In Re Fremont General Corp. Litigation

Citations: 564 F. Supp. 2d 1156; 2008 U.S. Dist. LEXIS 85561; 2008 WL 2609258Docket: 2:07-cv-02693-FMC-FFMx

Court: District Court, C.D. California; May 30, 2008; Federal District Court

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The United States District Court for the Central District of California denied the defendants' motion to dismiss the plaintiffs' consolidated complaint concerning fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA). The plaintiffs, representing participants in the Fremont General Corporation's 401(k) and Employee Stock Ownership Plans, alleged that the defendants, as fiduciaries, failed to prudently manage the plans by purchasing and retaining Fremont General stock, which they argued was an imprudent investment.

The defendants contended that their actions were consistent with ERISA, asserting that the plans in question, classified as Eligible Individual Account Plans (EIAPs), were exempt from the obligation to diversify investments. The court noted that under Rule 12(b)(6), allegations in the complaint are taken as true and construed in favor of the plaintiffs, allowing for a claim to be supported by any set of facts consistent with those allegations.

The plaintiffs' primary claim was based on the assertion that the defendants should have ceased offering Fremont General stock as an investment option and sold the existing holdings due to the imprudent nature of the stock. In addressing the defendants' reliance on the Ninth Circuit's decision in Wright v. Oregon Metallurgical Corp., the court clarified that while EIAPs are exempt from certain prudence requirements, they are not completely exempt from the duty to diversify, especially in situations where heavy reliance on company stock could indicate wrongful conduct. The court found that the defendants' interpretation of the Wright case was overly broad and did not adequately counter the plaintiffs' claims.

Wright identified a deteriorating financial situation and risk of insider self-dealing as factors necessitating diversification, though these do not conclusively rebut the presumption of prudence. The Ninth Circuit's ruling in In Re Syncor ERISA Litigation clarified that it has not adopted the 'Moench presumption,' which assumes fiduciaries of employee investment plans acted in accordance with ERISA when investing in employer stock. The Syncor Court noted that fiduciaries could breach the prudent man standard if they failed to divest from company stock amidst knowledge or suspicion of illegal practices inflating stock value. The court reversed a summary judgment favoring defendants, highlighting that genuine material facts regarding a breach of the prudent man standard existed. Under 29 U.S.C. § 1104(a), fiduciaries must act solely in the interest of participants with appropriate care and diligence. The Complaint alleges that Fremont General faced severe financial issues and mismanagement, which the Defendants, as senior executives and board members, should have recognized, leading to harm for the Plaintiffs due to imprudent investment choices. The Complaint adequately states claims for failure to manage plan assets and for failure to monitor fiduciaries. Despite Defendants disputing factual claims, the court accepts the allegations as true at the pleading stage. Furthermore, Plaintiffs assert that Defendants failed to provide complete and accurate information regarding Fremont General's mismanagement and accounting issues, resulting in inflated stock values. Defendants argue that ERISA does not require disclosures beyond statutory documents, per 29 U.S.C. § 1024(b)(4).

The Ninth Circuit has not specifically ruled on the issue at hand but recognizes that an ERISA fiduciary's duty to disclose information to beneficiaries extends beyond the documents mandated by 29 U.S.C. sections 1021-1031. This duty includes informing beneficiaries about circumstances that could jeopardize benefit funding, as established in Acosta v. Pacific Enterprises. Additionally, in Bins v. Exxon Co., the court acknowledged the existence of other affirmative disclosure duties for employer-fiduciaries under different circumstances. There is a division among district courts regarding the fiduciary's obligation to disclose investment soundness information, as seen in cases like In re Calpine Corp. ERISA Litigation and In Re Uniphase Corp. ERISA Litigation. The court finds the allegations in the current Complaint—asserting that Defendants should have recognized the imprudence of investing in Fremont General stock and informed the beneficiaries—adequate to support a claim, leading to the denial of Defendants' Motion to Dismiss. The court also denies the Motion to Dismiss concerning Co-Fiduciary Liability, aligning with its earlier analyses. Consequently, Defendants' Motion to Dismiss the Plaintiff's Consolidated Complaint is denied, and they must file an Answer within 20 days.