgment against these Counts on June 27, 2012, after concluding that the claims were moot because the FSC/SunAmerica Defendants had returned all such fees in 2011. [Docket Item 211.] See Goldenberg v. Indel, Civ. No. 09-5202, 2012 WL 2466567 (D.N.J. June 27, 2012).
These counts, regarding the investment in the SAMMF are the subject of the second proposed sub-class. Thus, the only active counts alleged in the second proposed sub-class are Counts V, VI, and XXIII (as to inferior returns only).
Third, Plaintiffs claim that the FSC/Wharton Defendants breached their fiduciary duty to abide by plan documents under § 1104(a)(1)(D) by investing Plan assets in three different funds that engage in the practice of investing in short sales (the so-called "Long/Short Funds"). Plaintiffs allege that an investment policy statement (the Wharton Business Group Inductotherm Inc., Profit Sharing Plan Investment Policy Statement, or "IPS"), executed by the Plan Trustees and Wharton employees in December of 2005 when Wharton was hired, promises that FSC/Wharton would not invest Plan assets in particular kinds of financial instruments. See Barndt Cert. Ex. UU, 2005 IPS Sec. VI. It provides that "no options and futures (except for hedging) shall be purchased. There shall be no purchase of securities on margin and no short sales." Id.; SAC ¶ 150. However, Plaintiff alleges, FSC/Wharton, in fact, invested some assets between April of 2006 and the end of 2009 in three different funds that advertise that they will invest in short options as a way to increase leverage, but also increase risk. Plaintiffs allege that such investments violated the Wharton Investment Policy, which Plaintiffs therefore claim is a violation of the fiduciary duty to act in accordance with the documents and instruments governing the Plan.
Counts VII, XXIV, and XXV are implicated in these allegations. These counts comprise the claims of the third proposed sub-class.
Finally, Counts IX and XXVII allege that both FSC/Wharton and Inductotherm are liable for violating the fiduciary duty of prudence (§ 1104(a)(1)(B)) for proposing and carrying out an investment strategy that was excessively balanced toward equities rather than fixed-income or cash investments. Plaintiffs allege that FSC/Wharton proposed and executed, and the Inductotherm Defendants approved, an investment strategy that, in 2005, set a target for an asset allocation of 80% equities and 20% fixed-income or cash. While Plaintiffs acknowledge that after the significant losses of 2008 the asset allocation balance between equities and fixed income was temporarily moderated somewhat to a more equal balance, it was readjusted back toward the aggressive 80/20 target by September of 2009. Plaintiffs claim that the majority of the Plan participants are relatively close to retirement age, who would benefit from a more conservative equity/fixed-income allocation, and that it was and is therefore imprudent of Defendants to enact and pursue the relatively aggressive allocation that they have. Plaintiffs allege that this excessive focus on equities has resulted in significant losses to the Plan and injured Plan participants by reducing the value of their interest in the Plan assets.
Plaintiffs bring most of these claims, including the excessive equities claims, on behalf of the Plan pursuant to § 1132(a)(2) and § 1109, meaning that Plaintiffs are not seeking recovery of damages as to their specific account balances, but instead are seeking recovery of the Plan's damages to be returned to the Plan itself.
As explained above, Plaintiffs are seeking to certify four sub-classes built around these four groups of alleged ERISA violations.
Subclass # Counts Defendants Description
1 I, XXVI Inductotherm Trust Agreement and FSC Selection Class
2 V, VI, XXII FSC/Wharton Prohibited Transaction Class
3 VII, XXIV, XXV FSC/Wharton Long/Short Fund Class
4 IX, XXVII FSC/Wharton, Excessive Equities Class Inductotherm
Plaintiffs describe the proposed sub-classes as follows:
1) The Trust Agreement and FSC Selection Class consisting of all persons who were Plan participants, other than Defendants, at any time between January 1, 2006 and September 30, 2011.
2) The Prohibited Transaction Class consisting of all persons who participated in the Plan, other than Defendants, from December 1, 2005 to March 31, 2011, when Plan assets were invested in the SAMMF.
3) The Long-Short Fund Class consisting of all persons who participated in the Plan, other than Defendants, from April 17, 2006 to February 7, 2011, when Plan ...