In Re Enron Corp. Securities, Derivative & ERISA

MEMORANDUM AND ORDER

HARMON, District Judge.

TITTLE

ROADMAP

I. Overview of Causes of Action and Pending Motions.531

Annnpimlp Law ii.

A FRTSA

1. Fiduciary Liability.

a. Expansive Definition.

b. Fiduciary Duties...

c. “Two-Hat” Doctrine.

d. Power to Appoint/Remove Plan Fiduciaries.

e. Duty to Disclose.

f. Personal Liability of Corporate Employees.

g. Professional Liability.

h. Section 404(e) Plans.

i. Causation.

2. Co-fiduciary Liability.

3. Directed Trustee Liability.

4. Standing and Remedies.

5. Service on and Liability of the Administrative Committees of the Plans as Unincorporated Associations. 05

RICO Amendment. 05

Common Law Claims . 05

1. Preemption and the Federal Statutes at Issue. 05

a. ERISA (Generally). 05

b. SLUSA (Generally) . ©

2. ERISA Preemption and Plaintiffs’ Common-Law Conspiracy Claim 05

3. ERISA Preemption and Plaintiffs’ Common-Law Negligent Misrepresentation Claim 05

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III. Application of the Law to the Complaint s Allegations...

A. Procedural Objections.

B. RICO Amendment.

C. ERISA Breach of Fiduciary and Co-Fiduciary Duty

1. Count I and Count V.

2. Count II.

3. Count III.

4. Count IV .

D. Texas Common Law Causes of Action.

1. Count IX: Civil Conspiracy.

2. Count VIII: Negligent Misrepresentation.

RE TITTLE DEFENDANTS’ MOTIONS TO DISMISS

The above referenced action is brought on behalf of Enron Corporation (“Enron”) employees who were participants in three employee pension benefit plans governed by the Employment Retirement Income Security Act of 1974 (“ERISA”), § 3(2), 29 U.S.C. § 1002 (2), specifically the Enron Corporation Savings Plan (“Savings Plan”), the Enron Corporation Employee Stock Ownership Plan (“ESOP”), and the Enron Corporation Cash Balance Plan (“Cash Balance Plan”),

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and also on behalf of Enron employees who received “phantom stock” as compensation.

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The first consolidated amended class action com

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plaint (instrument # 145) alleges that Defendants are liable for the following violations during a proposed Class Period from January 20, 1998 through December 2, 2001:(1) breach of fiduciary and co-fiduciary duties under ERISA, 29 U.S.C. §§ 1104 and 1105; (2) the commission of or conspiracy to commit unlawful acts or omissions in the conduct of certain enterprises’ affairs through a pattern of racketeering activity in a scheme to mislead and defraud Enron employees, shareholders, potential investors, and the securities market in violation of the Racketeer Influenced and Corrupt Organizations Act (civil “RICO”), 18 U.S.C. §§ 1961-1968 ; and (3) negligence and civil conspiracy under Texas common law.

I. OVERVIEW OF CAUSES OF ACTION AND PENDING MOTIONS

Defendants fall into five groups: (1) Enron and individual officers and directors of the company; (2) committees, trustees, and individuals that administered the three pension plans; (3) Enron’s accountant Arthur Andersen LLP and some of its individual partners and employees (Thomas H. Bauer, Joseph F. Berardino, Debra A. Cash, Donald Dreyfus, James A. Friedlieb, D. Stephen Goddard, Jr., Gary B. Goolsby, Michael D. Jones, Michael M. Lowther, John Stewart, William Swanson, Nancy A. Temple, and Roger D. Willard); (4) Enron’s outside law firm Vinson

&

Elkins L.L.P. and some of its individual partners (Ronald Astin, Joseph Dilg, Michael Finch, and Max Hendrick, III); and (5) five investment banks (J.P. Morgan Chase & Co., Merrill Lynch & Co., Inc., Credit Suisse First Boston, Citigroup, Inc., and Salomon Smith Barney, Inc).

The complaint asserts its causes of action in nine counts: five under ERISA, two under RICO, one under Texas common-law negligence, and the last under Texas common-law civil conspiracy.

Count I originally asserted a claim on behalf of the Savings Plan and the ESOP

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against Defendants Enron, the

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Enron ERISA Defendants,

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Kenneth L. Lay,

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Jeffrey K. Skilling [to be dismissed],

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Richard A. Causey [to be dimsissed],

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and Arthur Andersen,

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at a time when Enron, the Enron ERISA Defendants, Lay, and Skilling knew or should have known that Enron stock was an imprudent investment choice, for breaches of their fiduciary and co-fiduciary duties of prudence, care and loyalty under 29 U.S.C. §§ 1104 (a)(1)(A)-(D)

9

and 1105, for (1) allowing Savings Plan participants the ability to direct the Plan’s fiduciaries to purchase Enron stock for their individual accounts from monies the participants contributed as deductions from their salaries; (2) inducing the participants to direct the fiduciaries to purchase Enron stock for their individual accounts in exchange for funds they contributed to the Plan; (3) causing and allowing the Savings Plan to purchase or accept Enron’s matching contributions in the form of Enron stock; (4) imposing and maintaining age restrictions and other restrictions on the participants’ ability to direct the Savings Plan fiduciaries to transfer both Savings Plan and ESOP assets out of Enron stock; and (5) inducing the Savings Plan and ESOP participants to direct or allow the fiduciaries of both Plans to maintain investments in Enron stock. Arthur Andersen is charged with breaching its fiduciary duty under § 502(a)(3) of ERISA, 29 U.S.C. § 1132 (a)(3), by participating in the Enron Defendants’ breach of fiduciary

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duties by actively concealing from the Plan fiduciaries and Plan participants the actual financial condition of Enron and the imprudence of investing in Enron stock.

Count II is brought on behalf of the Savings Plan and the ESOP against Defendants Enron, the Enron ERISA Defendants, Lay, Skilling [since dismissed], Cau-sey [since dismissed], and the Northern Trust Company (“Northern Trust”), for breach of their fiduciary duties under 29 U.S.C. §§ 1104 (a)(l)(A)-(D) and 1105, based on the lockdown (freeze, blackout)

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of the two Plans, without adequate notice

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to participants, effectually from October 17, 2001 until November 14, 2001,

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while the Plans were switched to a new record keeper and trustee,

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during which time the price of Enron stock fell from $33.84 to $10.00 per share.

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fiduciary duty in violation of 29 U.S.C. § 1104 (a)(1)(D) against Enron, the Enron ERISA Defendants (excluding the ESOP Administrative Committee and the Cash Balance Administrative Committee), Lay, Skilling, Causey [since dismissed], and the Northern Trust Company for their failure to diversify the Savings Plan assets, i.e., to liquidate the Enron stock, in accordance with the terms of the plan, because Defendants knew or should have known that investment in Enron stock was imprudent.

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In Count III, Plaintiffs, on behalf of the Savings Plan,

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assert a breach of

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In Count IV Plaintiffs on behalf of Certain Retirement Plan Participants and Beneficiaries assert against Enron, the Enron ERISA Defendants, and the Enron Corp. Cash Balance Plan as Successor to the Enron Corp. Retirement Plan [since dismissed], another claim of breach of fiduciary duty, this time with respect to offsets (reductions) of accrued pension benefits that were based on the artificially inflated price of Enron stock from 1998-2000. The

Enron Corp.

Cash Balance Plan and its predecessor, the Enron Corp. Retirement Plan, constituted a “defined benefit plan” under 29 U.S.C. § 1002 (35)

15

and was fully funded by Enron. In essence Plaintiffs allege that until January 1, 1996, the retirement benefits provided to a plan participant of five years or more service were determined by adding different percentages of final average pay multiplied by levels of years of accrued service, and then offset by the annuity value of a portion of that participant’s account in the ESOP (“Offset Account”) as of certain determination dates, usually the date the benefit payments began or, if earlier, the date(s) of distribution(s) from the Offset Account.

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Effective January 1, 1996, the Retirement Plan was amended, renamed the Enron Corp. Cash Balance Plan, and the benefit formula was changed from an average pay formula to a cash balance formula, while the offset arrangement between the Plan and the ESOP was to be phased out over the coming five-year period. Under the new plan, a plan participant’s accrued benefit under the Cash Balance Plan was based on his employment from 1987-1994 and was offset over the five-year phase-out period by the value of his ESOP stock based on a formula set out in §§ 5.1-5.5 of the Plan. Each January 1st from 1996-2000, the value of one-fifth of the shares of Enron stock credited to each participant’s Offset Account was to be calculated based on the stock’s market price on that date as reported at closing time on the New York Stock Exchange and was thereafter permanently fixed at that amount. Plaintiffs allege that Defendants knew or should have known that the market price of Enron stock from 1998 to 2000 was artificially inflated and not representative of its true value, and that Defendants breached their fiduciary duty by not computing the component of the offset at its true, much lower value. As a result, participants and beneficiaries who accrued benefits under the Retirement Plan between January 1, 1987 and December 31, 1994 have suffered losses because their retirement benefits would be offset by the inflated market price of one-fifth of the shares of Enron stock in their ESOP Offset Account in 1998, 1999, and 2000.

Count V, brought on behalf of the Savings Plan, the ESOP, and the Cash Balance Plan against Enron and the Compensation Committee Defendants, alleges another breach of fiduciary and co-fiduciary duties under 29 U.S.C. § 1104 (a)(1)(A)-(D) and § 1105 relating to their failure to appoint and monitor other plan fiduciaries and their failure to disclose to the investing fiduciaries material information about Enron’s true financial condition. Specifically Plaintiffs claim that Defendants breached their fiduciary duties (1) by appointing fiduciaries to manage Plan assets that Defendants knew, or should have known, were not qualified to manage Plan assets loyally and prudently; (2) by failing to monitor adequately the investing fiduciaries investment of these assets; (3) by failing to monitor adequately the Plans’ other fiduciaries’ implementation of the terms of the Plans, including but not limited to investment of the assets; (4) by failing to disclose to the investing fiduciaries material facts concerning Enron’s financial condition that they knew or should have known were material to loyal, prudent investment decisions concerning the use of Enron stock in the Plans and/or with respect to the implementation of the terms of the Plans; (5) by failing to remove fiduciaries who Defendants knew or should have known were not qualified to manage the Plans’ assets loyally and prudently; (6) by knowingly participating in the investing fiduciaries’ breaches by accepting the benefits of those breaches, both personally and on behalf of Enron; (7) by knowingly undertaking to hide acts and omissions of the fiduciaries that Defendants knew constituted fiduciary breaches; and (8) by failing to remedy those fiduciaries’ known breaches.

Count VI asserts RICO violations under section 1962(c), conducting the affairs of a RICO enterprise through a pattern of racketeering activities involving Enron stock, and 1962(d), conspiring to do so, thereby causing injury to Plaintiffs’ and proposed Class Members’ property.

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Count VI is brought on behalf of all proposed classes against the “Enron Insider Defendants” (i.e., Kenneth L. Lay, Jeffrey K. Skilling, Andrew S. Fastow,

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Michael Kopper,

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Richard A. Causey, James V. Derrick, Jr.

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, the Estate of J. Clifford Baxter,

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Mark A. Frevert,

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Stanley C. Horton,

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Kenneth Rice,

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Richard B. Buy,

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Lou L. Pai,

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Robert A. Belfer, Norman P. Blake, Ronnie C. Chan, John H. Duncan, Wendy L. Gramm, Robert K. Jae-dicke, Charles A. LeMaistre, Joe H. Foy,

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Joseph M. Hirko,

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Ken L. Harrison,

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Mark E. Koenig,

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Steven J. Kean,

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Rebecca P. Mark-Jusbasehe,

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Michael S. McConnell,

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Jeffrey McMahon,

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J. Mark Metts,

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Joseph W. Sutton

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); the “Accounting Defendants” (Arthur Andersen,

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David B. Duncan, Thomas H. Bauer, Debra A. Cash, Roger D. Willard, D. Stephen Goddard, Jr., Michael M. Lowther, Gary B. Goolsby, Michael C. Odom, Michael D. Jones, William Swanson, John E. Stewart, Nancy A. Temple, Donald Dreyfuss, James A. Friedlieb, Joseph F. Berardino, and Andersen Does 2 through 1800); the “Attorney Defendants” (Vinson & Elkins, LLP, Ronald T. Astin, Joseph Dilg, Michael P. Finch, and Max Hendrick, III); and the “Investment Banking Defendants” (Merrill Lynch & Co., Inc., J.P. Morgan Chase & Co., Credit Suisse First Boston Corporation, and Citigroup, Inc. and its subsidiaries Citigroup Securities and Salo-mon Smith Barney).

Count VI identifies the following as RICO enterprises, either legal entities or association-in-fact enterprises: Enron Corporation; an association-in-fact enterprise comprised of the Enron Insider Defendants, the Enron ERISA Defendants, the Accounting Defendants and/or Andersen, the Attorney Defendants, the Investment Banking Defendants, and other investment banks not named as defendants in the complaint (Canadian Imperial Bank of Commerce, Deutsche Bank, Bank America, Lehman Brothers, Barclays Bank, UBS Warburg, First Union Wachovia, Bear Stearns, and Morgan Stanley Dean Witter); the Savings Plan/ESOP/Cash Balance Plan Enterprise (consisting of three separate RICO enterprises, i.e., legal entities); the Enron-Andersen Enterprise (association-in-fact enterprise); the Andersen Enterprise; the LJM1 Enterprise; the LJM2 Enterprise; the Enron-Merrill Lynch Enterprise(s) (association-in-fact enterprise); the Enron-J.P. Morgan Chase-Mahonia Enterprise (association-in-fact enterprise); the Enron-CSFB Enterprise (association-in-fact enterprise); and the Enron-Citigroup Enterprise (association-in-fact enterprise).

According to Count VI, the pattern of racketeering which Defendants allegedly committed, aided and abetted, or conspired to commit was made up of predicate offenses e.g., violations of various federal statutes, including 18 U.S.C. § 664 (embezzlement and conversion of assets of an ERISA employee pension benefit plan),

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18 U.S.C. §§ 1341 and 1343 (feder

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al mail and wire fraud),

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18 U.S.C. § 1512 (b)(2) (obstruction of justice

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), and 18 U.S.C. § 2814 (interstate transportation offenses

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)

Count VII asserts a claim against Enron Insider Defendants, Arthur Andersen, and the Investment Banking Defendants for investing income that was derived from racketeering activities involving

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Enron stock in RICO enterprises, under §§ 1962(a)

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and 1962(d). Among the various alleged enterprises is an Association-in-Faet Enterprise comprised of the Enron Insider Defendants, the Enron ERISA Defendants, the Accounting Defendants and/or Andersen, the Attorney Defendants, the Investment Banking Defendants, and other investment banks (Canadian Imperial Bank of Commerce, Deutsche Bank, Bank America, Lehman Brothers, Barclays Bank, UBS Warburg, First Union Wachovia, Bear Stearns, and Morgan Stanley Dean Witter). Also named are the Enron Enterprise, the Savings Plan/ESOP/Cash Balance Plan Enterprise, the LJM1-LJM2 Enterprise, the Accountant Defendants Enterprise, the Enron-JP Morgan Chase-Mahonia Enterprise, the Enron CSFB Enterprise, the Enron-Citigroup Enterprise, and the TNPC-New Power Enterprise.

Count VIII asserts a Texas common-law claim for negligent misrepresentation on behalf of the participants and beneficiaries of the Savings Plan and the ESOP against the Andersen Defendants based on Andersen’s data, audits, and certified financial statements for Enron.

Finally, Count IX alleges on behalf of all proposed classes a civil conspiracy claim against Andersen, the Enron Insider Defendants, the Attorney Defendants, and the Investment Banking Defendants. Specifically Count IX states that these Defendants conspired to conceal Enron’s true financial condition and deceive Enron employees into accepting overvalued stock and phantom stock as compensation for their work, into keeping their retirement assets in artificially inflated Enron stock, and into continuing to work at Enron based on a false belief that it was a strong company.

In light of the length of the complaint, which is available to all counsel, and the fact that the

Tittle

action arises from many of the same facts summarized in detail in instrument # 1194 in

Newby,

the Court will not here reiterate the facts alleged, but will reference relevant allegations relating to its decisions regarding the following pending motions:

(1) Defendant Michael J. Kopper’s motion to dismiss for failure to state claims upon which relief can be granted (instrument # 207);

(2) Arthur Andersen LLP and Andersen Individual Defendants’ motion to dismiss the complaint (# 208);

(3) Defendant Rebecca Mark-Jus-basche’s Rule 12(b)(6) motion to dismiss all claims asserted against her (# 209);

(4) Defendant Michael C. Odom’s motion to dismiss pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the PSLRA (# 210);

(5) Defendant Ken L. Harrison’s Rule 12(b)(6) motion to dismiss -with prejudice all claims against him (# 216);

(6) Defendant Lou Pai’s motion to dismiss first consolidated and amended complaint (# 222);

(7) Defendants Citigroup, Inc. and Salo-mon Smith Barney, Inc.’s motion to dismiss Plaintiffs’ first consolidated and amended complaint (# 227);

(8) Defendant J.P. Morgan Chase & Co.’s motion to dismiss Plaintiffs’ first

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consolidated and amended complaint (# 229) and corrected motion to dismiss (# 851);

(9) Defendants Enron Corp. Savings Plan Administrative Committee, the Administrative Committee of the Enron Corp. Cash Balance Plan [since dismissed], and the Administrative Committee of the Enron Employee Stock Ownership Plan (# 231);

(10) Vinson

&

Elkins Defendants’ motion to dismiss (# 232);

(11) Defendant James V. Derrick, Jr.’s motion to dismiss Plaintiffs’ first consolidated and amended complaint (#233);

(12) Defendant Cindy K. Olson’s motion to dismiss (# 234);

(13) Defendant Richard A. Causey’s motion to dismiss (# 235);

(14) Defendant Credit Suisse First Boston Corporation’s motion to dismiss Plaintiffs’ first consolidated and amended complaint (# 236);

(15) Defendant Merrill Lynch & Co.’s motion to dismiss Plaintiffs’ first consolidated and amended complaint (#238);

(16) The Outside Director Defendants’ motion to dismiss Plaintiffs’ first consolidated and amended complaint (#240);

(17) Defendant the Northern Trust Company’s motion to dismiss Counts II and III of Plaintiffs’ first consolidated and amended complaint as to the Northern Trust Company (# 241);

(18) Defendant Andrew S. Fastow’s motion to dismiss (# 244);

(19) Defendant Joseph W. Sutton’s motion to dismiss (# 251);

(20) Defendant Jeffrey K. Skilling’s motion to dismiss first consolidated and amended complaint (# 262);

(21) Defendant Kenneth L. Lay’s motion to dismiss (# 264);

(22) Motion to dismiss Certain Officer Defendants (collectively, “Officer Defendants,” i.e., The Estate of J. Clifford Baxter, Mark A. Frevert, Stanley C. Horton, Kenneth D. Rice, Richard B. Buy, Joseph M. Hirko, Mark E. Koenig, Steven J. Kean, Michael S. McConnell, Jeffrey McMahon, and J. Mark Metts, who are named as Defendants only in the two RICO and the common law conspiracy claimsX# 265);

(23) Motion to dismiss on behalf of Certain Administrative Committee Members (Philip J. Bazelides,

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James G. Barnhart, Keith Crane, William Gulyas-sy, Rod Hayslett, Mary K. Joyce,

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Sheila Knudsen, Tod A. Lindholm, James S. Prentice,

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Paula Rieker, and David Shields

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)(# 269)

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; and

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(24) Enron Corp.’s

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motion to dismiss the first consolidated and amended complaint (# 370).

When a district court reviews a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), it must construe the complaint in favor the plaintiff and take all well-pleaded facts as true.

Kane Enterprises v. MacGREGOR (USA), Inc.,

322 F.3d 371, 374 (5th Cir.2003),

citing Campbell v. Wells Fargo Bank,

781 F.2d 440, 442 (5th Cir.1986). It may not dismiss the complaint “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”

Id., quoting Conley v. Gibson,

355 U.S. 41, 45-46 , 78 S.Ct. 99 , 2 L.Ed.2d 80 (1957). Nevertheless, a plaintiff must plead specific facts, not merely eonclusory allegations to avoid dismissal.

Id., citing Collins v, Morgan Stanley Dean Witter,

224 F.3d 496, 498 (5th Cir.2000)(“We will thus not accept as true eonclusory allegations or unwarranted deductions of fact.”). In addition to the complaint, the court may review documents attached to the complaint and documents attached to the motions to dismiss to which the complaint refers and which are central to the plaintiffs claim(s).

Collins,

224 F.3d at 498-99 .

II. APPLICABLE LAW

The Court hereby incorporates the conclusions of law set forth in its memoranda and orders dealing with the motions to dismiss in

Newby.

After reviewing the briefs and researching the issues raised in

Tittle,

the Court concludes that the following law applies.

A. ERISA

1. Fiduciary Liability

The issue of fiduciary status is a mixed question of law and fact.

Reich v. Lancaster,

55 F.3d 1034, 1044 (5th Cir.1995).

a. Expansive Definition of Fiduciary

Under ERISA, a person or entity may be deemed a fiduciary either by assumption of the fiduciary obligations (the functional or

de facto

method) or by express designation by the ERISA plan documents.

The phrase, “fiduciary with respect to a plan” is defined

de facto

in functional terms of control and authority in § 3(21)(A), 29 U.S.C. § 1002 (21)(A):

[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) 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 discretionary authority or discretionary responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.

“The phrase ‘to the extent’ indicates that a person is a fiduciary only with respect to those aspects of the plan over which he exercises authority and control.” Nora-

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mers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan (“Sommers II”),

883 F.2d 345, 352 (5th Cir.1989).

See also Beddall v. State Street Bank and Trust Co.,

137 F.3d 12, 18 (1st Cir.1998)(“[F]iduciary status is not an all or nothing proposition .... ”). “Fiduciary-status under ERISA is to be construed liberally, consistent with ERISA’s policies and objectives,” and is defined “‘in functional terms of control and authority over the plan, ... thus expanding the universe of persons subject to fiduciary duties-and to damages-under § 409(a).’ ”

Arizona State Carpenters Pension Trust Fund v. Citibank (Arizona),

125 F.3d 715, 720 (9th Cir.1997),

citing John Hancock Mut. Life Ins. v. Harris Trust & Sav. Bank,

510 U.S. 86, 96 , 114 S.Ct. 517 , 126 L.Ed.2d 524 (1993), and

quoting Mertens v. Hewitt Assoc.,

508 U.S. 248, 262 , 113 S.Ct. 2063 , 124 L.Ed.2d 161 (1993). “[Fiduciary obligations can apply to managing, advising, and administering an ERISA plan.”

Pegram v. Herdrich,

530 U.S. 211, 223 , 120 S.Ct. 2143 , 147 L.Ed.2d 164 (2000). Nevertheless, ‘“a person is a fiduciary only with respect to those aspects of the plan over which he exercises authority or control.’ ”

Bannistor v. Ullman,

287 F.3d 394, 401 (5th Cir.2002),

quoting Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enters., Inc. (“Sommers I"),

793 F.2d 1456, 1459-60 (5th Cir.1986),

cert. denied,

479 U.S. 1034 , 107 S.Ct. 884 , 93 L.Ed.2d 837 (1987).

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“[Fiduciary status is to be determined by looking at the

actual

authority or power demonstrated, as well as the formal title and duties of the parties at issue [emphasis in original].”

Landry v. Air Line Pilots Ass’n Inter. AFL-CIO,

901 F.2d 404, 418 (5th Cir.1990), ce

rt. denied,

498 U.S. 895 , 111 S.Ct. 244 , 112 L.Ed.2d 203 (1990).

In recent years several Circuit Courts of Appeals have focused on and contrasted the language used in the two clauses of subsection (i) of § 1002(21)(A), defining a fiduciary as a person who (“exercises any discretionary authority or discretionary control respecting management of such a plan or who exercises any authority or control over the management or disposition of its assets”) and highlighted the fact that the word, “discretionary,” is used only with regard to the first clause [emphasis added]. From a close reading of the literal language and structure of the provision, they conclude that where the person exercises any authority or control over the management or disposition of the assets of the plan, discretion is not required of a fiduciary.

See Board of Trustees of Bricklayers and Allied Craftsmen Local 6 of New Jersey Welfare Fund v. Wettlin Associates, Inc.,

237 F.3d 270, 273 (3d Cir.2001),

quoting IT Corp. v. General Am. Life Ins. Co.,

107 F.3d 1415, 1421 (9th Cir.l997)(“any control over disposition of plan money makes the person who has control a fiduciary”),

cert. denied,

522 U.S. 1068 , 118 S.Ct. 738 , 139 L.Ed.2d 675 (1998);

FirsTier Bank, N.A. v. Zeller,

16 F.3d 907, 911 (8th Cir.)(“Note that this section imposes fiduciary duties only if one exercises

discretionary

authority or control over plan

management,

but imposes those duties

whenever

one deals with plan

assets.

This distinction is not accidental—

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it reflects the high standard of care trust law imposes upon those who handle money or other assets on behalf of another.”),

cert. denied sub nom. Vercoe v. Firstier Bank, N.A.,

513 U.S. 871 , 115 S.Ct. 194 , 130 L.Ed.2d 126 (1994);

Board of Trustees of Western Lake Superior Piping Industry Pension Fund v. American Benefit Adm’rs, Inc.,

925 F.Supp. 1424, 1429 (D.Minn.1996).

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Such a distinction between authority and control over plan management versus over plan assets in requiring discretion only with regard to the former before fiduciary obligations are triggered appears to have roots in the fiduciary’s traditional duties. “At common law, fiduciary duties characteristically attach to decisions about managing assets and distributing property to beneficiaries” and “the common law trustee’s most defining concern historically has been the payment of money in the interest of the beneficiary.”

Pegram,

530 U.S. at 231 , 120 S.Ct. 2143 . Moreover, “ when Congress took up the subject of fiduciary responsibility under ERISA, it concentrated on fiduciaries’ financial decisions, focusing on pension plans, the difficulty many retirees faced in getting the payments they expected, and the financial mismanagement that had too often deprived employees of their benefits.”

Id.

at 232 , 120 S.Ct. 2143 ,

citing as examples,

S.Rep. No. 93-127, p. 5 (1973); S.Rep. No. 93-383, pp. 17, 95 (1973).

In contrast to the functional definition of fiduciary in § 1002(21)(A), § 402(a)(2) of ERISA, 29 U.S.C. § 1102 (a)(2), defines a formally “named fiduciary” as “a fiduciary who is named in the plan instrument, or who, pursuant to a procedure specified in the plan, is identified as a fiduciary (A) by a person who is an employer or employee organization with respect to the plan or (B) by such an employer and such an employee organization acting jointly.”

Section 409(a) of ERISA, 29 U.S.C. § 1109 (a), provides, “Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally ha-ble.” It makes no distinction between the functional definition of a trustee and the

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formal designation of a fiduciary named by the plan documents or by following the procedure in those documents for designating a fiduciary and thus applies to both,

b. Fiduciary Duties

The common law of trusts “offers a ‘starting point for analysis of [ERISA] ... [unless] it is inconsistent with the language of the statute, its structure, or its purposes.’ ”

Harris Trust,

530 U.S. at 249 , 120 S.Ct. 2180 ,

quoting Hughes Aircraft Co. v. Jacobson,

525 U.S. 432, 447 , 119 S.Ct. 755 , 142 L.Ed.2d 881 (1999). “[R]ather than explicitly enumerating

all

of the powers and duties of trustees and other fiduciaries, Congress invoked the common law of trusts to define the general scope of their authority and responsibility.’ ”

Varity Corp. v. Howe,

516 U.S. 489, 496 , 116 S.Ct. 1065 , 134 L.Ed.2d 130 (1996),

quoting Central States, Southeast and Southwest Areas Pension Fund v. Central Transport, Inc.,

472 U.S. 559, 570 , 105 S.Ct. 2833 , 86 L.Ed.2d 447 (1985). Thus a federal common law based on the traditional common law of trusts has developed and is applied to define the powers and duties of ERISA plan fiduciaries, at least in part, with modifications appropriate in light of the unique nature of the statutory employee benefit plans.

See, e.g., Pegram,

530 U.S. at 224 , 120 S.Ct. 2143 ;

Varity Corp.,

516 U.S. at 497 , 116 S.Ct. 1065 (“We also recognize ... that trust law does not tell the entire story.”);

Bussian v. RJR Nabisco, Inc.,

223 F.3d 286, 294 (5th Cir.2000)(“Although ERISA’s duties gain definition from the law of trusts, the usefulness of trust law to decide cases brought under ERISA is constrained by the statute’s provisions.”);

Donovan v. Cunningham,

716 F.2d 1455 , 1464 n. 15 (5th Cir.1983)(“ERISA’s modifications of existing trust law include imposition of duties upon a broader class of fiduciaries, 29 U.S.C. § 1003 (21)(1976), prohibition of exculpatory clauses,

id.

§ 1110(a), broad disclosure and reporting requirements,

id.

§§ 1021-31, and nationwide uniformity of rules,” and § 406’s “detailed list” of

per se

illegal types of transactions),

cert. denied,

467 U.S. 1251 , 104 S.Ct. 3533 , 82 L.Ed.2d 839 (1984). For example, the traditional four overlapping fiduciary duties (of loyalty, care, diversification of plan assets, and adherence to plan documents, where prudent), cited in footnote 9 of this memorandum and order and discussed in detail

infra,

are derived from the common law of trusts and are imposed upon ERISA fiduciaries. At the same time, in contrast to the common law of trusts, under ERISA the plan fiduciary may have multiple roles and wear many hats; he may serve as an employer and as a plan fiduciary.

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The scope of the incorporation of the common law of trusts is not clearly defined, however, and different courts have frequently come to different conclusions about the extent of its application.

The most fundamental duty of ERISA plan fiduciaries is a duty of complete loyalty, under 29 U.S.C. § 1104 (a)(1)(B), to insure that they discharge their duty “solely in the interests of the participants and beneficiaries,” and to “exclude all selfish interest and all consid

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eration of the interests of third persons.”

Id.

Fiduciaries must discharge their duties with respect to the plan “solely in the interest of the participants and the beneficiaries,” i.e., “for the exclusive purpose of (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.” 29 U.S.C. § 1104 (a)(1)(A). Thus among the responsibilities and duties imposed on fiduciaries by ERISA is avoidance of conflicts of interest.

Merbens v. Hewitt Assoc.,

508 U.S. 248, 251-52 , 113 S.Ct. 2063 , 124 L.Ed.2d 161 (1993).

Second, the fiduciary must meet a “prudent man” standard under 29 U.S.C. § 1104 (a)(1)(B), to 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” and “with single-minded devotion” to these plan participants and beneficiaries. According to the Department of Labor, 29 C.F.R. § 2550 .404a-l(b), these requirements are satisfied if the fiduciary

(i) Has given appropriate consideration to those facts and circumstances that, given the scope of such fiduciary’s investment duties, the fiduciary knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the plan’s investment portfolio with respect to which the fiduciary has investment duties; and

(ii) Has acted accordingly.

“Appropriate consideration” for purposes of this regulation includes but is not limited to

(i) A determination by the fiduciary that the particular investment or investment course of action is reasonably designed, as part of the portfolio (or, where applicable, that portion of the plan portfolio with respect to which the fiduciary has investment duties), to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action, and

(ii) Consideration of the following factors as they relate to such

portion

of the portfolio:

(A) The composition of the portfolio with regard to diversification;

(B) The liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan; and

(C) The projected return of the portfolio relative to the funding objectives of the plan.

Id.

at § 2550.404a-l(b)(2);

Laborers National Pension Fund v. Northern Trust Quantitative Advisors, Inc.

173 F.3d 313, 317-18 (5th Cir.)(noting that these regulations from the Department of Labor, 29 C.F.R. § 2550 .404a-1, generally reflect that a fiduciary with investment duties must act as a prudent investment manager under the modern portfolio theory rather than under the common law of trusts standard which examined each investment with an eye toward its individual riskiness),

cert. denied,

528 U.S. 967 , 120 S.Ct. 406 , 145 L.Ed.2d 316 (1999). In 29 C.F.R. § 2509.94-1 Interpretive Bulletin, the Department of Labor observes, “... [B]e-cause every investments necessarily causes a plan to forego other investment opportunities, an investment will not be prudent if it would be expected to provide a plan with a lower rate of return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return.”

Regarding this overlapping duty of “care, skill, prudence, and diligence under the circumstances then prevailing

*548

that a prudent man acting in a like capacity and familiar with such matters would use,” the Fifth Circuit has stated,

In determining compliance with ERISA’s prudent man standard, courts objectively assess whether the fiduciary, at the time of the transaction, utilized proper methods to investigate, evaluate and structure the investment; acted in a manner as would others familiar with such matters; and exercised independent judgment when making investment decisions. “ ‘[ERISA’s] test of prudence ... is one of conduct, and not a test of the result of performance of the investment. The focus of the inquiry is how the fiduciary acted in his selection of the investment, and not whether his investments succeeded or failed.’ ” Thus, the appropriate inquiry is “whether the individual trustees, at the time they engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment [citations omitted].”

Laborers National Pension Fund v. Northern Trust Quantitative Advisors, Inc.

173 F.3d at 317 . Since the prudence standard focuses on whether the fiduciary utilized appropriate methods to investigate and evaluate the merits of a particular investment, the “appropriate methods” in a particular case depend “on the ‘character’ and ‘aim’ of the particular plan and decision at issue and the ‘circumstances prevailing’ at the time a particular course of action must be investigated and undertaken.’ ”

Bussian,

223 F.3d at 299 . Furthermore, the standard of the prudent man is an objective standard, and good faith is not a defense to a claim of imprudence.

Reich,

55 F.3d at 1046 ;

Donovan v. Cunningham,

716 F.2d at 1467 (“this is not a search for subjective good faith — a pure heart and an empty head are not enough”).

Third, the ERISA fiduciary must diversify the plan’s investments to minimize risk of loss unless, under the circumstances, it is clearly prudent not to diversify. 29 U.S.C. § 1104 (a)(1)(C). The legislative history offers some guidance about diversifying the assets of an ERISA plan:

The degree of investment concentration that would violate this requirement to diversify cannot be stated as a fixed percentage, because a fiduciary must consider the facts and circumstances of each case. The factors to be considered include (1) the purposes of the plan; (2) the amount of the plan assets; (3) financial and industrial conditions; (4) the type of investment, whether mortgages, bonds or shares of stock or otherwise; (5) distribution as to geographical location; (6) distribution as to industries; (7) dates of maturity.

Metzler v. Graham,

112 F.3d 207, 208-09 (5th Cir.1997),

citing

H.R.Rep. No. 1280, 93d Cong., 2d Sess. (1974),

reprinted in

1974 U.S.C.C.A.N. 5038, 5084-85 (Conf. Rpt. at 304). The panel further noted, “We think it is entirely appropriate for a fiduciary to consider the time horizon over which the plan will be required to pay out benefits in evaluating the risk of large loss from an investment strategy.”

Metzler,

112 F.3d at 210 n. 6. Moreover, the panel admonished courts, “It is clearly imprudent to evaluate diversification solely in hindsight — plan fiduciaries can make honest mistakes that do not detract from a conclusion that their decisions were prudent at the time.”

Id.

at 209 .

To prevail on a claim that a fiduciary violated its duty to diversify, a plaintiff must show that the portfolio, on its face, is not diversified. The burden then shifts to the defendant to demonstrate that it was “clearly prudent” not to diversify, the express statutory exception

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to the duty to diversify.

Metzler,

112 F.3d at 209 . Factors such as the trustees’ “investigation of the purchase, the evaluation of other investment alternatives, and the relative expertise of the trustee ... are relevant to whether there was risk of large loss.”

Id.

at 212 . Both the plaintiffs evi-dentiary burden and the defendant’s evi-dentiary burden “must be analyzed from the perspective of what both parties acknowledge as their purpose; to reduce the risk of large loss.”

Id.

at 210 . “Prudence is evaluated at the time of the investment without the benefit of hindsight.”

Metzler,

112 F.3d at 209 .

Fourth, the plan fiduciary must follow the documents and instruments governing the plan to the extent that they are consistent with ERISA. 29 U.S.C. § 1104 (a)(1)(D). “In ease of a conflict, the provisions of the ERISA policies as set forth in the statute and regulations prevail over those of the Fund guidelines.”

Laborers Nat. Pension Fund v. Northern Trust Quantitative Advisors, Inc.,

173 F.3d at 322 .

In accord, Central States, Southeast and Southwest Areas Pension Fund v. Central Transport, Inc.,

472 U.S. 559, 568 , 105 S.Ct. 2833 , 86 L.Ed.2d 447 (1985)(“[T]rust documents cannot excuse trustees from their duties under ERISA and ... trust documents must generally be construed in light of ERISA’s policies .... ”);

Donovan v. Cunningham,

716 F.2d at 1467 (“Though freed by Section 408 from the prohibited transaction rules, ESOP fiduciaries remain subject to the general requirements of Section 404.”);

Herman v. NationsBank Trust Co., (Georgia),

126 F.3d 1354, 1368 (11th Cir.l997)(fiduciary was “obligated to determine whether the plan provisions ... were contrary to ERISA” and to fulfill his duties to act prudently and solely in the interests of the plan participants),

cert. denied,

525 U.S. 816 , 119 S.Ct. 54 , 142 L.Ed.2d 42 (1998).

See also Moench v. Robertson,

62 F.3d 553, 567 (3d Cir.1995)(where the plan language “constrains the [fiduciaries’] ability to act in the best interest of the beneficiaries,” it is inconsistent with ERISA and with the common law of trusts and must not be followed),

cert. denied,

516 U.S. 1115 , 116 S.Ct. 917 , 133 L.Ed.2d 847 (1996);

Eaves v. Penn,

587 F.2d 453, 459 (10th Cir.1978)(“While an ESOP fiduciary may be released from certain Per Se violations on investments in employer securities ..., the structure of [ERISA] itself requires that in making an investment decision of whether or not a plan’s assets should be invested in employers [sic ] securities, an ESOP fiduciary, just as fiduciaries of other plans, is governed by the ‘solely in the interest’ and ‘prudence’ tests of §§ 404(a)(1)(A) and (B).”).

51

Given that a fiduciary’s duties are “the highest known to the law,” “[a] trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”

Donovan v. Bierwirth,

680 F.2d 263 , 272 n. 8 (2d Cir.),

cert. denied,

459 U.S. 1069 , 103 S.Ct. 488 , 74 L.Ed.2d 631 (1982);

cited and quoted by Bussian v. RJR Nabisco, Inc.,

223 F.3d 286, 294 (5th Cir.2000). In determining whether a trustee has breached his duties, the court examines both the merits of the challenged transaction(s) and the thoroughness of the fiduciary’s investigation into the merits of

*550

the transaction(s).

Donovan v. Cunningham,

716 F.2d at 1467 .

52

Unlike the law of conspiracy, “[n]o fiduciary shall be hable with respect to a breach of fiduciary duty under this sub-chapter if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary.” 29 U.S.C. § 1109 (b);

see also Bannistor v. Ullman,

287 F.3d 894, 405 (5th Cir.2002).

c. “Two-Hat” Doctrine

Unlike the trustee at common law, who must wear only his fiduciary hat when he acts in a manner to affect the beneficiary of the trust, an ERISA trustee may wear many hats, although only one at a time, and may have financial interests that are adverse to the interests of the beneficiaries but in the best interest of the company.

Pegram,

530 U.S. at 225 , 120 S.Ct. 2143 ;

Bussian,

223 F.3d at 294-95 ;

Martinez v. Schlumberger, Ltd.,

338 F.3d 407, 412-13 (5th Cir.2003). For example a fiduciary may wear the hat of an employer and fire a beneficiary for reasons not related to the ERISA plan, or the hat of a plan sponsor and modify the terms of a plan to be less generous to the beneficiary.

Pegram,

530 U.S. at 225 , 120 S.Ct. 2143 . When making fiduciary decisions, however, a fiduciary may wear only his fiduciary hat.

Id.

Thus instead of defining a fiduciary merely as an administrator of or manager of or advisor to a plan, the statute states that he is a fiduciary only “to the extent that he acts in such a capacity in relation to a plan.”

Pegram,

530 U.S. at 225-26 , 120 S.Ct. 2143 ,

citing

29 U.S.C. § 1002 (21)(A);

Schlumberger,

338 F.3d at 412-13 . Accordingly, when a plaintiff alleges a cause of action for breach of fiduciary duty, the threshold question is whether the defendant was acting as a fiduciary, i.e., performing a fiduciary function, when he performed the action that constitutes the basis of the complaint.

Pegram,

530 U.S. at 226 , 120 S.Ct. 2143 ;

Schlumberger,

338 F.3d at 413 .

For example, under the “two hats” doctrine, adopted by the Supreme Court in

Curtiss-Wright Corp. v. Schoonejongen,

514 U.S. 73, 78 , 115 S.Ct. 1223 , 131 L.Ed.2d 94 (1995)(holding that an employer does not act as a fiduciary, but as a settlor

53

in adopting, amending

54

or ter-

*551

initiating a welfare plan

55

), a plan sponsor may function in a dual capacity as a business employer (settlor or plan sponsor

56

) whose activity is not regulated by ERISA and as a fiduciary of its own established ERISA plan, subject to ERISA. “The ... act of amending ... does not constitute the action of a fiduciary”; “ERISA’s fiduciary duty requirement simply is not implicated where [the employer], acting as the Plan’s settlor, makes a decision regarding the form or structure of the Plan such as who is entitled to receive Plan benefits and in what amounts, or how such benefits are calculated.”

Hughes Aircraft,

525 U.S. at 444 , 119 S.Ct. 755 . The law does not require employers to establish employee benefit plans. Congress sought to encourage employers to set up plans voluntarily by offering tax incentives, methods to limit fiduciary liability, means to contain administrative costs, and giving employers flexibility and control over matters such as whether or when to establish an employee benefit plan, how to design a plan, how to amend a plan, when to terminate a plan, all of which are generally viewed as business decisions of a settlor, not of a fiduciary, and thus not subject to fiduciary obligations.

Pegram,

530 U.S. at 226-27 , 120 S.Ct. 2143 ;

Martinez v. Schlumberger, Ltd.,

338 F.3d at 429 (“a company does not act in a fiduciary capacity by simply amending a plan” or by adopting, modifying or terminating a plan);

Akers v. Palmer,

71 F.3d 226, 230 (6th Cir.1995)(“a company is only subject to fiduciary restrictions when managing a plan according to its terms, but not when it decides what those terms are to be”),

cert. denied,

518 U.S. 1004 , 116 S.Ct. 2523 , 135 L.Ed.2d 1048 (1996);

Bennett v. Conrail Matched Savings Plan Administrative Committee,

168 F.3d 671, 679 (3d Cir.)(“in amending a plan, the employer is acting as a settlor”; thus “the mere fact that [the employer] amended its plan did not breach any fiduciary duties under ERISA”),

cert. denied,

528 U.S. 871 , 120 S.Ct. 173 , 145 L.Ed.2d 146 (1999);

Southern Illinois Carpenters Welfare Fund v. Carpenters Welfare Fund of Illinois,

326 F.3d 919, 924 (7th Cir.2003)(“[S]inee an employer has no duty to create a pension or welfare plan in the first place, neither does he have a duty to amend it to make it more generous, or a duty not to amend it if the amendment would make it less generous”).

With respect to amendment of a plan that has the effect of reducing or eliminating pension benefits, the general rule is that the employer who amends the plan according to the procedures laid out in the plan documents does not breach its fiduciary duty as long as the benefits that are reduced or eliminated had

not accrued or were not vested at the time and the amendment does not otherwise violate ERISA or the plan terms. Hines v. Massachusetts Mutual Life Ins. Co.,

43 F.3d 207, 210 (5th Cir.1995),

citing Izzarelli v. Rexene Prods. Co.,

24 F.3d 1506, 1524 (5th Cir.1994);

Heinz v. Central Laborers’ Pension Fund,

303 F.3d 802, 804 (7th Cir.2002)(“The accrued benefit of a participant under a plan may not be decreased by an amendment of the plan, other than an

*552

amendment described in section 1082(c)(8) [“substantial business hardship”] or 1441 [terminated multiemployer plans] of this title.”),

petition for cert. filed,

No. 02-891, 71 U.S.L.W. 3429 (Dec. 10, 2002).

Section 204(g), as amended 29 U.S.C. § 1054 (g), ERISA’s anti-cutback provision, provides in relevant part,

Decrease of accrued benefits through amendment of the plan

(1) The accrued benefit of a participant under a plan may not be decreased by an amendment of the plan other than an amendment described in section 1082(c)(8) or 1441 of this title.

57

(2) For purposes of paragraph (1), a plan amendment which has the effect of—

(A) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in regulations), or

(B) eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits.

Section 1054(g) statutorily protects against the reduction or elimination of accrued benefits, but not against reduction or elimination of benefits that are expected but not accrued.

Campbell v. BankBoston,

N.A., 327 F.3d 1, 8-9 (1st Cir.2003);

Board of Trustees of Sheet Metal Workers’ Natl. Pension Fund v. C.I.R.,

318 F.3d 599, 599 (4th Cir.2003). “Accrued benefits” in the defined benefit context are defined as “the individual’s accrued benefit determined under the plan,” which is “equal to the employee’s accumulated contributions.”

Campbell,

327 F.3d at 8 ,

citing

29 U.S.C. § 1002 (23)(A) and § 1054(c)(2)(B). Section 1002(23) of ERISA provides, The term “accrued benefit means ... in the case of a defined benefit plan, the individual’s ae-crued benefit determined under the plan and, except as provided in section 1054(c)(3) of this title, expressed in the form of an annual benefit commencing at normal retirement age.” Section 411(d)(6) of the Internal Revenue Code, 26 U.S.C. § 411 (d)(6), is a parallel provision prohibiting the same conduct, and Treasury Regulation § 1.411(d)-4, A-4(a), promulgated thereunder to “effectuate these ‘anti-cutback’ principles,” provides in relevant part,

[A pension] plan that permits the employer, either directly or indirectly, through the exercise of discretion, to deny a participant a section 411(d)(6) protected benefit provided under the plan for which the participant is otherwise eligible (but for the employer’s exercise of discretion) violates the requirements of section 411(d)(6).

Perreca v. Gluck,

295 F.3d 215, 228 (2d Cir.2002),

citing

Treasury Regulation § 1.411(d)-4, A-4. Under Treasury Regulation § 1411(d)-4, A-5, “The term employer includes plan administrator ... [and] trustee ....”

Id.

at 228 n. 10.

d. Power to Appoint/Remove Plan Fiduciaries

A person or entity that has the power to appoint, retain and/or remove a plan fiduciary from his position has discretionary authority or control over the management or administration of a plan and is a fiduciary to the extent that he or it exercises that power.

Coyne & Delany Co. v. Selman,

98 F.3d 1457, 1465 (4th Cir.1996)(“the power ... to appoint, retain and remove plan fiduciaries constitutes ‘discretionary authority’ over the management or administration of a plan within the meaning of § 1002(21)(A)”)

58

;

Hickman v. Tosco Corp.,

840 F.2d 564, 566 (8th Cir.1988)(“Tosco is a fiduciary within the

*553

meaning of ERISA ... because it appoints and removes the members of the administrative committee that administers the pension plan.”);

American Federation of Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance Soc. of the U.S.,

841 F.2d 658, 665 (5th Cir.1988)(“Lia-bility for failure to adequately train and supervise an ERISA fiduciary arises where the person exercising supervisory authority is in a position to appoint or remove plan administrators and monitor their activities.”);

Henry v. Frontier Industries, Inc.,

863 F.2d 886 , 1988 WL 132577 , *2 (9th Cir.1988)(“Largent was a fiduciary of the ESOP by virtue of his power to appoint and retain, and his duty to monitor the member(s) of the Administrative Committee .... ”);

Mehling v. New York Life Ins. Co.,

163 F.Supp.2d 502, 509-10 (E.D.Pa.2001);

Liss v. Smith,

991 F.Supp. 278, 310, 311 (S.D.N.Y.1998)(“It is by now well-established that the power to appoint plan trustees confers fiduciary status”; “[t]he duty to monitor carries with it, of course, the duty to take action upon discovery that the appointed fiduciaries are not performing properly”).

In

Leigh v. Engle,

727 F.2d 113, 133-35 (7th Cir.1984), the Seventh Circuit noted that 29 C.F.R. § 2509.75-5 at FR-3 provides that “a plan instrument which designates the corporation as ‘named fiduciary’ should provide for designation by the corporation of specified individuals or other persons to carry out specified fiduciary responsibilities under the plan.” Furthermore, in

Leigh ,

the Seventh Circuit concluded that two corporate officials exercising a duty to appoint fiduciaries had a duty to monitor their appointees’ actions:

As the fiduciaries responsible for selecting and retaining their close business associates as plan administrators, Engle and Libco had a duty to monitor appropriately the administrators’ actions. Engle and Libco could not abdicate their duties under ERISA merely through the device of giving their lieutenants primary responsibility for the day to day management of the trust. Engle and Libco were obliged to operate with appropriate prudence and reasonableness in overseeing their appointees’ management of the trust.

727 F.2d at 134-35 .

See also

ERISA Interpretative Bulletin 75-8, 29 § 2509.75-8(D-4) (members of a board of directors “responsible for the selection and retention of plan fiduciaries” have “ ‘discretionary authority or discretionary control respecting the management of such plan’ and are, therefore, fiduciaries with respect to the plan.”); (FR-17 Q & A)(“At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan.”).

59

*554

Some courts have placed restrictions on such liability. For instance, in

Brock v. Self,

632 F.Supp. 1509, 1523 (W.D.La.1986), the district court wrote,

[I]f the Plan instrument itself provided for a procedure whereby a named fiduciary may designate persons who are not named fiduciaries to carry out fiduciary responsibilities, the named fiduciaries might not be liable for the acts or omissions of the Third-Party Defendants. 29 C.F.R. § 2509.75-8 , FR-14 (1985). Because the Plan in the case at bar does not provide for any such procedure, however, then any designation of Third-Party Defendants as fiduciaries by Third-Party Plaintiffs will not relieve Third-Party Plaintiffs from responsibility or liability for the acts and omissions of Third-Party Defendants.

*555

See also Newton v. Van Otterloo,

756 F.Supp. 1121, 1132 (N.D.Ind.1991)(directors have duties to monitor plan fiduciaries whom they appoint but do not breach duties in the absence of “notice of possible misadventure by their appointees”).

e. Duty to Disclose

Plaintiffs have alleged that Enron fiduciary Defendants, including the Administrative Committee members, Lay, and the Compensation Committee members (Blake, Duncan, Jaedicke and LeMaistre), have breached their duty of loyalty to the plan participants by affirmatively and materially misleading them about Enron’s financial condition and performance and its accounting manipulations, while inducing them to hold and purchase additional Enron stock. Plaintiffs have also argued that Defendants charged in Count II (lock-down) and Count IV (Offset formula used by Cash Balance Plan) had a fiduciary duty to disclose Enron’s financial condition to plan participants and beneficiaries.

The fiduciary’s duty to disclose is an area of developing and controversial law.

Under the common law of trusts, which Congress indicated should apply as a threshold step to define duties of plan fiduciaries under ERISA, generally the trustee’s duty to disclose information was triggered by a specific request from a plan participant or beneficiary. According to Restatement (Second) of Trusts § 173 (1959),

60

The trustee is under a duty to the beneficiary to give him upon his request at reasonable times complete and accurate information as to the nature and amount of the trust property, and to permit him or a person duly authorized by him to inspect the subject matter of the trust and the accounts and vouchers and other documents related to the trust.

in addition, as embodied in comment d to § 173, are the seeds of the trustee’s duty to disclose:

The trustee is under a duty to communicate to the beneficiary material facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection in dealing with a third person with respect to his interest. ...

Although the duty to disclose has its roots in the common law of trusts, courts recently have been expanding a fiduciary’s affirmative duty to disclose material information to plan participants under ERISA.

It is well established that a plan administrator acts in a fiduciary capacity when it explains plan benefits, even likely future benefits, to its employees.

See, e.g., Varity Corp.,

516 U.S. at 502-03, 504-05 , 116 S.Ct. 1065 ;

McCall v. Burlington Northern/Santa Fe Co.,

237 F.3d 506, 510-11 (5th Cir.2000)(“Providing information about likely future plan benefits falls within ERISA’s statutory definition of a fiduciary Act.”),

cert. denied,

534 U.S. 822 , 122 S.Ct. 57 , 151 L.Ed.2d 26 (2001). The Supreme Court has held that § 404(a) of ERISA, 29 U.S.C. § 1104 (a)(1)(“a fiduciary shall discharge his fiduciary duty with respect to a plan solely in the interest of the participants and beneficiaries”), imposes a duty on a plan fiduciary not to affirmatively miscommunicate or mislead plan participants about material matters regarding their ERISA plan.

See, e.g., Varity Corp. v. Howe,

516 U.S. 489, 493, 505 , 116 S.Ct. 1065 , 134 L.Ed.2d 130 (1996)(holding that an employer which was also an ERISA Plan administrator breached its fiduciary duty of loyalty to the plan beneficiaries when it deceptively induced them to

*556

“switch employers and thereby voluntarily release [the company] from its obligation to provide them benefits”). In

Varity Corp.,

the Supreme Court proclaimed, “To participate knowingly and significantly in deceiving plan beneficiaries in order to save the employer money at the beneficiaries’ expense is not to act solely in the interest of the participants and beneficiaries .... [LJying is inconsistent with the duty of loyalty owed by all fiduciaries and codified in section 404(a)(1) of ERISA”.

Id.

at 506 , 116 S.Ct. 1065 .

See also Martinez v. Schlumberger, Ltd.,

338 F.3d at 425 (“When an ERISA plan administrator speaks in its fiduciary capacity concerning a material aspect of the plan, it must speak truthfully”);

McCall v. Burlington Northern/Santa Fe,

237 F.3d at 510-11;

Mullins v. Pfizer, Inc.,

23 F.3d 663, 668 (2d Cir.1994)(holding that “when a plan administrator speaks, it must speak truthfully”).

In

Varity Corp.

516 U.S. at 506 , 116 S.Ct. 1065 , the Supreme Court chose not to “reach the question whether ERISA fiduciaries have any fiduciary duty to disclose truthful information on their own initiative, or in response to employee inquiries.” Nevertheless, in that case the Supreme Court found that a plan sponsor, which distributed materials and called a meeting where it persuaded approximately 1,500 employees to transfer, voluntarily, to positions at a new subsidiary by intentionally misrepresenting that the subsidiary was financially stable and the employees’ benefits would be secure, was acting in a fiduciary capacity and violated its fiduciary duties. “While it may be true that amending or terminating a plan is beyond the power of a plan administrator — and, therefore, cannot be an act of plan ‘management’ or ‘administration’ — it does not follow that making statements about the likely future of the plan is also beyond the scope of plan administration.... [P]lan administrators often have, and commonly exercise, discretionary authority to communicate with beneficiaries about the future of plan benefits.”

Varity Corp.,

516 U.S. at 505 , 116 S.Ct. 1065 .

Courts have generally agreed that where an ERISA fiduciary makes statements about future benefits that misrepresent present facts, these misrepresentations are material if they would induce a reasonable person to rely on them.

Ballone v. Eastman Kodak Co.,

109 F.3d 117, 122-23 (2d Cir.1997);

Mullins v. Pfizer,

23 F.3d at 669 ;

Kurz v. Philadelphia Electric Co.,

994 F.2d 136, 140 (3d Cir.1993),

cert. denied sub nom Philadelphia Electric Co. v. Fischer,

510 U.S. 1020 , 114 S.Ct. 622 , 126 L.Ed.2d 586 (1993);

James v. Pirelli Armstrong Tire Corp.,

305 F.3d 439, 439 (6th Cir.2002)(“[A] misrepresentation is material if there is a substantial likelihood that it would mislead a reasonable employee in making an adequately informed decision in pursuing ... benefits to which she may be entitled.”),

cert. denied,

_ U.S. _, 123 S.Ct. 2077 , 155 L.Ed.2d 1062 (2003).

Concern for uninformed and vulnerable plap participants has increasingly led some courts, including the Third Circuit, to conclude that circumstances known to the plan fiduciary can give rise to an expanded affirmative duty to disclose information necessary to protect a participant or beneficiary because that participant or beneficiary “may have no reason to suspect that it should make inquiry into what may appear to be a routine matter.”

Glaziers and Glassworkers Union Local No. 252 Annuity Fund v. Newbridge Securities, Inc.,

93 F.3d 1171, 1181 (3d Cir.1996).

See also Griggs v. E.I. Dupont de Nemours & Co.,

237 F.3d 371, 380 (4th Cir.2001)(“ERISA administrators have a fiduciary obligation ‘not to misinform employees through material misrepresentations and incomplete, inconsistent or contradictory disclosures.’ ... Moreover, a fiducia

*557

ry is at times obligated to affirmatively provide information to the beneficiary ... [including] ‘facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection ... [citations omitted].’ ”);

Bins v. Exxon Co. U.S.A.,

189 F.3d 929 (1999)(“We believe that once an ERISA fiduciary has material information relevant to a plan participant or beneficiary, it must provide that information whether or not it is asked a question.”),

on rehearing en banc,

220 F.3d 1042, 1048-49 (9th Cir.2000)(when a proposed change in retirement benefits becomes sufficiently likely and therefore material, the employer has a duty to provide complete and truthful information);

Schmidt v. Sheet Metal Workers’ Nat. Pension Fund,

128 F.3d 541 , 546-47 (7th Cir.1997)(“A plan fiduciary may violate its duties ... either by affirmatively misleading plan participants about the operations of a plan, or by remaining silent in circumstances where silence could be misleading.”), ce

rt. denied,

523 U.S. 1073 , 118 S.Ct. 1513 , 140 L.Ed.2d 667 (1998).

A number of the Circuit Courts of Appeals have held that after an ERISA participant/beneficiary requests information from his plan’s fiduciary, who is informed of that participant/beneficiary’s circumstances, the fiduciary has a duty to provide full and accurate information material to the participanVbeneficiary’s situation, including information about which the participant/benefieiary did not specifically ask.

See, e.g., Watson v. Deaconess Waltham Hosp.,

298 F.3d 102, 114 (1st Cir.2002);

Griggs v. E.I. Dupont de Nemours & Co.,

237 F.3d 371, 380-81 (4th Cir.2001);

Bowerman v. Wal-Mart-Stores, Inc.,

226 F.3d 574, 590 (7th Cir.2000);

Krohn v. Huron Memorial Hosp., 173

F.3d 542, 547-48 (6th Cir.1999)(“[A] plan administrator has ‘an affirmative duty to inform when it knows that silence might be harmful’...,” including full information about short- and long-term disability benefits when asked about disability benefits generally);

Shea v. Esensten,

107 F.3d 625, 629 (8th Cir.)(“Where an HMO’s financial incentives discourage a treating doctor from providing essential health care referrals for conditions covered under the plan benefit structure, the incentives must be disclosed and the failure to do so is a breach of ERISA’s fiduciary duties”),

cert. denied,

522 U.S. 914 , 118 S.Ct. 297 , 139 L.Ed.2d 229 (1997);

Anweiler v. American Elec. Power Serv. Corp.,

3 F.3d 986, 991 (7th Cir.1993);

Drennan v. Gen. Motors Corp.,

977 F.2d 246 , 251 (6th Cir.1992)(“A fiduciary must give complete and accurate information in response to participants’ questions .... ”);

Eddy v. Colonial Life Ins. Co.,

919 F.2d 747, 750 (D.C.Cir.1990)(“At the request of a beneficiary (and in some circumstances upon his own initiative), a fiduciary must convey complete and correct material information to a beneficiary”).

Thus some Circuits have concluded that there is an additional affirmative duty, beyond a full and accurate response triggered by a participant/beneficiary’s specific question, to disclose material information to plan participants and beneficiaries. The Third Circuit, one of the most aggressive courts in this area, has held, “[I]t is a breach of fiduciary duty for an employer to knowingly make material misleading statements about the stability of a benefits plan.”

Adams v. Freedom Forge Corp.,

204 F.3d 475, 480 (3d Cir.2000),

citing In re Unisys Corp. Retiree Med. Benefits ‘ERISA” Litig.,

57 F.3d 1255 (3d Cir.1995),

cert. denied,

517 U.S. 1103 , 116 S.Ct. 1316 , 134 L.Ed.2d 469 (1996). “[T]he ‘duty to inform is a constant thread in the relationship between beneficiary and trustee; it entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence

*558

might be harmful.’ ”

Bixler v. Central Pa. Teamsters Health-Welfare Fund,

12 F.3d 1292 , 1300 (3d Cir.1993),

quoted for that proposition by James v. Pirelli Armstrong Tire Corp.,

305 F.3d 439, 452 (6th Cir.2002),

cert. denied,

_ U.S. _, 123 S.Ct. 2077 , 155 L.Ed.2d 1062 (2003),

Watson v. Deaconess Waltham Hosp.,

298 F.3d at 115 ,

61

Shea v. Esensten,

107 F.3d at 629, and

Bins v. Exxon Co. U.S.A.,

220 F.3d 1042, 1054 (9th Cir.2000)(en.

banc). In accord, Griggs,

237 F.3d at 381 (“[A]n ERISA fiduciary that knows or should know that a beneficiary labors under a material misunderstanding of plan benefits that will inure to his detriment cannot remain silent .... ”);

Anweiler,

3 F.3d at 991 (“Fiduciaries must also communicate material facts affecting the interests of beneficiaries. This duty exists when a beneficiary asks fiduciaries for information, and even when he or she does not.”). The Third Circuit has asserted that

an employer or plan administrator fails to discharge its fiduciary duty in the interest of the plan participants and beneficiaries when it provides, on its own initiative, materially false or inaccurate information to employees about the future benefits of a plan. Under these circumstances, it is not necessary that employees ask specific questions about future benefits or that they take the affirmative step of asking questions about the plan to trigger the fiduciary duty.

James v. Pirelli,

305 F.3d at 455 ;

in accord McGrath v. Lockheed Martin Corp.,

48 FedAppx. 543, 555, 2002 WL 31269646 , *10 (6th Cir.2002).

See also

Restatement (Second) of Trusts § 173, comment d (1957)(The trustee “is under a duty to communicate to the beneficiary material facts affecting the interest of the beneficiary which he knows that the beneficiary does not know and which the beneficiary needs to know for his protection in dealing with a third person .... ”). The Sixth Circuit has additionally held, “A fiduciary breaches his duty by providing plan participants with materially misleading information, ‘regardless of whether the fiduciary’s statements or omissions were made negligently or intentionally.’ ...”

James v. Pirelli Armstrong Tire Corp.,

305 F.3d at 449 .

In comparison, in the very few cases in which the Fifth Circuit has addressed a fiduciary duty to disclose, and then only in narrow circumstances, the Fifth Circuit appears to impose such a duty cautiously. Rather than promulgating broad rules, it approaches the issue case by case, examining the facts and circumstances of each to determine the nature and extent of any duty to disclose that should be imposed. Like many courts, it views the plan administrator as having a fiduciary duty to plan participants as a whole, but not to individual participants with particular problems who do not make a specific request for information. The Fifth Circuit has stated, “[A]bsent a specific participant-initiated inquiry, a plan administrator does not have any fiduciary duty to determine whether confusion about a plan term or condition exists. It is only after the plan administrator does receive an inquiry that it has a fiduciary duty to respond promptly and adequately in a way that is not misleading [footnotes omitted].”

Switzer v. Wal-Mart Stores, Inc.,

52 F.3d 1294, 1299 (5th Cir.1995)(holding that plan administrator has no duty to give personal

*559

ized attention to each and every employee, and in particular to inform a plan participant that he was late in remitting his final COBRA premium).

Nevertheless, in

McDonald v. Provident Indem. Life Ins. Co.,

60 F.3d 234, 237 (5th Cir.1995),

cert. denied,

516 U.S. 1174 , 116 S.Ct. 1267 , 134 L.Ed.2d 214 (1996), the panel observed, “Section 404(a) imposes on a fiduciary the duty of undivided loyalty to plan participants and beneficiaries, as well as a duty to exercise care, skill, prudence and diligence. An obvious component of those responsibilities is the duty to disclose material information.” In

McDonald ,

an appellate court held that § 404(a) required the fiduciary to disclose a change in its rate schedule that caused a prohibitive premium to be set because of the impact such a premium could have on small employers, including the plaintiff. Subsequently, in

Ehlmann v. Kaiser Foundation Health Plan of Texas,

198 F.3d 552, 556 (5th Cir.2000),

cert. dismissed,

530 U.S. 1291 , 121 S.Ct. 12 , 147 L.Ed.2d 1036 (2000)(holding that ERISA does not impose a fiduciary duty on health maintenance organizations to disclose physician compensation and reimbursement schemes to plan participants),

62

the Fifth Circuit described the imposition of a duty to disclose in

McDonald

as based on the “extreme impact” that the change in rate schedules would have on small employers. The panel observed about

McDonald inter alia,

“Clearly these cases, which adopt a case by case or an

ad hoc

approach, do not warrant the wholesale judicial legislation of a broad duty to disclose that would apply regardless of special circumstance or specific inquiry.”

Id.

Thus the Fifth Circuit does recognize that in addition to a specific inquiry from a plan participant, special circumstances with a potentially “extreme impact” on a plan as a whole, where plan participants generally could be materially and negatively affected, might support imposition of such an affirmative duty in a particular case.

63

*561

The

Tittle

Plaintiffs complain not only of general material misrepresentations regarding Enron’s financial condition and the inducement to purchase or hold Enron stock, but also of particular employee meetings held in which certain Defendants urged plan participants to continue their employment and purchase or hold Enron stock as part of Defendants’ larger scheme to enrich themselves. Indeed, among the “predicate acts” alleged under their RICO claims, as factual support for their interstate transportation of persons and property in order to defraud, Plaintiffs claim that the Enron Insider Defendants, Arthur Andersen Defendants, and some Investment Banking Defendants conspired to induce Enron employees “to travel ... in the execution of the wrongful scheme alleged herein, ... to Houston, Texas, to attend meetings conducted by the Enron Insider Defendants at which ECSP participants were reassured that their 401(k) funds were safely invested and that they should hold and maintain their investments in Enron stock.” (Complaint at 281-82, ¶796). The facts and holding in

Varity Corp.

have relevance here.

Mindful of Congress’ balanced intent in enacting ERISA “ ‘to offer employees enhanced protection for their benefits, on the one hand, and, on the other, ... not to create a system that is so complex that administrative costs, or litigation expenses, unduly discourage employers from offering welfare benefit plans in the first place,’ ” in

Schlumberger,

338 F.3d at 413-16 , the Fifth Circuit discussed

Varity Corp. v. Howe,

516 U.S. 489 , 116 S.Ct. 1065 , 134 L.Ed.2d 130 , in some detail in the context of an employer/administrator/fiduciary’s duty to disclose to plan participants future changes to their ERISA plan.

According to the Fifth Circuit, in

Varity Corp.,

former employees of Varity Corporation’s subsidiary Massey-Ferguson, Inc. sued Varity, alleging that “Varity Corporation had affirmatively represented to them that their benefits woúld remain secure if they transferred to a new subsidiary, Massey Combines.”

Schlumberger,

338 F.3d

*562

at 414,

citing Varity,

516 U.S. at 492-93 , 116 S.Ct. 1065 . In fact Varity created Massey Combines in order to transfer Massey-Ferguson’s money-losing divisions, including its benefit plans, and other debts to Massey Combines with the expectation that Massey Combines would fail. In order to convince the plan beneficiaries to switch to Massey Combines, Varity had a special meeting with the employees and promised that their benefits would remain secure if they transferred, even though Varity knew the result would be quite different. Approximately 1500 employees relied on these promises and made the transfer; Massey Combines went into receivership within a couple of years and those employees lost their benefits.

Id.

at 414,

citing id.

at 494, 116 S.Ct. 1065 . Although Varity argued that it was wearing its settlor/employer hat when it urged Massey-Ferguson’s employees to switch to Massey Combines, the Supreme Court concluded otherwise and found that when Varity convened the meeting to represent that the transfer would not threaten their benefits, it was acting in its fiduciary capacity as a plan administrator.

Id.

at 415,

citing id.

at 501-02, 116 S.Ct. 1065 . The high court opined that “ ‘Varity was exercising ‘discretionary authority’ respecting the plan’s ‘management’ or ‘administration’ when it made these misrepresentations’” and that “‘[c]onveying information about the likely future of plan benefits, thereby permitting beneficiaries to make an informed choice about continued participation, would seem to be an exercise of a power ‘appropriate’ to carrying out an important plan purpose.’ ”

Id.

at 415,

citing id.

at 498, 502, 116 S.Ct. 1065 . Emphasizing that fiduciary duties primarily constrain the exercise of discretionary authority operating beyond duties laid out in the express terms of plan instruments, the Supreme Court emphasized the ERISA fiduciary’s duty of loyalty and concluded that Varity had breached that duty in “ ‘participating] knowingly and significant by in deceiving a plan’s beneficiaries in order to save the employer money at the beneficiaries’ expense’ ” and lying to the employee participants.

Id.

at 415-16,

citing id.

at 506, 116 S.Ct. 1065 .

Although the facts in

Varity Corp.

are not precisely on point with those in the instant suit, there are sufficient parallels with the

Tittle

Plaintiffs’ allegations to state a claim for breach of fiduciary duty in their representations to employees in these meetings.

This Court concludes that in light of the fiduciary’s duties of loyalty and of care, skill, prudence, and diligence, the

Tittle

plaintiffs have stated a claim generally for breach of a fiduciary duty to disclose based on material information in various ERISA counts, implied or express; they have asserted that Defendants breached their fiduciary duty regarding Enron’s alleged fraudulent accounting, concealment of its deceitful business practices and of the company’s precarious, swiftly deteriorating financial condition, and Defendants’ alleged representations knowingly intended to induce the plan participants’ continued participation in pension plans’ purchase and holding of Enron stock, which were known or should have been known to plan fiduciaries. They have alleged with supporting facts that disclosure was essential to protect the interests (retirement assets) of plan participants and beneficiaries from the threat of substantial depletion. Plaintiffs have specifically alleged that Lay, Olson, the Compensation Committee, the Enron ERISA Defendants, and Enron breached their fiduciary duty under ERISA by failing to disclose information about Enron’s dangerous financial condition that they knew or should have known

64

to plan participants, the Administrative Committee, or plan counsel, while

*563

these Defendants were individually selling large amounts of their own Enron holdings.

Certain Committee and Outside Directors (“Compensation Committee”) Defendants

65

have argued that if these Defendants met their duty of loyalty by selectively disclosing only to the plan participants non-public information about material accounting irregularities and financial improprieties, so that the participants could make an informed decision not to purchase additional shares or to sell their currently held shares of Enron stock before the market and the public found out and the price plunged, Defendants would be violating insider trading laws under the federal securities laws.

66

*564

Rule 10b-5, 17 C.F.R. § 240 .10b-5, requires that a corporate insider, because he owes a fiduciary duty to shareholders, either disclose material non-public information publicly or abstain from trading his own shares for personal gain.

See, e.g., Chiarella, v. United States,

445 U.S. 222, 226-29 , 100 S.Ct. 1108 , 63 L.Ed.2d 348 (1980).

See, generally,

# 1269 at 8-12 in

Newby,

H-01-3624. Furthermore, if a plan fiduciary were to tell plan participants of Enron’s actual financial condition so they could sell at a high price based on this nonpublic information, he would also be violating insider trading laws and he, the plan participants as “tippees,” and the Administrative Committee might be found liable of securities law violations.

See

15 U.S.C. § 78u-1(a)(l)(B)(imposmg civil penalties for insider trading against a person who directly or indirectly controlled a person who sold a security while in possession of such material, nonpublic information or violated the law in communicating such information) & (b)(l)(A)(imposing controlling person liability where the “controlling person knew or recklessly disregarded the fact that such controlled person was likely to engage in the act or acts constituting the violation and failed to take appropriate steps to prevent such act or acts before they occurred”).

As authority for their argument, these Defendants cite two unpublished opinions,

Hull v. Policy Management Systems Corp.,

No. CIV.A.3:00-778-17, 2001 WL 1836286 (D.S.C. Feb. 9, 2001), and

In re McKesson HBOC, Inc. ERISA Litigation,

No. C00-2003RMW, 2002 WL 31431588 , *6 (N.D.Cal. Sept. 30, 2002). In

Hull

the court

inter alia

dismissed a claim against corporate-defendant administrative committee members for failing to provide correct, adverse information about the actual value of the corporation and failing to act on it and sell the stock in the trust fund to protect the interests of the plan participants. The district court opined that the plaintiffs’ standard of care for the corporation’s stock was illegal and impractical because it

would put the Committee in the untenable position of choosing one of the three unacceptable (and in some instances illegal) courses of action; (1) obtain “inside” information and then make stock purchase and retention decisions based on this “inside” information; (2) make the disclosures of “inside” information itself before acting on the discovered information, overstepping its role and, in any case, likely causing the stock price to drop; or (3) breach its fiduciary duty by not obtaining and acting on “inside” information.

2001 WL 1836286 , at *9. In the same vein, in

In re McKesson

the district court concluded, “Fiduciaries are not obligated to violate the securities laws in order to satis

*565

fy their fiduciary duties.” 2002 WL 31431588 at *6. The district court opined, moreover, that had there been public disclosure by ERISA Enron fiduciaries in an efficient market, there would have been a swift adjustment in market price and the plan participants would have been unable to sell the stock at artificially high prices so the court dismissed claims against a number of defendants under Rule 12(b)(6). See instruments #504 and 513 in

Tittle.

First, the Court notes that the holding in

McKesson,

that ERISA fiduciaries must comply with the prohibition on selective disclosure under the securities laws for the fiduciaries’ or their beneficiaries’ personal gain, is limited to ESOP plans, which by their nature are generally excepted from the duty to diversify, and on its face does not apply to 401(k) plans. Second, and more significant, the Court finds that the

McKesson

court’s rationale is misguided for the following reasons.

Defendants’ argument that despite the duty of loyalty, a fiduciary should make no disclosure to the plan participants, because under the securities laws he cannot selectively disclose nonpublic information, translates in essence into an argument that the fiduciary should both breach his duty under ERISA and, in violation of the securities laws, become part of the alleged fraudulent scheme to conceal Enron’s financial condition to the continuing detriment of current and prospective Enron shareholders, which include his plan’s participants. This Court does not believe that Congress, ERISA or the federal securities statutes sanction such conduct or such a solution, i.e., violating all the statutes and conning the public. As a matter of public policy, the statutes should be interpreted to require that persons

foliote

the laws, not undermine them. They should be construed not to cancel out the disclosure obligations under both statutes or to mandate concealment, which would only serve to make the harm more widespread; the statutes should be construed to require, as they do, disclosure by Enron officials and plan fiduciaries of Enron’s concealed, material financial status to the investing public generally, including plan participants, whether “impractical” or not, because continued silence and deceit would only encourage the alleged fraud and increase the extent of injury.

At the same time, a fiduciary’s duty of loyalty should also not be construed to require him to enable and encourage plan participants to violate the law, i.e., to sell their stock at artificially high prices to make a profit or avoid loss

before

disclosure of Enron’s financial condition was made public. Nor would selective disclosure of that information by the fiduciary to plan participants protect any lawful financial interests of the plan participants and beneficiaries. Like any other investor, plan participants have no lawful right, before anyone else is informed of Enron’s negative financial picture, to profit from fraudulently inflated stock prices or to avoid financial loss by selling early before public disclosure. If the material information about Enron’s precarious financial status had been made public by Enron officials and plan fiduciaries in accordance with their legal obligations and the prices of the stock dropped before the plan participants could make a profit or reduce a substantial loss, the damage to the plan participants would not be the fault of the plan fiduciary but of the underlying alleged fraudulent Ponzi scheme and the corporate officials who participated in it concealed it, and against whom the plan would have a cause of action A trustee has no duty to violate the law to serve his beneficiaries. Restatement (Second) Trusts § 166, cmt. a. Nor is an ERISA fiduciary an insurer of the value of plan assets, even where that price is the result of fraud or manipulation; he has, instead, an ongoing obligation to satisfy the pru

*566

dent man rule, which, if he performs the necessary investigations and provides accurate information in accordance with it, relieves him of personal liability regardless of the financial success or failure of the purchased assets, even if he does not discover the fraud. If he does not meet the requirements of the prudent man standard, then the plan fiduciary is personally liable to the plan for monetary damages under ERISA. Similarly if Enron directors fail to meet their duties of disclosure but continue to conceal or materially misrepresent Enron’s financial condition, they are subject to liability under the securities laws. Thus under either scenario the plan and/or plan participants and beneficiaries who invest in Enron stock because of material misrepresentations or omissions of corporate officers/fiduciaries have a remedy against those who violate the law and injure them.

“The Department of Labor, the agency responsible for interpreting and enforcing ERISA, flatly rejects the

McKesson

court’s position on the interaction between ERISA and the securities laws.” Secretary of Labor’s Amended

Amicus Curiae

Brief (# 1024 at 7). The Court finds that the Secretary’s brief appropriately addresses the issue and suggests practical ways to resolve the alleged tension between ERISA and the federal securities statutes so that both can be followed:

Defendants’ duty to “disclose or abstain” under the securities laws does not immunize them from a claim that they failed in their conduct as ERISA fiduciaries. To the contrary, while their Securities Act and ERISA duties may conflict in some respects, they are congruent in others, and there are certain steps that could have been taken that would have satisfied both duties to the benefit of the plans. First and foremost, nothing in the securities laws would have prohibited them from disclosing the information to other shareholders and the public at large, or from forcing Enron to do so.

See MATTER OF CADY, ROBERTS,

1961 WL 60638 , at *3 (1961). The duty to disclose the relevant information to the plan participants and beneficiaries, which the Plaintiffs assert these Defendants owed as ERISA fiduciaries, is entirely consistent with the premise of the insider trading rules: that corporate insiders owe a fiduciary duty to disclose material nonpublic information to the shareholders and trading public.

See id.

(incorporating common law rule that insiders should reveal material inside information before trading) ....

Second it would have been consistent with the securities law for the Committee to have eliminated Enron stock as a participant option and as the employer match under the Savings Plan.... The securities rules do not require an individual never to make any decision based on insider information. To the contrary, the insider trading rules require corporate insiders to refrain from buying (or selling) stock if they have material, nonpublic information about the stock. Thus, the “disclose or abstain” securities law rule is entirely consistent with, and indeed contemplates a decision not to purchase a particular stock. See

Condus v. Howard Sav. Bank,

781 F.Supp. 1052, 1056 (D.N.J.1992) (it is perfectly legal to retain stock based on inside information; violation of insider trading requires buying or selling of stock). It would have been entirely consistent with securities laws for the fiduciaries to have eliminated Enron stock as a participant option and the employer match.... Finally, another option would have been to alert the appropriate regulatory agencies, such as the SEC and the Department of Labor, to the misstatements.

*567

Id.,

# 1024 at 26-27.

67

f. Personal Liability of Corporate Employees

Courts are divided about if and under what circumstances the officers or employees of a corporation that is the named fiduciary in plan instruments may be personally liable for a breach of their fiduciary duty. In light of the traditional rule that the employees of a corporation acting within the course and scope of their employment cannot be personally liable for their actions, some courts have held that the individual corporate employee must have an individual discretionary role in the plan administration to be liable as a fiduciary under ERISA. To shield themselves from liability, Defendants rely heavily on

Confer v. Custom Engineering Co.,

952 F.2d 34, 37 (3d Cir.1991), holding “that when an ERISA plan names a corporation as a fiduciary, the officers who exercise discretion on behalf of the corporation are not fiduciaries within the meaning of section 3(21)(A)(iii) unless it can be shown that these officers have

individual

discretionary roles as to plan administration.”

68

*568

See also Torre v. Federated Mutual Ins. Co.,

Civ. A. No. 91-425-DES, 1993 WL 545237 , *3 (D.Kan. Dec. 3, 1993);

Eyler v. C.I.R.,

T.C. Memo 1995-123 , No. 16247-92, 1995 WL 127907 (1995) [page references unavailable] (U.S. Tax Ct. Mar. 23, 1995) (following

Confer), aff'd, 88

F.3d 445 (7th Cir.1996);

Professional Helicopter Pilots Ass’n v. Denison,

804 F.Supp. 1447, 1451 (M.D.Ala.1992).

Other courts, stressing the functional definition of a fiduciary under ERISA, have held that the individuals within the corporations who actually exercised the fiduciary discretionary control or authority in their official capacity may also be personally liable, depending on the facts of the particular case.

See, e.g., Kayes v. Pacific Lumber Co.,

51 F.3d 1449, 1459-61 (9th Cir.1995) (Because fiduciary status under ERISA depends upon an individual’s functional role rather than title, as exemplified by Department of Labor interpretations, and because of ERISA’s underlying, broadly based liability policy, the Ninth Circuit “reject[s] the Third Circuit’s interpretation in

Confer

that an officer who acts on behalf of a named fiduciary corporation cannot be a fiduciary if he acts within his official capacity and if no fiduciary duties are delegated to him individually.”), ce

rt. denied,

516 U.S. 914 , 116 S.Ct. 301 , 133 L.Ed.2d 206 (1995). Such a rule would allow a corporation to “shield its decision-makers from personal liability merely by stating in the plan documents that all their actions are taken on behalf of the company and not in a fiduciary capacity.”

69

Id.

at 1461.

Stewart v. Thorpe Holding Co. Profit Sharing Plan,

207 F.3d 1143, 1156 (9th Cir.2000) (“where, as here, a committee or entity is named as the plan fiduciary, the corporate officers or trustees who carry out the fiduciary functions are themselves fiduciaries and cannot be shielded from liability by the company”),

cert. denied,

531 U.S. 1074 , 121 S.Ct. 768 , 148 L.Ed.2d 668 (2001);

Landry v. Air Line Pilots Ass’n Inter. AFL-CIO,

901 F.2d 404, 418 (5th Cir.1990) (Members of the board of directors of an employer that maintains an employee benefit plan will be viewed as fiduciaries for the plan maintained by that employer only “to the ex

*569

tent” that they have the responsibility for functions listed in § 3(21)(A) of ERISA, such as selection and retention of plan fiduciaries, over which they necessarily would exercise “discretionary authority or discretionary control respecting management of such plan.”),

cert. denied,

498 U.S. 895 , 111 S.Ct. 244 , 112 L.Ed.2d 203 (1990);

Martin v. Schwab,

No. CIV. A. 91-5059-CVSW-1, 1992 WL 296531 , at *5 (W.D.Mo.1992) (“Defendants’ contention they have no individual exposure as fiduciaries [because they were members of the Board of Directors] is clearly at odds with the language of the statute

70

.... Congress ‘conferred fiduciary status on persons and entities by activity and not by label.’ ”);

Kay v. Thrift & Profit Sharing Plan for Employees of Boyertown Casket Co.,

780 F.Supp. 1447, 1461 (E.D.Pa.1991) (holding liable the company and the company employees personally involved in a plan decision that was determined to be a breach of fiduciary duty);

Eaton v. D’Amato,

581 F.Supp. 743, 747 (D.D.C.1980) (where a corporation’s “key officials exercised far more than ministerial powers[,][t]heir status as administrator may well qualify them automatically as fiduciaries’’);

Freund v. Marshall & Ilsley Bank,

485 F.Supp. 629, 641 (W.D.Wis.1979) (“While it is indeed contemplated under ERISA that a corporation, as an entity, may be a plan fiduciary, the analysis does not end there. Individuals within the corporation who exercise the type of authority or control described in section 3(21)(A) of ERISA will themselves be fiduciaries with respect to the Plan.”).

This year the Fifth Circuit emphasized that in last year’s opinion in

Bannistor v. Ullman,

287 F.3d 394, 403-06 (5th Cir.2002) (holding that corporate officers were liable as fiduciaries since they exercised control over plan assets, approved a new health plan, and had check-signing authority for their employer corporation), it had demonstrated that it has adopted the functional approach of the Ninth Circuit in

Kayes

and holds corporate officers personally responsible for the role they played in the management of plan assets, while it clearly rejected

Confer. Musmeci v. Schwegmann Giant Super Markets, Inc.,

332 F.3d 339 , 350 n. 7 (5th Cir.2003). One district court in the Fifth Circuit had previously held corporate officials personally. liable when acting within the scope of their employment on behalf of the corporation.

Brock v. Self,

632 F.Supp. 1509, 1523-24 (W.D.La.1986) (“While the ... Company, as an entity, is properly held to be a fiduciary, it cannot shield its officers and employees from liability for their fiduciary breaches under the express terms of ERISA, which provides that [a]ny person who is a fiduciary with respect to a plan who breaches any of the responsibilities imposed upon fiduciaries ...

shall be personally liable

to make good to such plan any losses to the plan resulting from each such breach ... [emphasis added by court].”),

quoting

29 U.S.C. § 1109 (a).

In view of the broad language, the functional and flexible definition of “fiduciary,” and the expansive liability policy of the statute, as well as the holding in

Mus-meci,

this Court agrees with those courts which reject a

per se

rule of nonliability for corporate officers acting on behalf of the corporation and instead make a functional, fact-specific inquiry to assess “the extent of responsibility and control exercised by the individual with respect to the Plan” to determine if a corporate employee, and thus also the corporation, has exercised sufficient discretionary authority and con

*570

trol to be deemed an ERISA fiduciary and thus personally liable for a fiduciary breach.

Bell v. Executive Committee of United Food and Commercial Workers Pension Plan for Employees,

191 F.Supp.2d 10, 15 (D.D.C.2002);

Musmeci

332 F.3d at 350 n. 7.

g. Professional Liability

Even where a person exercises some control over the plan’s operations or assets, if he is providing only traditional professional services to the plan, he is not a “fiduciary” for such services and is not subject to an ERISA suit for breach of fiduciary duties. “[A]n attorney rendering legal and consulting advice to a plan” will not be considered to be a fiduciary unless he exercises authority over the plan “in a manner other than by usual professional functions” and thus cannot be sued for breach of fiduciary duty under ERISA for pursuing a lawyer’s traditional services.

Rutledge v. Seyfarth, Shaw, Fairweather & Geraldson,

201 F.3d 1212, 1220 (9th Cir.2000)

(quoting Yeseta v. Baima,

837 F.2d 380, 385 (9th Cir.1988)),

amended and superseded on other grounds,

208 F.3d 1170 (9th Cir.),

cert. denied,

531 U.S. 992 , 121 S.Ct. 482 , 148 L.Ed.2d 456 (2000). The same is true for providers of other professional services, including accountants and banks.

Rutledge,

201 F.3d at 1220 ;

Painters of Phila. Dist. Council No. 21 Welfare Fund v. Price Waterhouse,

879 F.2d 1146 , 1150 (3d Cir.1989);

Anoka Orthopaedic Assocs., P.A. v. Lechner,

910 F.2d 514 , 517 (8th Cir.1990);

O’Toole v. Arlington Trust Co.,

681 F.2d 94, 96 (1st Cir.1982). The Department of Labor’s guidelines for interpreting ERISA’s definition of “fiduciary” in 29 U.S.C. 1002(21)(A) note that “attorneys, accountants, actuaries, and consultants will ordinarily not be considered fiduciaries.” Interpretive Bulletin 75-5, 29 C.F.R. § 2509.75-5 (1987).

ERISA does not permit a civil action for legal damages against a non-fiduciary charged with knowing participation in a fiduciary breach.

Reich v. Rowe,

20 F.3d 25, 26, 28 (1st Cir.1994),

citing Mertens v. Hewitt Associates,

508 U.S. 248 , 113 S.Ct. 2063 , 124 L.Ed.2d 161 (1993). As an alternative to fiduciary liability, a nonfiduciary may be hable as a “party in interest,” but only for “appropriate equitable relief,” including injunctions and equitable restitution, in civil actions brought by plan participants under 29 U.S.C. § 1132 (a)(3).

71

See also Useden v. Acker,

947 F.2d 1563, 1581-82 (11th Cir.1991), ce

rt. denied sub nom. Useden v. Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,

508 U.S. 959 , 113 S.Ct. 2927 , 124 L.Ed.2d 678 (1993). A party in interest of an employee benefit plan is defined in 29 U.S.C. § 1002 (14) and includes

inter alia

any fiduciary (administrator, officer, trustee, custodian, etc.), a person that provides services to the plan (such as an accountant, attorney), an employer of any employees covered by the plan and an employee organization including any members covered by the plan. Such non-fiduciaries may be held liable for such “appropriate equitable relief’ if they are “parties in interest” and, with actual or constructive knowledge, they participate in a fiduciary’s breach of its duties in transactions between the plan and a party in interest that are expressly prohibited under § 406(a) of ERISA, 29 U.S.C. § 1106 (a).

*571

Section

406(a)

bars a plan fiduciary from entering into certain kinds of transactions that he “knows or should know” are transactions with a party in interest to the injury of the participants of the plan. These include purchases of assets, loans and extensions of credit, payments and transfers of assets to the party in interest, and payments for furnishing services. Section 406(b) bars a fiduciary from dealing with plan assets for his own interest.

See, e.g., Donovan v. Cunningham,

716 F.2d at 1464-65 (“[T]he object of section 406 was to make illegal per se the types of transactions that experience had shown to entail a high potential for abuse.”).

See also Harris Trust and Sav. Bank v. Salomon Smith Barney, Inc.,

530 U.S. 238, 241, 248 , 120 S.Ct. 2180 , 147 L.Ed.2d 187 (2000) (unanimous op.);

McDannold v. Star Bank, N.A.,

261 F.3d 478, 485-86 (6th Cir.2001);

Whitfield v. Lindemann,

853 F.2d 1298, 1303 (5th Cir.) (holding attorney liable as a nonfiduciary),

cert. denied sub nom. Klepak v. Dole,

490 U.S. 1089 , 109 S.Ct. 2428 , 104 L.Ed.2d 986 (1989).

72

When a plaintiff shows that a fiduciary “caused the plan to engage in an allegedly unlawful transaction” listed in § 406(a)(1), 29 U.S.C. § 1106 (a)(1), the fiduciary, in contrast to the participating interested party, may be held personally responsible for monetary damages under § 409(a), 29 U.S.C. § 1109 (a), “for any losses incurred by the plan, any ill-gotten profits, and other equitable and remedial relief deemed appropriate by the court.”

Lockheed Corp. v. Spink,

517 U.S. at 888, 116 S.Ct. 1783 .

Although the claim against the party in interest in

Harris Trust

was brought under § 406 for participation in designated prohibited transactions, the Supreme Court’s broad language indicated that ERISA § 502(a)(3) authorizes a private cause of action for “appropriate equitable relief’ to redress any violations of ERISA’s Title I, which would include violations of § 404’s fiduciary duties. In its ruling, the high court stated that § 502(a)(3) “admits of no limit on the universe of possible defendants” and “the focus ... is on redressing the

fact or practice

which violates any provision of [ERISA Title I].”

Harris Trust,

530 U.S. at 246-47 , 120 S.Ct. 2180 (contrasting the fact that § 503(a) “makes no mention at all of which parties may be proper defendants” while other provisions “do expressly address who may be a defendant.”). Thus it would appear that a party-in-interest’s liability under

Harris Trust

applies beyond prohibited transactions with the plan under § 406 to a knowing participation in a fiduciary’s breach of fiduciary duties under § 404(a).

See Rudowski v. Sheet Metal Workers Intern. Ass’n, Local Union Number 24,

113 F.Supp.2d 1176 (S.D.Ohio 2000) (holding that a nonfiduci-ary union may be liable for participating in a fiduciary breach of § 404 in a suit brought under § 502(a)(3));

L.I. Head Start Child Dev. Serv., Inc. v. Frank,

165 F.Supp.2d 367 (E.D.N.Y.2001) (attorneys alleged to have knowingly participated in a breach of duty could be liable to return legal fees received in that improper transaction). Plaintiffs have alleged that Arthur Andersen, while not a plan fiduciary, was a knowing participant in the fiduciary breaches by other Defendants by actively

*572

concealing from the plans’ fiduciaries and participants Enron’s actual financial condition and the imprudence of investing in its stock.

73

Moreover, they assert that the accounting firm received large fees that included assets belonging to the plan for Arthur Andersen’s provision of these services that purportedly constituted a knowing participation in the breach of fiduciary duty. Thus Plaintiffs seek to have the court impose a constructive trust on plan assets or proceeds traceable to such assets, and ultimately conveyance of those assets or profits derived from them to the plan, i.e., equitable restitution.

Even though generally a lawyer or accountant providing services to a plan is a party in interest and not a fiduciary, it has been recognized that at times a professional consultant or advisor may go beyond his normal, traditional advisory function and, because of his special expertise and influence, in effect exercise the discretionary authority or control over the management or administration of an ERISA plan to the point that he has assumed the fiduciary obligations and has transmuted into a fiduciary as defined under ERISA, 29 U.S.C. § 1102 (21)(A).

Mertens,

508 U.S. at 262 , 113 S.Ct. 2063 (“professional service providers ... become liable for damages only when they cross the line from advisor to fiduciary”).

See also Schloegel v. Boswell

994 F.2d 266, 271 (5th Cir.1993), ce

rt. denied,

510 U.S. 964 , 114 S.Ct. 440 , 126 L.Ed.2d 374 (1993);

Reich v. Lancaster,

55 F.3d 1034, 1047-49 (5th Cir.1995);

Martin v. Feilen,

965 F.2d 660 (8th Cir.1992) (finding that two partners in an accounting firm who recommended a complex series of transactions, structured deals, provided advice, and had expertise not shared among other corporate insiders exercised effective control over the plan’s assets and were ERISA fiduciaries),

cert. denied,

506 U.S. 1054 , 113 S.Ct. 979 , 122 L.Ed.2d 133 (1993);

Carpenters’ Local Union No. 964 Pension Fund v. Silverman,

No. 93 CIV. 8787(RPP), 1995 WL 378539 (S.D.N.Y. June 26, 1995) (finding a law firm was a fiduciary under ERISA where plan trustees depended on lawyers’ expertise for a real estate investment, lawyers played a role in investment decisions, and one partner was a plan trustee).. To meet the “authority or control” element under 29 U.S.C. § 1002 (21)(A)(i), a plaintiff must show that the consultant or advisor did not merely influence the plan fiduciary, but “caused [the] trustee ... to relinquish his

*573

independent discretion in investing the plan’s funds and follow the course prescribed” by the consultant.

Schloegel,

994 F.2d at 271-72 ,

citing Sommers Drug Stores Co. Employee Profit Sharing Trust,

798 F.2d at 1460. Alternatively, the rendering of investment advice for a fee on a regular basis pursuant to an agreement or understanding between the consultant and the plan where the agreement indicates that the consultant’s advice will be the primary basis for the plan’s investment decisions and the consultant will provide individualized investment advice according to the plan’s individual needs may also impose fiduciary liability on a professional consultant.

Schloegel,

994 F.2d at 273 .

There is no

per se

rule regarding the rendering of professional advice and the point at which a professional may become subject to fiduciary liability.

Pappas v. Buck Consultants, Inc.,

923 F.2d 531, 537-38 (7th Cir.1991) (the legislative history “seems to ... contemplate! ] ... a fact intensive inquiry that looks at whether the professional transcended her ‘ordinary functions’ ”);

Mertens,

508 U.S. at 262 , 113 S.Ct. 2063 (“professional service providers ... become liable for damages only when they cross the line from advisor to fiduciary”). A fact intensive examination of the extent of the discretion and control assumed by the administrator is required.

Pappas,

923 F.2d at 538 ;

Reich,

55 F.3d at 1047 . For instance, where pre-existing policies, practices and procedures sufficiently limit an entity that assumes discretionary authority or control over plan management and/or assets, that entity will not be viewed as a fiduciary.

Reich,

55 F.3d at 1047 . The performance of ministerial duties or mere processing of claims will not impose fiduciary liability; however, if the administrator has the authority to grant, deny or review claims or has the sole authority to determine the benefits to which the insured plan participant is entitled, the administrator may be a fiduciary under ERISA.

Id.

(and cases cited therein);

Arizona State Carpenters Pension Trust Fund,

125 F.3d at 721-22 (“A person or entity who performs only ministerial services or administrative functions within a framework of policies, rules and procedures established by others is not an ERISA fiduciary. To become a fiduciary, the person or entity must have control respecting the management of the plan or its assets, give investment advice for a fee, or have discretionary responsibility in the administration of the plan.”). The statute “ ‘defines ‘fiduciary' not in terms of formal trusteeship, but in functional terms of control and authority over the plan, thus expanding the universe of persons subject to fiduciary duties — and to damages — under § [1109(a) ].’ ”

Id.

at 1048,

quoting Kayes v. Pacific Lumber Co., 51 F.3d

at 1459, and § 1002(21)(A).

See also

29 C.F.R. § 2510.3-21 (c).

74

Courts have analyzed the extent of authority and control exer

*574

cised by attorneys and accountants over plan investment decisions to determine whether they crossed the line and became fiduciaries of the plan.

See, e.g., Martin v. Feilen,

965 F.2d 660, 669 (8th Cir.1992) (finding that accountants who provided professional accounting services to an ESOP and also recommended transactions, structured deals, and provided investment advice to the point that they exercised effective control over the plan’s assets and utilized their positions of trust and confidence as corporate insiders to involve the plan in transactions in which they had a personal interest were fiduciaries of the ESOP),

cert. denied sub nom. Henss v. Martin,

506 U.S. 1054 , 113 S.Ct. 979 , 122 L.Ed.2d 133 (1993);

Useden v. Acker,

947 F.2d 1563, 1577-78 (11th Cir.1991) (finding that a law firm providing advice on a number of concerns but not beyond the usual professional function of attorneys and otherwise controlling the plan did not become a fiduciary),

cert, denied sub nom. Use-den v. Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,

508 U.S. 959 , 113 S.Ct. 2927 , 124 L.Ed.2d 678 (1993).

h. Section 404(c) Plans

Generally ERISA imposes liability for resulting losses on fiduciaries who commit breaches of their duties. 29 U.S.C. § 1109 (a) (“Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchap-ter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach .... ”). Section 404(c) of ERISA, 29 U.S.C. § 1104 (c), however, provides that a plan fiduciary is not liable if (1) the plan is an “individual account plan”, (2) the plan participants can exercise control over the assets allocated to their accounts, and (3) the plan participants actually do exercise control over their accounts in a manner proscribed under the regulations.

75

Under § 404(c), the

*575

plan participants that exercise such control over their accounts will not be treated as fiduciaries, and neither the plan participants nor the other plan fiduciaries will be hable for any loss or breach that results from the plan participants’ exercise of control over the plan administration; in other words, no one is liable for the participants’ loss that results from the participants’ own informed investment choices.

See generally In re Unisys Sav. Plan Litig., 74 F.3d

420, 443-46 (3d Cir.1996),

cert. denied sub nom. Unisys Corp. v. Meinhardt,

519 U.S. 810 , 117 S.Ct. 56 , 136 L.Ed.2d 19 (1996).

There is little case law regarding § 404(c) plans. The legislative history reveals that 29 U.S.C. § 1104 (c) created “a special rule” for plans that permit the participant to have “independent control” over his individual account assets and provides that the participant who exercises that independent control, as well as other plan fiduciaries, is not liable for losses caused by the participant’s control.

In re Unisys,

74 F.3d at 445 ,

citing

H.R. Conf. Rep. No. 1280,

reprinted in

1974 U.S.C.C.A.N. at 5085-86. A House Conference Report states,

Therefore, if the participant instructs the plan trustee to invest the full balance of his account in,

e.g.,

a single stock, the trustee is not liable for any loss because of a failure to diversify or because the investment does not meet the prudent man standards. However, the investment must not contradict the terms of the plan, and if the plan on its face prohibits such investments, the trustee could not follow the instructions and avoid liability.

Id., quoting

H.R. Conf. Rep. No. 1280,

reprinted in

1974 U.S.C.C.A.N. at 5086. The legislative history also indicates that the statute requires the plan to offer “a broad range of investments.”

Id.

at 446 n. 24.

The Department of Labor issued final regulations regarding § 404(c) in 1992.

76

29 C.F.R. § 2550 .404c-1. The Court quotes below portions of the regulations that are relevant to the issues in this class action. It defines a § 404(c) plan as an individual account plan under § 3(34) of ERISA that

(i) Provides an opportunity for a participant or beneficiary to exercise control over assets in his individual account ... ; and

(ii) Provides a participant or beneficiary an opportunity to choose, from a broad range of investment alternatives, the manner in which some or all of the assets in his account are invested ....

29 C.F.R. § 2550 .404c-1(b)(1).

Regarding the requirement that an opportunity be provided to a participant or beneficiary to exercise control over his account, to qualify as a § 404(e) plan, the regulation provides:

(A) Under the terms of the plan, the participant or beneficiary has a reasonable opportunity to give investment instructions (in writing or otherwise, with opportunity to obtain written confirmation of such instructions) to an identified plan fiduciary who is obligated to comply with such instructions except as otherwise provided in paragraph (b)(2)(ii)(B) and (d)(2)(ii).

(B) The participant or beneficiary is provided or has the opportunity to obtain sufficient information to make in

*576

formed decisions with regard to investment alternatives available under the plan, and incidents of ownership appurtenant to such investments. For purposes of the subparagraph, a participant or beneficiary will not be considered to have sufficient investment information unless-

(1)The participant or beneficiary is provided by an identified plan fiduciary (or a person or persons designated by the plan fiduciary to act on his behalf):

(i) An explanation that the plan is intended to constitute a plan described in section 404(c) of [ERISA], and title 29 of the Code of Federal Regulations Section 2550.440c-l, and the fiduciaries of the plan may be relieved of liability for any losses which are the direct and necessary result of investment instructions given by such participant or beneficiary;

(ii) A description of the investment alternatives available under the plan and, with respect to each designated investment alternative, a general description of the investment objectives and risk and return characteristics of each such alternative, including information relating to the type and diversification of assets comprising the portfolio of the designed investment alternative.

29 C.F.R. § 2550 .404c-1(b)(2)(i)(A)-(B)(ii).

The regulation allows a plan to “impose reasonable restrictions on the frequency with which participants and beneficiaries may give investment instructions.” 29 C.F.R. 2550.404(c)-l(b)(i)(C). To be “reasonable,” the plan must, with respect to each investment alternative, allow participants and beneficiaries to provide “investment instructions with a frequency which is appropriate in light of the market volatility to which the investment alternative may reasonably be expected to be subject.”

Id.

Participants and beneficiaries must be permitted to give investment instructions at minimum at least once in any three-month period and to give transfer instructions as often as they are allowed to give investment instructions.

Id.

The Department of Labor’s regulation also prescribes the following guidelines for a “Broad range of investment alternatives”:

(i) A plan offers a broad range of investment alternatives only if the available investment alternatives are sufficient to provide the participant or beneficiary with a reasonable opportunity to:

(A) Materially affect the potential return on amounts in his individual account with respect to which he is permitted to exercise control and the degree of risk to which such amounts are subject;

(B) Choose from at least three investment alternatives:

(1) Each of which is diversified;

(2) Each of which has materially different risk and return characteristics;

(3) Which in the aggregate enable the participant or beneficiary by choosing among them to achieve a portfolio with aggregate risk and return characteristics at any point within the range normally appropriate for the participant or beneficiary; and

(4) Each of which when combined with investments in the other alternatives tends to minimize through diversification the overall risk of large losses, taking into account the nature of the plan and the size of participants’ or beneficiaries’ accounts. In determining whether a plan provides the participant or beneficiary with a reasonable opportunity to diversify his investments, the nature of the investment alternatives offered by the plan and the size of the portion of the individual’s account over which he is

*577

permitted to exercise control must be considered.

29 C.F.R. § 2550 .404c — 1 (b)(3).

The regulation also addresses “exercise of control.” 29 C.F.R. § 2550 .404c-l(c).

Inter alia

it states,

Whether a participant or beneficiary has exercised independent control in fact with respect to a transaction depends on the facts and the circumstances of the case. However, a participant’s or beneficiary’s exercise of control is not independent in fact if:

(i) The participant or beneficiary is subjected to improper influence by a plan fiduciary or the plan sponsor with respect to the transaction;

(ii) A plan fiduciary has concealed material non-public facts regarding the investment from the participant or beneficiary, unless the disclosure of such information by the plan fiduciary to the participant or beneficiary would violate any provision of federal law or any provision of state law which is not preempted by the Act ....

29 C.F.R. § 2550 .404c — 1 (c)(2)(i) — (ii). Plaintiffs here contend that the plan fiduciary concealed material non-public facts about Enron’s financial condition from them so that under the regulation they did not, in fact, exercise independent control in making investment decisions for their individual accounts. As discussed

supra,

Defendants respond that to have provided such information only to the Savings Plan participants would have violated the federal securities laws. This Court has disagreed with Defendants and adopted the view of the Secretary of Labor.

In addition, “[a] fiduciary has no obligation ... to provide investment advice to a participant or beneficiary under an ERISA section 404(c) plan.” 29 C.F.R. § 2550 .404e-l(c)(4).

Finally 29 C.F. R. § 2550.404c-l(d), in relevant part, explains

(d) Effect of independent exercise of control-

(1) Participant or beneficiary not a fiduciary. If a participant or beneficiary of an ERISA section 404(c) plan exercises independent control over assets in his individual account in the manner described in paragraph (c), then no other person who is a fiduciary with respect to such plan shall be liable for any loss

(2) Limitation on liability of plan fiduciaries.

(i) If a participant or beneficiary of an ERISA section 404(c) plan exercises independent control over assets in his individual account in the manner described in paragraph (c), then no other person who is a fiduciary with respect to such plan shall be hable for any loss, or with respect to any breach of part 4 of Title I of the Act, that is the direct and necessary result of that participant’s or beneficiary’s exercise of control.

(ii) Paragraph (d)(2)(i) does not apply with respect to any instruction, which if implemented-

(A) Would not be in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA.

(D) Could result in a loss in excess of a participant’s or beneficiary’s account balance; or

(E) Would result in a direct or indirect:

(4) Acquisition or sale of any employer security except to the extent that:

(iii) Such securities are publicly traded on a national exchange or other generally recognized market;

(iv) Such securities are traded with sufficient frequency and in sufficient volume to assure that participant and

*578

beneficiary directions to buy or sell the security may be acted on promptly and efficiently;

(v) Information provided to shareholders of such securities is provided to participants and beneficiaries with accounts holding such securities....

29 C.F.R. § 2550.404 (c)-l(d).

Because § 404(c) in essence exempts a fiduciary from liability that he normally would have under 29 U.S.C. § 1109 (a), the fiduciary seeking protection under § 404(c), and not the plaintiff, has the burden of demonstrating that it applies.

In re Unisys,

74 F.3d at 446 ;

Allison v. Bank One-Denver,

289 F.3d 1223 , 1238 (10th Cir.2002)(as amended on denial of rehearing). The court must review evidence relating to whether a participant could remove his assets from one fund and place them in an acceptable alternative fund, whether the plan provided the participants with adequate information for an average participant to understand and evaluate his investments and the risks and financial consequences that might be associated with his taking control, information about the rights provided to participants and obligations imposed on fiduciaries by ERISA, the financial condition and performance of the investments, the alternative funds available, and developments which substantially affected that financial status.

Unisys,

74 F.3d at 446-47 .

If a plan does not qualify as a § 404(c), the fiduciaries retain liability for all investment decisions made, including decisions by the Plan participants. Plaintiffs contend that the Savings Plan did not qualify as a § 404(c) plan for all or most of the Class Period because it did not provide a broad range of diversified investment options, liberal opportunities to transfer assets among allocations, and sufficient information to make sound investment decisions, nor did the plan provide the requisite notice to participants that it intended to qualify as such a plan. The Court has found that they have raised material fact issues as to whether the Savings Plan did qualify as a § 404(c) plan that cannot be resolved on a 12(b)(6) motion.

If the plan does qualify as a § 404(c) plan, and if the participants or beneficiaries exercised independent control over the assets in their individual accounts, “then no other person who is a fiduciary with respect to such plan shall be liable for any loss ... that is the direct and necessary result of that participant’s or beneficiary’s exercise of control.” 29 C.F.R. § 2550 .404c-1(4)(d)(2). Losses that do not “result from” the participant’s exercise of control are still charged against the plan fiduciary, which retains the duty to prudently select investment options under the plan and to oversee their performance on a continuing basis.

See

Advisory Opinion No. 98-04(A)(“... [T]he Department emphasized that the act of designating investment alternatives in an ERISA section 404(c) plan is a fiduciary function to which the limitation on liability provided by section 404(c) is not applicable”); Letter from the Pension and Welfare Benefits Administration, U.S. Dept. of Labor to Douglas O. Kant, 1997 WL 1824017 , *2 (Nov. 26, 1997)(“The responsible plan fiduciaries are also subject to ERISA’s general fiduciary standards in initially choosing or continuing to designate investment alternatives offered by a 404(c) plan.”).

Even if the Savings Plan were to qualify as a § 404(c) plan, relating to the Savings Plan and the ESOP in the Department of Labor’s Final Regulation Regarding Participant Directed Individual Account Plans, Preamble, 57 Fed.Reg. 46,906, 924 n. 27 (1992), the agency emphasized,

[T]he act of designating investment alternatives ... is a fiduciary function ... [and][a]ll of the fiduciary provisions of ERISA remain applicable to both the

*579

initial designation of investment alternatives and investment managers and the ongoing determination that such alternatives and managers remain suitable and prudent investment alternatives for the plan [emphasis added].

See also Buccino v. Continental Assurance Co.,

578 F.Supp. 1518, 1521 (S.D.N.Y.1983)(“as Fund fiduciaries [Defendants] were under a continuing obligation to advise the Fund to divest itself of unlawful or imprudent investments”);

Fink v. Nat’l Sav. & Trust Co.,

772 F.2d 951, 955-56 (D.C.Cir.1985)(“[T]he requirement of prudence in investment decisions and the requirement that all acquisitions be solely in the interests of plan participants continue to apply. The investment decisions of a profit sharing plan’s fiduciary are subject to the closest scrutiny under the prudent person rule, in spite of the ‘strong policy and preference in favor of investment in employer stock.’ ”);

Eaves v. Penn,

587 F.2d 453, 458-60 (10th Cir.1978)(holding that the trustee of an ESOP is subject to the duty of loyalty and the prudent man requirements in deciding whether to invest plan assets in employer’s securities).

i. Causation

Defendants contend that Plaintiffs have failed to plead facts showing that the alleged breaches of fiduciary duty caused the loss to the plans. There is division of opinion about who bears the burden of proving the fiduciary caused the alleged losses to a plan.

The Sixth and Second Circuits have placed the burden of demonstrating causation on the plaintiff.

Kuper v. Iovenko,

66 F.3d 1447, 1459-60 (6th Cir.1995)(To satisfy the causation link between a breach of fiduciary duty and an alleged plan loss, “a plaintiff must demonstrate that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.”);

Silverman v. Mutual Benefit Life Ins. Co.,

138 F.3d 98, 105-06 (2d Cir.)(placing the burden of proof of causation on the plaintiff),

cert. denied,

525 U.S. 876 , 119 S.Ct. 178 , 142 L.Ed.2d 145 (1998).

The Fifth and Eighth Circuits have held that the plaintiff initially must prove a breach of fiduciary duty and a prima facie case of loss by the plan under § 1109(a), and then the burden shifts to the defendant fiduciary to prove that the loss was not caused by the breach of the fiduciary duty.

77

McDonald,

60 F.3d at 237 ;

Martin v. Feilen,

965 F.2d 660, 671 (8th Cir.1992),

cert. denied sub nom. Henss v. Martin,

506 U.S. 1054 , 113 S.Ct. 979 , 122 L.Ed.2d 133 (1993).

78

In accord,

*580

Meyer v. Berkshire Life Ins. Co.,

250 F.Supp.2d 544, 564, 571 (D.Md.2003);

McCurdy v. Wedgewood Capital Management Co.,

No. CIV. A. 97-4304, 1999 WL 391494 , *4 (E.D.Pa. May 28, 1999);

Chao v. Moore,

No. CIV. A. AW-99-1283, 2001 WL 743204 , *7-8 (D.Md. June 15, 2001). This Court is bound by

McDonald .

Thus Plaintiffs need not plead causation.

See Ehlmann v. Kaiser Foundation Health Plan,

20 F.Supp.2d 1008, 1011 (N.D.Tex.1998)(plaintiff not required to plead causation under

McDonald), aff'd,

198 F.3d 552 (5th Cir.2000),

cert. dismissed,

530 U.S. 1291 , 121 S.Ct. 12 , 147 L.Ed.2d 1036 (2000). Moreover, because at this point Plaintiffs have pleaded under Counts II and III both fiduciary breach and injury, i.e., that Defendants’ participation in the lockdowns and failure to diversify caused the plans, and indirectly the plaintiffs, to lose hundreds of millions of dollars, Plaintiffs have stated a claim and demonstrated standing to sue, even though they have not alleged that “but for the lockdown” or “but for the failure of the fiduciaries to diversify investments of the Plan,” they, themselves, would have timely diversified their investments or sold the Enron stock in their individual accounts.

2. Co-Fiduciary Liability

A person must be a fiduciary before he can be liable as a co-fiduciary.

Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enters., Inc. (“Sommers II”),

883 F.2d 345, 352 (5th Cir.1989)(Because a person is a fiduciary only to the extent that he exercises authority or control over that management of a plan or plan assets, in the absence of such authority and control a person cannot be liable as a co-fiduciary).

Under section 405(a) of ERISA, 29 U.S.C. § 1105 (a),

In addition to any liability which he may have under any other provision of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility with respect to the same plan in the following circumstances:

(1) if he participates knowingly in, or undertakes knowingly to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach;

(2) if, by his failure to comply with section 404(a)(1) [ 29 U.S.C. § 1104 (a)(1) ] in the administration of his specific responsibilities, which give rise to his status as fiduciary, he has enabled such other fiduciary to commit a breach; or

(3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.

79

A fiduciary that breaches § 1105(a) is “personally hable to make good to such plan any losses to the plan resulting from each such breach ...” under § 1109(a) of the statute.

Sections 405(a)(1) and (3) require a showing of actual knowledge of the other fiduciary’s breach; there is no vicarious liability under these provisions.

Donovan

*581

v. Cunningham,

716 F.2d 1455, 1475 (5th Cir.1988),

cert. denied,

467 U.S. 1251 , 104 S.Ct. 3533 , 82 L.Ed.2d 839 (1984);

Keach v. U.S. Trust Co.,

240 F.Supp.2d 840, 844 (C.D.Ill.2002).

But see Diduck v. Kaszycki & Sons Contractors, Inc.,

974 F.2d 270, 283 (2d Cir.1992)(constructive knowledge sufficient).

80

The elements of a claim brought under § 405(a)(1), 29 U.S.C. § 1105 (a)(1), are “(1) that a co-fiduciary breached a duty to the plan, (2) that the fiduciary knowingly participated in the breach or undertook to conceal it, and (3) damages resulting from the breach.”

Silverman v. Mutual Ben. Life Ins. Co.,

941 F.Supp. 1327, 1335 (E.D.N.Y.1996),

aff'd, 138 F.3d 98

(2d Cir.1998), ce

rt. denied,

525 U.S. 876 , 119 S.Ct. 178 , 142 L.Ed.2d 145 (1998). As noted, under Fifth Circuit law, the plaintiff does not have the burden of pleading or proving the third element, which falls instead on the defendant fiduciary.

McDonald,

60 F.3d at 237 .

Under § 405(a)(2), 29 U.S.C. § 1105 (a)(2), providing the broadest type of co-fiduciary liability without any requirement of knowledge about what the co-fiduciary is doing, to impose liability a plaintiff must prove that the fiduciary “failed to comply with its duties under ERISA, and thereby enabled a co-fiduciary to commit a breach.”

Silverman,

941 F.Supp. at 1336 .

In accord, Free v. Briody,

732 F.2d 1331, 1335 (7th Cir.1984);

Brock v. Self,

632 F.Supp. 1509, 1524 (W.D.La.1986).

For a cause of action under § 405(a)(3), 29 U.S.C. § 1105 (a)(3), the elements are that the fiduciary had knowledge of the co-fiduciary’s breach and that the losses “resulted from” the co-fiduciary defendant’s failure to take reasonable steps to remedy the breach.

Id.

at 1337 . Under Department of Labor Interpretive Bulletin, 29 C.F.R. § 2509.75 -5FR-10, a fiduciary must take all legal and reasonable steps to prevent or remedy a breach by a co-fiduciary, including taking legal action against the co-fiduciary or informing the Department or the plan sponsor.

3. Directed Trustee Liability

There is a factual dispute in

Tittle

as to whether Northern Trust was a “directed” or discretionary trustee. Plaintiffs argue that it was the latter. The complaint alleges that Northern Trust was the trustee of the Savings Plan and exercised discretionary authority and control over plan assets when it imposed the lockdown, in spite of the fact that it had the power to postpone the lockdown until the price of Enron stock stabilized to avoid injury to the participants, and that numerous red flags should have alerted Northern Trust to the dangers of proceeding with the scheduled lockdown. Furthermore, the complaint asserts, plan documents and the trust agreement

81

gave Northern Trust

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discretionary authority and control over plan assets and plan administration where there was no direction by the Administrative Committee.

Alternatively, the complaint asserts that if Northern Trust was a directed trustee and if the Administrative Committee gave written instructions to Northern Trust regarding the lockdown, Northern Trust breached its fiduciary duties in following the lockdown instructions because the directions were contrary to ERISA and Northern Trust knew or should have known that the lockdown instructions violated ERISA.

Northern Trust contends that it was a “directed” trustee, as opposed to a “discretionary” trustee, under provisions in the plan documents and trust agreement that subjected it to direction by the Administrative Committee, that the Administrative Committee exercised total authority and discretion over the plan assets and management, and that Northern Trust thus had no responsibility or liability for the lockdown.

While case law addressing the duties of a directed trustee is minimal, it is also in conflict with respect to the extent, if any, of the duty and potential liability of a directed trustee. The issue necessitates consideration of the relationship of several different provisions under ERISA.

As a starting point, under § 408(a)(1), 29 U.S.C. § 1103 (a)(1),

All assets of an employee benefit plan shall be held in trust by one or more trustees. Such trustee or trustees shall be either named in the trust instrument or in the plan instrument described in section 402(a) or appointed by a person who is a named fiduciary, and upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan, except to the extent that-

(1) the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustee shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to [ERISA].

In other words, in contrast to the general rule, pursuant to which trustees hold the assets of every employee benefit plan in trust and have exclusive authority and discretion to manage and control the assets of the plans, an exception

82

may arise when

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the plan authorizes a named fiduciary (a fiduciary either named in the plan document or designated by an employer or an employee organization according to a procedure described in the plan), who is not a trustee, to direct the trustee, who in turn then becomes a “directed” trustee.

Under § 403(a)(1) of the statute, the directed trustee will escape liability for his actions performed pursuant to the named fiduciary’s direction if the named fiduciary’s directions are “proper” and “in accordance with the terms of the plan” and “not contrary to” ERISA. The underlying issue here can be rephrased as to what extent, if at all, is the directed trustee a fiduciary, as defined in § 3(21)(A), and thus subject to the standards, duties, and obligations of an ERISA fiduciary under § 404(a)(l)(the duty of loyalty, the prudent man rule, the duty of diversification of plan investments, and the duty of acting in accordance with the provisions of the statute)?

Difficulties in construing the scope of the directed trustee’s fiduciary obligations pursuant to the statute are compounded by (1) the lack of a statutory definition of “proper” with respect to the named fiduciary’s directions and (2) a lack of guidance about the nature and extent of a directed trustee’s duty to determine whether the fiduciary’s directions are “in accordance with the terms of the plan” and “not contrary to” ERISA under § 403(a)(1). For example, if the instruction on its face looks consistent with the plan and the statute, does a directed trustee have any duty to investigate further? What if the directed trustee knows or suspects that the directing fiduciary has breached his fiduciary duties?

Implicated by the directed fiduciary provision is § 409(a), which makes a fiduciary personally liable “to make good to such plan any losses to the plan resulting from such breach .... ” Thus if the directed trustee is a fiduciary, the plan may hold him personally liable for losses caused by any breach of his fiduciary duty. If he is not a fiduciary, a plan may not seek a remedy against him for any misconduct under § 409 and § 404 Moreover, § 502(a) does not provide an individual civil action for relief against a non-fiduciary, so plan participants may be without a remedy for a directed trustee’s allegedly wrongful conduct.

Furthermore a directed trustee’s potential fiduciary liability also implicates claims under § 405, 29 U.S.C. § 1105 , a plan fiduciary’s liability for breach of duty by a co-fiduciary, discussed

supra.

Section 405(b)(1)(A) provides that where assets are held by two or more trustees, “each shall use reasonable care to prevent a co-trustee from committing a breach.” 29 U.S.C. § 1105 (b)(1)(A). This provision incorporates the common law of trusts. Restatement (Second) of Trusts § 184 (1959); 2A Austin Wakeman Scott & William F. Fratcher,

Scott on Trusts

§ 184 at p. 561 (4th ed.1987).

Section 405(b)(1) of ERISA, 29 U.S.C. § 1105 (b)(1), begins, “except as otherwise provided in ... section 1103(a)(1) and (2)”; and § 405(b)(3)(B) states, “No trustee shall be liable under this subsection for following instructions referred to in section 1103(a)(1).” At the same time, § 405(b)(2) states, “Nothing in this subsection shall limit any liability that a fiduciary may have under subsection (a) or other provision of this part.” “[T]his part clearly refers to § 405(b), which includes the requirement that the “directing” named fiduciary’s instructions must be “proper” and in compliance with the terms of the plan and the statute. Section 405 has been criticized as “nearly impenetrable in its awkward structure and phrasing,” while subsection 405(b)(3)(B) in particular has been characterized as “oddly placed,” inexplicable by

*584

the rule of statutory construction, and confusing because of phrases that appear to exempt the directed fiduciary from liability for following the instructions of a directing named fiduciary, yet a contrary provision that clearly does not.” Patricia Wick Hatamyar,

See no Evil? The Role of the Directed Trustee under ERISA,

64 Tenn. L.Rev. 1, 19-21 (1996).

83

As noted by Ms. Hatamyar, “To say that a trustee is not liable for following [an instruction that is “proper” and “made in accordance with” the plan and ERISA,] is to beg the question of when an instruction is improper enough for the trustee to ignore: in other words, if § 405(b)(3)(“No trustee shall be liable under this subsection for following instructions referred to in section 403(a)(1)”) “refers generally to the directed trustee’s liability for following a named fiduciary’s direction, it is redundant.”

Id.

at 21.

In contrast, Ms. Hatamyar observes that in the other two statutory exceptions to a trustee’s exclusive authority, i.e., when authority is granted to an investment manager under § 405 or to a plan participant over his own individual account under § 404(c), the statute is quite explicit about the resulting limitations on the directed trustee’s liability.

Id.

at 17-18. With a properly appointed investment manager, under § 405(d)(1) the trustee has no liability for breaches of duty occurring under the investment manager’s management and control unless the trustee knowingly participates in or conceals a breach of duty by that investment manager as a co-fiduciary under § 405(a). See § 405(d)(1) of ERISA, 29 U.S.C. § 1105 (d)(l)(“If an investment manager or managers have been appointed under section 1102(c)(3) of this title, then not withstanding subsections (a)(2) and (3) and subsection (b) of this section, no trustees shall be liable for the acts or omissions of such investment manager or managers, or be under an obligation to invest or otherwise manage any asset of the plan which is subject to the management of such investment manager.”). Similarly, when the plan participant is given control of his individual account, under § 404(c)(1) the participant does not become a “fiduciary” by exercising that control and thus the directed trustee cannot be hable as a co-fiduciary under § 405. Had Congress intended that the directed trustee be completely relieved of liability for following a named fiduciary’s instructions, it could just as easily have stated so. 64 Tenn. L.Rev. at 21 (“If a trustee were free from liability for following a named fiduciary’s directions, one would expect to see that stated unambiguously in section 405.”).

This Court agrees with Ms. Hatamyar that in light of the common law history, Congress did not intend to release the directed trustee from all liability where the directed trustee follows the directions of a named fiduciary, and that if it had, it would have expressly stated so. 64 Tenn. L.Rev. at 21. After attempting to follow the rules of statutory construction to give meaning to each provision, Ms. Hatamyar concluded that § 405(b)(3)(B) does not provide a safe harbor from liability for the directed trustee, but is a nullity.

Id.

at 20.

Construction of the statute does require first a determination whether the directed trustee is a fiduciary. If so, and if the directed trustee follows “proper” directions of the named fiduciary with respect to that part of the plan management or control granted to the named fiduciary,

*585

and if those directions are “in accordance with the terms of the plan” and “not contrary to” ERISA under § 408(a)(1), the directed trustee is not liable for a co-fiduciary’s [the named fiduciary’s] breaches. Regardless, the same issue must initially be addressed under both § 403(a)(1) and § 405(b)(1) — the extent of a directed trustee’s duty to determine whether the instructions are “proper” and consistent with the terms of the plan and of ERISA.

Defendants rely on the fact that a single sentence in the legislative history of § 403(a)(1) states that the trustee is only required to determine whether the directed action

facially

complies with the terms of the plan and of ERISA, a fairly minimal duty:

If the plan provides that the trustees are subject to the direction of named fiduciaries, then the trustees are not to have the exclusive management and control over the plan assets, but generally are to follow the directions of the named fiduciary. Therefore, if the plan sponsor wants an investment committee to direct plan investments, he may provide for such an arrangement in the plan. In addition, since investment decisions are basic to plan operations, members of such an investment committee are to be named fiduciaries.... If the plan so provides, the trustee who is directed by an investment committee is to follow that committee’s directions

unless it is clear on their face

that the actions to be taken under those directions would be prohibited by the fiduciary responsibility rules of the bill or would be contrary to the terms of the plan or trust [emphasis added],

H.R. Conf. Rep. No. 93-1280 (1973),

reprinted in

1974 U.S.C.C.A.N. 5038, 5079. Furthermore Defendants argue that the legislative history implies that if the directed trustee meets the facial compliance requirement, his responsibility is less than that of a fiduciary and that he may be free of any liability:

if the trustee properly follows the instructions of the named fiduciaries, the trustee generally is not to be liable for losses which arise out of following these instructions. (The named fiduciaries, however, would be subject to the usual fiduciary responsibilities rules and would be subject to liability on breach of these rules.)

Id.

at 5082.

The American Bankers Association (“the Association”), the principal national trade association of the banking industry in the United States, whose members serve as trustees of numerous ERISA pension plans, has submitted an

amicus curiae

brief (# 464), arguing, based on the single sentence, quoted above, in the minimal legislative history available relating to § 403(a)(1), that the directed trustee’s duty is merely to examine the named fiduciary’s directions to determine whether it is “clear on their face” that following these directions would violate ERISA or the plan or trust document. According to the Association, the directed trustee is not required to examine the merits of the named fiduciary’s direction.

84

The Association maintains that the banking and trust industry has relied on this facial compliance standard since ERISA was enacted in 1974. The Association insists that the directed trustee is not subject to a fiduciary’s duty to act prudently and loyally nor required to exercise independent judgment nor subject to the Department of Labor’s

*586

broader and more demanding standard that a directed trustee should not follow the named fiduciary’s directions if he “knows or should know” that the directions violate ERISA’s fiduciary duties of prudence. The Association further claims the Department of Labor’s standard is not supported by its cited authority.

85

For a number of reasons, including the rules of statutory construction, the common law roots of the directed trustee concept, the Department of Labor’s interpretation, as well as some of the case law, all of which are discussed in detail in the remainder of this section, this Court is not persuaded by the Association’s argument for a minimum standard that would shield its members from liability.

The first step in construing a statute is to decide whether the language in question has a plain and unambiguous meaning by examining the plain language, the specific context in which the language is used, and the broader context of the complete statute.

Robinson v. Shell Oil Co.,

519 U.S. 337, 340-41 , 117 S.Ct. 843 , 136 L.Ed.2d 808 (1997). “Plain” language does not always mean that it is always “indisputable” or “pellucid.”

Aviall Services, Inc. v. Cooper Industries, Inc.,

312 F.3d 677, 679 (5th Cir.2002),

petition for cert. filed,

02-1192, 71 USLW 3552 (Feb. 12, 2001). Thus, as the proper way to interpret a provision, one should examine the contested passage in connection with other sections and the law as a whole, as well as the statute’s purpose and policies, with the aim of reaching the most reasonable and harmonious result.

Id.

at 680-81 n. 3.

“Legislative history should be consulted gingerly, if at all, in aid of statutory construction.”

Aviall Services,

312 F.3d at 684 . Use of legislative history is only appropriate where the language is “opaque,” “translucent,” or ambiguous.

Id.

at 680 n. 3,

citing Perrone v. General Motors Acceptance Corp.,

232 F.3d 433, 440 (5th Cir.2000),

cert. denied,

532 U.S. 971 , 121 S.Ct. 1601 , 149 L.Ed.2d 468 (2001). Even when reference to the legislative history is appropriate, there is disagreement about the reliability and persuasiveness of such evidence.

See, e.g., Shannon v. U.S.,

512 U.S. 573, 583 , 114 S.Ct. 2419 , 129 L.Ed.2d 459 (1994),

citing County of Washington v. Gunther,

452 U.S. 161, 182 , 101 S.Ct. 2242 , 68 L.Ed.2d 751 (1981)(Rehnquist, J., dissenting)(“[I]t is well settled that the legislative history of a statute is a useful guide to the intent of Congress.”), and

Wisconsin Public Intervenor v. Mortier,

501 U.S. 597, 617 , 111 S.Ct. 2476 , 115 L.Ed.2d 532 (1991)(Scalia, J., coneurring)(Legislative history is “unreliable ... as a genuine indicator of congressional intent.”).

In interpreting § 403(a)(1), as a threshold matter the Court notes that nowhere in that provision relating to the directed trustee, nor in the statute as a whole, is the phrase “clear on their face” or any paraphrase of that facial compliance standard to be found. The Supreme Court has stated, “We are not aware of any case in which we have given an authoritative weight to a single passage of legislative history that is in no way anchored in the text of the statute.”

Shannon v. U.S.,

512 U.S. 573, 583 , 114 S.Ct. 2419 , 129 L.Ed.2d 459 (1994). Moreover, in terms of the statute as a whole, the Fifth Circuit has long held that given its remedial purposes, ERISA is “to be construed liberally to safeguard the interests of fund participants and beneficiaries, and to preserve

*587

the integrity of fund assets.”

Landry v. Air Line Pilots Ass’n Intern., AFL-CIO,

901 F.2d 404 , 417 and n. 38 (5th Cir.)(and cases cited therein),

cert. denied,

498 U.S. 895 , 111 S.Ct. 244 , 112 L.Ed.2d 203 (1990).

Inter alia,

fiduciary status in particular under the statute is broadly construed in accordance with ERISA’s policies and objectives.

John Hancock Mutual Life Ins. v. Harris Trust & Sav. Bank,

510 U.S. 86, 96 , 114 S.Ct. 517 , 126 L.Ed.2d 524 (1993)(“To help fulfill ERISA’s broadly protective purposes, Congress commodiously imposed fiduciary standards on persons whose actions affect the amount of benefits retirement plan participants will receive.”);

see also Mertens,

508 U.S. at 262 , 113 S.Ct. 2063 (ERISA “defines ‘fiduciary’ not in terms of formal trusteeship, but in

functional

terms of control and authority over the plan, ... thus expanding the universe of persons subject to fiduciary duties — and damages-under § 409(a).”).

With respect to the language of § 403(a)(1), the Court agrees that the phrase, “proper directions,” is ambiguous because there is no definition of “proper” other than an implied relationship to the remainder of the provision requiring, also in vague language, compliance with the plan and with the statute, similarly undefined; indeed the meaning of the terms and the scope of the trustee’s duty under the whole provision are uncertain.

86

The underlying issue in construing § 403(a)(1) is the same question discussed

supra,

whether the directed trustee is a fiduciary to any degree, and therefore subject to the fiduciary duties embodied in § 404(a) of the statute. Of significance in this determination, “the underlying purposes of ERISA” have been described by the Supreme Court as “enforcement of strict fiduciary standards of care in the administration of all aspects of pension plans and promotion of the best interests of participants and beneficiaries.”

Massachusetts Mutual Life Ins. Co. v. Russell,

473 U.S. 134, 158 , 105 S.Ct. 3085 , 87 L.Ed.2d 96 (1985)(Brennan, J., joined by Justices White, Marshall and Blackmun, concurring). Furthermore, “in enacting ERISA Congress made

more

exacting the requirements of the common law of trusts relating to employee trust funds.”

Id.

at 158 n. 17, 105 S.Ct. 3085 ,

quoting Donovan v. Mazzola,

716 F.2d 1226, 1231 (9th Cir.1983), ce

rt. denied,

464 U.S. 1040 , 104 S.Ct. 704 , 79 L.Ed.2d 169 (1984). ERISA’s expansive definition of fiduciary, its enhancement of the fiduciary’s duty incorporated from trust law, and the statute’s purpose and policy of heightened protection of plan assets and plan participants and beneficiaries, together, support the Court’s conclusion that § 403(a) should be read to maintain some, rather than virtually eliminate, fiduciary obligations of a directed trustee to question and investigate where he has some reason to know the directions he has been given may conflict with the plan and/or the statute.

As an example of ERISA’s emphasis on fiduciary protection of plan participants and beneficiaries, increased over that provided by common law beyond the statute’s expansion of the definition of “fiduciary,” “thus expanding the universe of persons subject to fiduciary duties — and damages — under § 409(a),”

87

section 410(a) of ERISA, 29 U.S.C. § 1110 (a), seeks to bar a fiduciary’s evasion of its responsibilities: “Any provision in an agreement or instru

*588

ment which purports to relieve a fiduciary from responsibility, obligation, or duty under this part shall be void as against public policy.” Unlike the single sentence in the legislative history for § 403(a), which states the “clear on their face” standard notably absent from the statutory provision, the legislative history of § 410 reflects the same purpose as the statutory provision: “[E]xculpatory provisions which reheve a fiduciary from liability shall be void as against public policy.” H.R. Rep. 1280, 93d Cong., 2d Sess.,

reprinted in

1974 U.S.C.C.A.N. 4639, 5038, 5101.

Moreover, the Association dismisses the origins of the directed trustee’s liability in the common law of trusts by quoting the Supreme Court’s statements, such as “trust law does not tell the entire story,” but “often will inform but will not necessarily determine the outcome of, an effort to interpret ERISA’s fiduciary duties,” or trust law may “offer only a starting point, after which courts must go on to ask whether, or to what extent, the language of the statute, its structure, or its purposes require departing from common-law trust requirements.”

Varity Corp.,

516 U.S. at 497 , 116 S.Ct. 1065 . Yet the Association fails to make such an analysis or to demonstrate that the statute was an intentional modification of the common law regarding a directed trustee, but instead basically ignores the question. Other than complaining about the burden that a “knew or should know” standard would impose on a directed trustee, the Association fails to identify reasons to carve out an exception here to the established concept that “rather than explicitly enumerating all of the powers and duties of trustees and other fiduciaries, Congress invoked the common law of trusts to define the general scope of their authority and responsibility.”

Varity Corp.,

516 U.S. at 496 , 116 S.Ct. 1065 ;

Central States,

472 U.S. at 570 , 105 S.Ct. 2833 (same);

Firestone Tire and Rubber Co. v. Bruch,

489 U.S. 101, 110 , 109 S.Ct. 948 , 103 L.Ed.2d 80 (1989)(“ERISA’s legislative history confirms the Act’s fiduciary responsibility provisions ... ‘codiffy] and mak[e] applicable to [ERISA] fiduciaries certain principles developed in the evolution of the law of trusts.’ ”).

Moreover, the Association brushes off the Secretary’s reliance on

Scott on Trusts

§ 185 at 562-68, without a close reading, even though it corresponds to the Restatement (Second) of Trusts § 185 and deals expressly with the common-law roots of the statute’s directed-trustee/direeting-named-fiduciary relationship, although the common law uses different terminology than ERISA to describe that relationship. Apparently concluding that § 185 of the Restatement (Second) of Trusts is irrelevant to ERISA, the Association emphasizes that rather than dealing with what the statute terms a “named fiduciary,” § 185 refers generally to a person holding a “power of control” over the trust and permits that person to be a “co-trustee, beneficiary, settlor or person otherwise unconnected with the trust” which would be subject to different rules for determining their level of responsibility, depending on which type of person is the holder of power. Comment a to Restatement (Second) of Trusts § 185(1959).

Section 185, entitled “Duty With Respect to Person Holding Power of Control,” provides,

If under the terms of the trust a person has power to control the action of the trustee in certain respects, the trustee is under a duty to act in accordance with the exercise of such power, unless the attempted exercise of the power violates the terms of the trust or is a violation of a fiduciary duty to which such person is subject in the exercise of the power.

Restatement (Second) of Trusts § 185 (1959). The Court acknowledges that the Restatement (Second) of Trusts § 185 is

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far more inclusive than § 403(a)(1); it covers situations where persons, including fiduciaries and nonfiduciaries, are given power by the trust to direct the trustee, as well as situations where the holder of the power is acting for his own benefit or as a fiduciary for the benefit of a beneficiary.

Nevertheless Comment e to the Restatement (Second) § 185 specifically addresses the situation where a

fiduciary

is empowered by the trust document to direct a trustee and provides a guide to the directed trustee’s obligations under common law that also informs and is codified in § 403(a)(1), as well as reveals the seeds for the “knew or should know” standard now advocated by the Secretary of Labor. Comment e to § 185 also reflects that a directed trustee’s obligations derive from those at common law of co-trustees, who, if they have reason to suspect that a co-trustee was breaching his duty, must take reasonable steps to prevent a breach:

Duty of trustee where holder of power is subject to fiduciary obligations.

If the power is for the benefit of someone other than the holder of the power, the holder of the power is subject to a fiduciary duty in the exercise of the power. In such a case the trustee is under a duty similar to his duty with respect to the action of a co-trustee. See § 184. If the trustee has reason to suspect that the holder of a power is attempting to exercise it in violation of a fiduciary duty to which the holder is subject in the exercise of the power, the trustee

is under a duty not to comply

and may be liable if he does comply. If the holder of the power insists upon compliance notwithstanding the objection of the trustee, it is the duty of the trustee to apply to the court for instructions.

Even though the person holding the power holds it as a fiduciary and in fact violates his duty as fiduciary in the exercise of the power, the trustee is not liable for acting in accordance with the exercise of the power if he has no notice that the holder of the power is violating his duty as fiduciary [emphasis added].... [emphasis added]

The Restatement (Second) of Trusts § 184 further stakes out a trustee’s duty with respect to a co-trustee, while § 224

88

sets out the rule for one trustee’s liability for a breach of trust by a co-trustee; these three section (§§ 185, 184 and 224), with their quoted comments, are the basis from which ERISA’s co-fiduciary liability under § 405 is derived. Section 184 states, “If there are several trustees, each trustee is under a duty to the beneficiary to participate in the administration of the trust and to use reasonable care to prevent a co-trustee from committing a breach of trust or to compel a co-trustee to redress a breach of trust.”

Id.

Comment a to § 184 states in relevant part, “if a trustee has reason to suspect that a co-trustee is committing or attempting to commit a breach of trust, he must take reasonable steps to prevent him from doing so [emphasis added].”

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Moreover the ERISA statute, itself, and the underlying common law of trusts also suggest a continuing responsibility on the part of the directed trustee. According to § 403(a) of ERISA, 29 U.S.C. § 1103 (a), “[a]ll assets of an employee benefit plan shall be held in trust by one or more trustees.” Furthermore, the trustee “shall have

exclusive

authority and discretion to manage and control the assets of the plan,

except to the extent that ...

the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary

who is not a trustee

[emphasis added].”

Id.

The employment of a trust structure necessarily invests a trustee with common-law fiduciary duties. Restatement (Second) of Trusts § 2, comment h (stating that “a trust involves three elements, namely, (1) a trustee, who holds the trust property and is subject to equitable duties to deal with it for the benefit of another; (2) a beneficiary, to whom the trustee owes equitable duties to deal with the trust property for his benefit; (3) trust property, which is held by the trustee for the beneficiary.”). At common law, a trust is defined as “a fiduciary relationship with respect to property, subjecting the person by whom the title to property is held to equitable duties to deal with the property for the benefit of another person .... ” Restatement (Second) of Trusts § 2 (1959). According to comment f to § 2, a trustee holds a legal interest in trust property, while the beneficiary has an equitable interest. Under § 3(3) of the Restatement (Second) of Trusts, a “trustee” is “[t]he person holding property in trust.” Thus if trust law is applied, as Congress indicated it should be where not inconsistent with ERISA’s purpose and language, as long as the trust remains in existence, the trustee retains a legal interest in, and thus some ultimate authority, over the plan’s assets, which would qualify a trustee to meet the definition of a “fiduciary” under § 3(21)(A)(i)(“exercises any authority or control respecting management or disposition of [plan]

assets

[emphasis added],” which, as noted in

FirsTier,

does not require the trustee to have discretion.)

Under the terminology employed in ERISA, when instructed by a named fiduciary, a “trustee” remains designated a “trustee,” though his role is qualified by the adjective “directed.” Moreover, under the statute, the named fiduciary (“who is not a trustee” according to the requirements of the statute) who directs the trustee does

not

then become a “directing trustee” nor does the named fiduciary replace the trustee. The statutory language appears to this Court to support a continuance of fiduciary responsibility, though modified, in the trustee, who retains a legal interest in the trust and some authority over the plan assets, the

res

in the trust. According to the statute, the named fiduciary must instruct the directed trustee to perform what actions the named fiduciary wants done, thus interposing the trustee (and any control he has) between the named fiduciary and the act. The trustee’s function as the holder of the legal interest in the property of the trust also precludes direct action on the trust’s

res

by the named fiduciary. Furthermore the express imposition by the statute of a duty, though its scope is uncertain, on the directed trustee to determine whether the instructions given to him by the directing named fiduciary were “proper,” “made in accordance with the plan,” and “not contrary to ERISA,” also implies that the trustee retains certain supervising and investigative duties and that the directed trustee is still bound by the terms of the plan documents and of ERISA and cannot escape its fiduciary or statutory obligations to the plan participants and beneficiaries. As has been noted by many, the statute fails to define “proper

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