     10-792-cv (L)
     Gearren v. McGraw-Hill Cos., Inc.

 1                      UNITED STATES COURT OF APPEALS
 2                          FOR THE SECOND CIRCUIT
 3
 4                              August Term 2010
 5       (Argued: September 28, 2010        Decided: October 19, 2011)
 6                  Docket No. 10-792-cv (L) 10-934-cv(Con)
 7

 8   ------------------------------------------------------x

 9   PATRICK L. GEARREN, JAN DEPERRY, MARY SULLIVAN, HARVEY
10   SULLIVAN, and CYNTHIA DAVIS, on behalf of themselves and
11   all others similarly situated,
12
13              Plaintiffs-Appellants,
14
15                        -- v. --
16
17   THE MCGRAW-HILL COMPANIES, INCORPORATED, THE PENSION
18   INVESTMENT COMMITTEE OF MCGRAW-HILL, MARTY MARTIN, THE
19   BOARD OF DIRECTORS OF THE MCGRAW-HILL COMPANIES,
20   INCORPORATED, WINFRIED BISCHOFF, DOUGLAS N. DAFT, LINDA
21   KOCH LORIMER, HAROLD MCGRAW, HILDA OCHOA-BRILLEMBOURG,
22   MICHAEL RAKE, JAMES H. ROSS, EDWARD B. RUST, KURT L.
23   SCHMOKE, SIDNEY TAUREL, JOHN DOES 1-20, ROBERT J.
24   BAHASH, HENRY HIRSCHBERG, ALEX MATURRI, JAMES H.
25   MCGRAW, IV, DAVID L. MURPHY, JOHN C. WEISENSEEL,
26   KATHLEEN A. CORBET, PHIL EDWARDS, ROBERT P. MCGRAW, and
27   PEDRO ASPE,
28
29              Defendants-Appellees.*
30
31   ------------------------------------------------------x
32
33   B e f o r e :   WALKER, CABRANES, and STRAUB, Circuit Judges.

34         Plaintiffs-Appellants appeal from a decision of the District

35   Court for the Southern District of New York (Richard J. Sullivan,

36   Judge) granting defendants’ motion to dismiss plaintiffs’ class-


     *
 1        The Clerk of Court is directed to amend the caption as set
 2   forth above.

                                         1
 1   action complaints for failure to state a claim upon which relief

 2   can be granted.   Plaintiffs, participants in two retirement plans

 3   offered by The McGraw-Hill Companies, Inc. (“McGraw-Hill”),

 4   brought suit alleging breach of fiduciary duty under the Employee

 5   Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et

 6   seq.   As in the companion Citigroup case, plaintiffs allege (1)

 7   that defendants acted imprudently by including employer stock as

 8   an investment option in the retirement plans and (2) that

 9   defendants failed to provide adequate and truthful information to

10   participants regarding the status of employer stock.   We hold

11   that the facts alleged by plaintiffs are, even if proven,

12   insufficient to establish that the defendants abused their

13   discretion by continuing to offer Plan participants the

14   opportunity to invest in McGraw-Hill stock.   We also hold that

15   plaintiffs have not alleged facts sufficient to prove that

16   defendants made any statements, while acting in a fiduciary

17   capacity, that they knew to be false.   AFFIRMED.

18          Judge STRAUB dissents for substantially the same reasons

19   expressed in his dissent and partial concurrence in In re:

20   Citigroup ERISA Litigation, No. 09-3804-cv (2d Cir. [DATE]).

21                                   EDWIN J. MILLS, Stull, Stull &
22                                   Brody, New York, NY (Michael J.
23                                   Klein, Stull, Stull & Brody, New
24                                   York, NY; Francis A. Bottini, Jr.
25                                   Albert Y. Chang, Johnson Bottini,
26                                   LLP, San Diego, CA, on the brief),
27                                   for Plaintiffs-Appellants.
28

                                       2
 1   MYRON D. RUMELD, Proskauer Rose LLP,
 2   New York, NY (Russell L. Hirschhorn,
 3   Proskauer Rose LLP, New York, NY;
 4   Howard Shapiro, Proskauer Rose LLP,
 5   New Orleans, LA; Floyd Abrams, Susan
 6   Buckley, Tammy L. Roy, Cahill Gordon
 7   & Reindel LLP, New York, NY, on the
 8   brief), for Defendants-Appellees.
 9
10   MICHAEL   SCHLOSS,    Senior   Trial
11   Attorney    (M.   Patricia    Smith,
12   Solicitor of Labor, Timothy D.
13   Hauser, Associate Solicitor for Plan
14   Benefits     Security,     Elizabeth
15   Hopkins, Counsel for Appellate and
16   Special Litigation, on the brief),
17   United States Department of Labor,
18   Washington, DC, for amicus curiae
19   Hilda L. Solis, Secretary of the
20   United States Department of Labor.
21
22   CAROL CONNOR COHEN, Arent Fox LLP,
23   Washington, DC (Caroline Turner
24   English, Arent Fox LLP, Washington,
25   DC; Robin S. Conrad, Shane B. Kawka,
26   National Chamber Litigation Center,
27   Washington, DC), for amicus curiae
28   Chamber of Commerce of the United
29   States of America.
30
31   JOSEPH   M.    MCLAUGHLIN,   Simpson
32   Thacher & Bartlett LLP, New York, NY
33   (George S. Wang, Agnès Dunogué,
34   Hiral D. Mehta, Simpson Thacher &
35   Bartlett LLP, New York, NY; Ira D.
36   Hammerman,    Kevin    M.   Carroll,
37   Securities Industry and Financial
38   Markets Association, Washington,
39   DC), for amicus curiae Securities
40   Industry   and   Financial   Markets
41   Association.
42
43
44
45
46
47


       3
 1   PER CURIAM:

 2        Plaintiffs-Appellants Patrick L. Gearren, Jan Deperry, Mary

 3   Sullivan,   Harvey   Sullivan,   and   Cynthia   Davis,   on   behalf   of

 4   themselves and a putative class of persons similarly situated

 5   (“Plaintiffs”), appeal from a decision of the District Court for

 6   the Southern District of New York (Richard J. Sullivan, Judge)

 7   granting defendants’ motion to dismiss plaintiffs’ complaints for

 8   failure to state a claim upon which relief can be granted.1

 9   Plaintiffs, participants in two retirement plans offered by The

10   McGraw-Hill Companies, Inc. (“McGraw-Hill”), brought suit alleging

11   breach of fiduciary duty under the Employee Retirement Income

12   Security Act (“ERISA”), 29 U.S.C. § 1001 et seq.               As in the

13   companion Citigroup case, plaintiffs allege (1) that defendants

14   acted imprudently by including employer stock as an investment

15   option in the retirement plans and (2) that defendants failed to

16   provide adequate and truthful information to participants regarding

17   the status of employer stock.     We hold that the facts alleged by

18   plaintiffs are, even if proven, insufficient to establish that the

19   defendants abused their discretion by continuing to offer Plan

20   participants the opportunity to invest in McGraw-Hill stock.            We

21   also hold that plaintiffs have not alleged facts sufficient to


     1
 1        The district court consolidated for resolution two
 2   substantially identical complaints. All references in this
 3   opinion to the “Complaint” are to the complaint brought by
 4   plaintiffs Harvey and Mary Sullivan.


                                        4
 1   prove that defendants made any statements, while acting in a

 2   fiduciary capacity, that they knew to be false.

 3                                BACKGROUND

 4        This case was argued in tandem with In re: Citigroup ERISA

 5   Litig., No. 09-3804-cv, which raised similar issues and which we

 6   decide by separate opinion filed today.        The facts alleged by

 7   plaintiffs are substantially similar to those alleged in the

 8   Citigroup case. Plaintiffs are participants in one of two defined-

 9   contribution retirement plans offered by McGraw-Hill:        the 401(k)

10   Savings and Profit Sharing Plan of the McGraw-Hill Companies, Inc.

11   and Its Subsidiaries (the “McGraw-Hill Plan”) and the Standard and

12   Poor’s 401(k) Savings and Profit Sharing Plan for Represented

13   Employees (the “S&P Plan”) (collectively, the “Plans”). Both Plans

14   are eligible individual account plans (“EIAPs”), 29 U.S.C. §

15   1107(d)(3)(A).    The Plans allow McGraw-Hill employees to make pre-

16   tax contributions from their salaries to individual retirement

17   accounts. The employees are then able to allocate the funds within

18   their accounts among a set of investment options.         Each Plan was

19   managed by Defendant Marty Martin, who served as McGraw-Hill’s Vice

20   President   for   Employee   Benefits   and   as   each   Plan’s   name

21   administrator, and by the Pension Investment Committee, which was

22   responsible for selecting the investment options to be offered to

23   Plan participants. The McGraw-Hill Stock Fund (the “Stock Fund”),

24   which was “invested primarily in the Common Stock of [McGraw-


                                       5
 1   Hill],” remained an investment option in both Plans throughout the

 2   Class Period (December 3, 2006, through December 5, 2008), as

 3   mandated by the Plan documents.

 4           Plaintiffs filed their class action complaint on June 12,

 5   2009, following a drop in the price OF McGraw-Hill stock from

 6   $68.02 to $24.23 during the Class Period.                  The defendants are

 7   McGraw-Hill, Marty Martin, the Pension Investment Committee, and

 8   McGraw-Hill’s      Board    of   Directors.        Plaintiffs   challenge   the

 9   defendants’ management of the Plans and, in particular, the Stock

10   Fund.    They allege that McGraw-Hill became an imprudent investment

11   option during the Class Period because its financial services

12   division, Standard and Poor’s (S&P), knowingly provided inflated

13   ratings to financial products linked to the subprime-mortgage

14   market.      The   public’s      discovery    of   these   ratings   practices,

15   plaintiffs allege, led to the sharp drop in the price of McGraw-

16   Hill stock.

17           Count I of plaintiffs’ complaint alleges that the defendants

18   breached their fiduciary duties by continuing to offer the Stock

19   Fund as an investment option in the Plans throughout the Class

20   Period, while “McGraw-Hill’s true adverse financial and operating

21   condition was being concealed.”             Compl. ¶ 86.     Count II alleges

22   that the defendants violated their duty of loyalty by making

23   misrepresentations         and   nondisclosures     regarding   McGraw-Hill’s

24   financial condition and S&P’s ratings practices.                 Compl. ¶ 93.


                                             6
 1   Counts III and IV are, in substance, derivative of Counts I and II.

 2   Count III alleges that the defendants violated their duty of

 3   loyalty by acting “in their own interests rather than solely in the

 4   interests” of the Plans’ participants.        Compl. ¶ 102.        Finally,

 5   Count IV alleges that the Board of Director defendants failed to

 6   properly appoint, monitor, and inform the members of the Pension

 7   Investment Committee.

 8        On February 10, 2010, the district court granted in full

 9   defendants’ motion to dismiss.     See Gearren v. McGraw-Hill Cos.,

10   Inc., 690 F. Supp. 2d 254 (S.D.N.Y. 2010).          With respect to Count

11   I, the district court held that the defendants were entitled to a

12   presumption that their decision to offer the Stock Fund as an

13   investment option was prudent.    The court concluded that the facts

14   alleged by plaintiffs were, if proven, insufficient to overcome the

15   presumption.   Id. at 265-70.     The court also rejected Count II,

16   finding that the defendants had no affirmative duty to disclose

17   McGraw-Hill’s financial position to Plan participants and that any

18   alleged   misrepresentations    were   not   made    in   the   defendants’

19   capacity as ERISA fiduciaries. Id. at 271-73. The court dismissed

20   Counts III and IV because they depended on the success of Counts I

21   and II.   Id. at 273.

22        Plaintiffs now appeal from the district court’s judgment

23   dismissing the complaint.

24


                                        7
 1                                DISCUSSION

 2         We review de novo the district court’s dismissal under

 3   Federal Rule of Civil Procedure 12(b)(6).   Gallop v. Cheney, 642

 4   F.3d 364, 368 (2d Cir. 2011).    “To survive a motion to dismiss,

 5   a complaint must contain sufficient factual matter, accepted as

 6   true, to ‘state a claim to relief that is plausible on its

 7   face.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting

 8   Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).    We

 9   consider each of plaintiffs’ claims in turn and conclude that

10   plaintiffs have failed to state a claim for relief.

11   I.   Count I:   Inclusion of the McGraw-Hill Stock Fund as an

12   Investment Option

13         Plaintiffs first argue that the district court erred by

14   dismissing their claims that the defendants acted imprudently by

15   continuing to allow plan participants to invest in McGraw-Hill

16   stock during the Class Period.   We disagree.   As we explain in

17   the companion Citigroup opinion, we adopt the Moench presumption

18   and review defendants’ decision to continue to allow Plan

19   participants to invest in employer stock, in accordance with the

20   Plans’ terms, for an abuse of discretion.    See Moench v.

21   Robertson, 62 F.3d 553, 571 (3d Cir. 1995) (“[A]n ESOP fiduciary

22   who invests the assets in employer stock is entitled to a

23   presumption that it acted consistently with ERISA by virtue of

24   that decision.”).   Plan fiduciaries are only required to divest


                                       8
 1   an EIAP or ESOP of employer stock where the fiduciaries know or

 2   should know that the employer is in a “dire situation.”    Edgar v.

 3   Avaya, Inc., 503 F.3d 340, 348 (3d Cir. 2007).     “Mere stock

 4   fluctuations, even those that trend downward significantly, are

 5   insufficient to establish the requisite imprudence to rebut the

 6   presumption.”   Wright v. Or. Metallurgical Corp., 360 F.3d 1090,

 7   1099 (9th Cir. 2004).

 8        Here, we agree with the district court that even if we

 9   assume that plaintiffs’ allegations are proved, plaintiffs are

10   unable to establish that defendants knew or should have known

11   that McGraw-Hill was in a dire situation.    Plaintiffs’

12   allegations relate entirely to operations within the Credit

13   Market Services group of S&P, which is one of McGraw-Hill’s three

14   operating segments.     More specifically, plaintiffs allege that

15   Credit Market Services provided inflated ratings to two

16   structured-finance products:   collateralized debt obligations and

17   residential mortgage backed securities.     Even if the defendant

18   fiduciaries were aware of these problems in the Credit Market

19   Services group of S&P, the facts alleged do not support

20   plaintiffs’ contention that defendants should have determined

21   that McGraw-Hill itself was in a dire situation.    Defendants

22   could not reasonably have foreseen, based on the information

23   alleged to have been available to them at the time, the sharp

24   decline in the price of McGraw-Hill stock that occurred after the


                                       9
 1   problems with S&P’s ratings practices become public.    Moreover,

 2   they were not compelled to conclude that McGraw-Hill was in the

 3   kind of dire situation that would have required them to limit

 4   participants’ investments in the Stock Fund.

 5   II.   Count II: Misstatements and Omissions

 6         Plaintiffs also allege that defendants breached their

 7   fiduciary duty of loyalty both by failing to disclose information

 8   about McGraw-Hill’s financial condition to Plan participants and

 9   by making false or misleading statements about McGraw-Hill to the

10   participants.   In the Citigroup opinion, we explained why we

11   reject the argument that fiduciaries have a duty to disclose

12   nonpublic information about the expected performance of the

13   employer’s stock.   Accordingly, plaintiffs cannot state a claim

14   for relief based on defendants’ failure to disclose to

15   participants information regarding S&P’s rating practices and,

16   more generally, McGraw-Hill’s financial strength.

17         Plaintiffs’ claims that defendants made false or misleading

18   statements or omissions regarding McGraw-Hill stock also cannot

19   survive defendants’ motion to dismiss.   The only specific false

20   or misleading statements identified by defendants are those

21   contained in SEC filings that were later incorporated into the

22   Plans’ Summary Plan Descriptions (“SPDs”).     ERISA, however, only

23   holds fiduciaries liable to the extent that they were “acting as

24   a fiduciary . . . when taking the action subject to the


                                     10
 1   complaint.”   Pegram v. Herdrich, 530 U.S. 211, 226 (2000).   Here,

 2   defendants who signed or prepared the SEC filings were acting in

 3   a corporate, rather than ERISA fiduciary, capacity when they did

 4   so.   See Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 257

 5   (5th Cir. 2008) (defendants were not “acting in anything other

 6   than a corporate capacity” when preparing SEC filings).

 7   Therefore, in the circumstances presented here, these defendants

 8   may not be held liable under ERISA for misstatements contained in

 9   the SEC filings.

10         Plaintiffs also argue that because the Plans’ SPDs

11   incorporated the SEC filings, the SPDs contained the same

12   misstatements as the SEC filings.    Defendant Marty Martin, as the

13   Plans’ administrator, was responsible for distributing the SPDs

14   to participants.   29 U.S.C. § 1021(a)(1).   We have held that a

15   fiduciary may be held liable for false or misleading statements

16   when “the fiduciary knows those statements are false or lack a

17   reasonable basis in fact.”   Flanigan v. Gen. Elec. Co., 242 F.3d

18   78, 84 (2d Cir. 2001).   Plaintiffs have not provided any specific

19   allegations as to how Martin knew or should have known that S&P’s

20   rating practices were improper or that, consequently, the SEC

21   filings contained misstatements or omissions.   While plaintiffs

22   do allege in conclusory fashion that all of the defendants “knew

23   or should have known of the material misrepresentations”

24   contained in the SEC filings, Compl. ¶ 48, they provide no basis


                                     11
 1   for this conclusion, especially as it is applied to Martin, who

 2   served as McGraw-Hill’s Vice President for Employee Benefits.

 3   Accordingly, plaintiffs have not adequately alleged that Martin

 4   made any intentional or knowing misstatements to Plan

 5   participants by incorporating SEC filings into the SPDs.

 6   III.   Plaintiffs’ Remaining Claims

 7          Finally, plaintiffs allege both that defendants failed to

 8   manage the Plans “solely in the interests of the Participants”

 9   and that the Board of Director defendants failed to properly

10   appoint, monitor, and inform the members of the Plans’ Pension

11   Investment Committee about the condition of McGraw-Hill stock.

12   Compl. ¶¶ 103, 109.     Before both the district court and this

13   court, plaintiffs have conceded that these secondary claims fail

14   if plaintiffs are unable to survive Rule 12(b)(6) as to their

15   primary claims, addressed above.         Gearren v. McGraw-Hill Cos.,

16   Inc., 690 F. Supp. 2d 254, 273 (S.D.N.Y. 2010); Plaintiffs-

17   Appellants’ Brief at 50.       Accordingly, we affirm the district

18   court’s dismissal of plaintiffs’ theories of secondary liability.

19                                   CONCLUSION

20          We   have   carefully   considered    all   of   appellants’   other

21   arguments and found them to be without merit.           For the foregoing

22   reasons, the judgment of the district court is hereby affirmed.
23
24




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