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Harris v. Koenig

March 12, 2009

WILLIAM S. HARRIS, ET AL., PLAINTIFFS,
v.
JAMES E. KOENIG, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Gladys Kessler U.S. District Judge

MEMORANDUM OPINION

Plaintiffs, William S. Harris, Reginald E. Howard, and Peter M. Thornton, Sr., are former employees of Waste Management Holdings, Inc. ("Old Waste" or "the Company")*fn1 and participants in the Waste Management Profit Sharing and Savings Plan ("Old Waste Plan" or "Plan"). They bring this action under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001, et seq., on behalf of the approximately 30,000 Plan participants seeking to recoup losses suffered by the Plan related to the purchase of Old Waste common stock ("Company Stock") between January 1, 1990 and July 15, 2002 at prices "artificially inflated" by material undisclosed information about Old Waste's "true financial condition." Third Am. Compl. ¶ 1. Plaintiffs allege three separate claims periods --- (1) January 1, 1990 through February 24, 1998 ("First Claim Period"); (2) July 15, 1999 through December 1, 1999 ("Second Claim Period"); and (3) February 7, 2002 through July 15, 2002 ("Third Claim Period") -- and separate ERISA violations during each of those periods. Id.

Defendants are the "Old Waste Fiduciaries," which include Old Waste (the Plan's sponsor); the Old Waste executives who allegedly administered the Old Waste Plan, including the Waste Management, Inc. Profit Sharing and Savings Plan Investment Committee ("Old Waste Investment Committee"); the individual Trustee Members of the Old Waste Investment Committee;*fn2 the Waste Management, Inc. Profit Sharing and Savings Plan Administrative Committee ("Old Waste Administrative Committee"); the individual Trustee Members of the Old Waste Administrative Committee;*fn3 the Old Waste Board of Directors; the individual Members of the Old Waste Board of Directors;*fn4 and DOES 1-15.*fn5

Defendants are also the "New Waste Fiduciaries," which include the Waste Management Retirement Savings Plan ("New Waste Plan"); and the New Waste executives who allegedly administered the New Waste Plan, including the Investment Committee of the Waste Management Retirement Savings Plan ("New Waste Investment Committee"); the individual Trustee Members of the New Waste Investment Committee;*fn6 the State Street Bank and Trust Company ("State Street"); and DOES 16-30.*fn7

This matter is before the Court on Defendants' Omnibus Motion to Dismiss the Third Amended Complaint [#186] ("Defs.' Omnibus Mot.") and State Street Bank and Trust Company's Motion to Dismiss the Third Amended Complaint [#183] ("State Street's Mot.").*fn8 Upon consideration of the Motions, Oppositions, Replies, and the entire record herein, and for the reasons stated below, Defendants' Omnibus Motion to Dismiss is granted in part and denied in part and State Street's Motion to Dismiss is denied.

I. BACKGROUND*fn9

A. Factual History

The Old Waste Plan is an "individual account" or "defined contribution" employee pension plan. See Defs.' Ex. 22 (1999 Summary Plan Description) at 25. An individual account or defined contribution plan is "one where employees and employers may contribute to the plan, and the employer's contribution is fixed and the employee receives whatever level of benefits the amount contributed on his behalf will provide." Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439 (1999) (internal quotations omitted). See 29 U.S.C. § 1002(34) (an individual account or defined contribution plan "provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account").

Old Waste Plan participants may invest in any of the Plan's ten investment options, including the Waste Management Inc., Stock Fund which is invested primarily in Company Stock ("Stock Fund") as well as cash. See Defs.' Omnibus Mot., Ex. 22 (1999 Summary Plan Description at 3, 11). See Third Am. Compl. ¶ 40.

On January 16, 1998, Old Waste and Waste Services, Inc., merged to become New Waste. On January 1, 1999, the Old Waste Plan was merged with the USA Waste Services, Inc. Employee's Savings Plan to become the Waste Management Retirement Savings Plan ("New Waste Plan"). On the same date, State Street was appointed to serve as the Trustee of the New Waste Plan. Effective February 1, 1999, the New Waste Investment Committee appointed State Street to serve as the Investment Manager for Company Stock assets. See Third Am. Compl. ¶¶ 47, 50. Pursuant to the terms of the Investment Manager Agreement between State Street and the New Waste Investment Committee, State Street had "full discretionary authority to manage Company Stock assets." Id. ¶ 50.

The State Street appointments were made after the July 24, 1998 filing of the Complaint in the Illinois Securities Litigation, discussed infra.

1. The Illinois Securities Litigation

On October 10, 1997, Old Waste announced in a press release that the prior reports of its earnings from continuing operations for the third quarter of 1996 were overstated. See id. ¶ 88. It also cautioned "that earnings for the third quarter of 1997 were expected to be below analysts' expectations and that [Old Waste's] fourth Quarter 1997 results might be reduced by a charge to income that could be material to its results of operations for the year." See id.

By December 18, 1997, various purchasers of Old Waste securities had filed fourteen securities fraud class actions in the United States District Court for the Northern District of Illinois ("Illinois district court") alleging, in relevant part, that Old Waste, certain of its officers and directors and its auditor, Arthur Andersen, LLP, had violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. See In re Waste Mgmt., Inc. Sec. Litig., CA 97-7709 (N.D. Ill.) ("Illinois Securities Litigation").

On February 24, 1998, Old Waste announced that it was restating its financial statements for 1991 and prior periods, including the periods 1992 through 1996, and the first three quarters of 1997 ("Restatement"). It also admitted that prior to 1992 and continuing through the first three quarters of 1997, it had materially overstated its reported income by $1.43 billion. See Third Am. Compl. ¶ 89.

On July 24, 1998, the Illinois Securities Litigation plaintiffs filed a consolidated amended complaint claiming that the Old Waste Fiduciaries "had engaged in potential breaches of fiduciary obligations with respect to the Old Waste Plan by causing it to acquire shares of Old Waste Stock between January 1, 1990 [and] February 24, 1998, when they knew that such stock was not a prudent Plan investment because its price exceeded fair market value." Id. ¶ 110.

As already noted, on January 1, 1999, State Street Bank was appointed Trustee of the New Waste Plan, after its merger with the Old Waste Plan, and on February 1, 1999, State Street was appointed Investment Manager for Company Stock assets.

On July 15, 1999, the Illinois district court entered a Preliminary Approval Order approving a proposed settlement and provisionally certifying a class, for settlement purposes only, of all persons (other than defendants and their affiliates) who had acquired Company Stock between November 3, 1994 and February 24, 1998. See id. ¶ 111. Pursuant to the Preliminary Approval Order, "a Notice of Pendency and Proposed Settlement of Class Action, dated July 20, 1999 (the 'Illinois Notice'), was sent to [all] members of the [Illinois settlement class], including the Plan and its fiduciaries." Id. The Illinois Notice described the scope of the release that would be given by members of the Illinois settlement class in exchange for the settlement consideration, and advised class members of their right to object to or opt out of the proposed settlement by September 2, 1999. See id.

On September 17, 1999, the Illinois district court entered a Final Judgment and Order of Dismissal endorsing the proposed settlement ("Illinois Securities Settlement"). See id. ¶ 116.

2. The Texas Securities Litigation

On July 6, 1999, New Waste "issued a press release reporting a $250 million projected revenue shortfall for the second quarter of 1999 and sharply lower earnings." Id. ¶ 102. On November 9, 1999, after a subsequent review of its books and records, New Waste announced after-tax charges and adjustments of $1.23 billion. See id. ¶ 105.

On July 7, 1999, the first of over thirty securities class action complaints was filed against New Waste and certain of its officers and directors in In re Waste Mgmt., Inc. Sec. Litig., H-99-2183 (S.D. Texas), in the United States District Court for the Southern District of Texas ("Texas district court") ("Texas Securities Litigation"). See id. ¶ 125. According to Plaintiffs, the complaint placed State Street on notice that "senior management of New Waste had engaged in alleged securities violations in connection with the [July 1998] Merger as a result of public representations they made regarding New Waste's competitive position, its cash flow from operations and the successful integration of Old Waste and USA Waste." Id. ¶ 125.

On July 14, 2000, the plaintiffs in the Texas Securities Litigation filed their amended consolidated class action complaint. According to Plaintiffs, that filing placed State Street on notice that former Old Waste fiduciaries had engaged in potential breaches of fiduciary duties with respect to the Old Waste Plan including "concealing from other Old Waste Plan Committees and participants the fact that Old Waste had not done adequate due diligence of the proposed corporate Merger, [had] not conduct[ed] a prudency review of the proposed Merger themselves, and caus[ed] the Plan to acquiesce in the Merger, which was not in the best interest[s] of the Plan and its participants." Id. ¶ 127.

On February 7, 2002, the Texas district court entered a Preliminary Approval Order approving a proposed settlement, and provisionally certifying a class, for settlement purposes only, of all persons (other than defendants and their affiliates) who had acquired Company Stock between June 11, 1998 and November 9, 1999. See id. ¶ 128. Pursuant to the Preliminary Approval Order, "a Notice of Proposed Class Action Settlement (the 'Texas Notice') was sent to members of the [Texas settlement class], including the Plan and its fiduciaries[.]" Id. The Texas Notice described the scope of the release that would be given by members of the Texas settlement class in exchange for the settlement consideration, advised class members of their right to object to or opt out of the proposed settlement by April 19, 2002. It also required a class member to submit a Proof of Claim and Release on or before July 15, 2002 in order for a class member to participate in the settlement. See id.

On April 29, 2002, the Texas district court entered a Final Judgment and Order endorsing the proposed settlement ("Texas Securities Settlement"). On July 15, 2002, State Street submitted a Proof of Claim and Release on behalf of the Plan. See id. ¶ 140.

B. The ERISA Litigation in the District of Columbia

On April 1, 2002, Plaintiffs filed the instant action in this Court.

1. The Illinois Motion to Enforce

On June 7, 2002, Old Waste filed a motion to enforce the Illinois Securities Settlement in the Illinois district court. In the motion, it argued that Plaintiffs in the instant action were barred from prosecuting any ERISA claims relating to or arising out of Old Waste's February 24, 1998 Restatement because (1) the Old Waste Plan had released all claims relating to the Restatement on behalf of itself and Plan participants; and (2) the Old Waste Plan and its participants were barred by the Illinois Securities Settlement from asserting any released claims in this or any other action. See Defs.' Omnibus Mot. Ex. 11. On December 3, 2002, this Court granted Defendants' motion for a stay of proceedings in the instant action pending a ruling by the Illinois district court on their motion to enforce.

On March 11, 2003, the Illinois district court denied Defendants' motion to enforce on the ground that the alleged class period in the instant action spans a broader period than the November 3, 1994 through February 24, 1998 period at issue in the Illinois Securities Litigation. It explained that although it could have interpreted and applied the relevant terms of the Old Waste Plan "in order to determine whether a release from liability for securities law violations encompasses potential ERISA liability," its resolution of that matter would not relieve this Court of its obligation to make that same assessment, "because the time span of the D.C. suit exceeds that covered by" the Illinois Securities Settlement. Defs.' Omnibus Mot., Ex. 12 at 2-3.

2. The Texas Settlement Proceedings

On April 19, 2002, Plaintiff Harris, who was not a member of the Texas settlement class, objected to the proposed settlement of the Texas Securities Litigation on the ground that the New Waste Plan's decision to participate in the settlement constituted a breach of ERISA-imposed duties. On April 29, 2002, Harris filed a motion to intervene, which the Texas district court denied. See Defs.' Ex. 14. Following the Texas district court's approval of the Texas Securities Settlement, Harris filed a Federal Rule of Civil Procedure 59(e) motion to alter or amend the judgment.

Thereafter, "counsel for Lead Plaintiff and counsel for Harris, after arm's-length negotiations regarding issues relating to Harris's objection, . . . reached a Stipulation of Settlement Modifying Plan of Allocation," which the Texas district court approved ("Texas Amending Order"). Defs.' Omnibus Mot., Ex. 16 at 4. Under the Texas Amending Order, the original Plan of Allocation entered in connection with the Texas Securities Settlement was modified "so that $4.5 million (less Harris's Counsel's attorneys fees, costs and expenses) [was] set aside from the Net Settlement Fund and . . . allocated to the Waste Management Retirement Savings Plan [the New Waste Plan], such allocation being in addition to the approximately $2 million that the participants of the Plan would otherwise be entitled to receive under the Plan of Allocation." Id. at 5-6.

3. Plaintiffs' Claims in the Instant Litigation

On April 26, 2002, Plaintiffs in the instant action filed their First Amended Complaint. On October 24, 2003, they filed their Second Amended Complaint. On November 12, 2003, they filed their Substitute Second Amended Complaint. On February 7, 2005, they filed their Third (and final) Amended Complaint.

The conduct alleged in the first five Counts of the Third Amended Complaint occurred during the First Claim Period (January 1, 1990 through February 24, 1998) and arose out of alleged accounting irregularities engaged in by the Old Waste Fiduciaries.

According to Plaintiffs, during the First Claim Period, the Old Waste Fiduciaries caused or allowed the Old Waste Plan to acquire approximately $128 million worth of unit shares in the Stock Fund, which is invested primarily in Company Stock. They argue that the Old Waste Fiduciaries "knew or should have known that [Company Stock] was an imprudent pension plan investment because the Old Waste Fiduciaries participated in, knew of, or should have known of Old Waste's massive and widespread accounting irregularities during the First Claim Period, which caused [Company Stock] to be significantly overvalued. When the full extent of Old Waste's earnings misstatements was revealed, the Plan lost tens of millions of dollars on its investment in the Stock Fund." Pls.' Opp'n to Defs.' Omnibus Mot. at 3-4.

In Count I, Plaintiffs claim that the Old Waste Investment Committee and its individual Trustee Members breached their fiduciary duties of loyalty and prudence under ERISA Section 404, 29 U.S.C. § 1104, by (1) failing to conduct an adequate fiduciary review to determine whether the Stock Fund was a prudent investment; (2) causing the Old Waste Plan to maintain the Stock Fund as a Plan investment when they knew the unit shares were inflated in value and not a prudent investment; (3) causing the Old Waste Plan to make new investments in unit shares of the Stock Fund when they knew the unit shares were inflated in value and not a prudent investment; and (4) failing to take steps to prevent losses in the Stock Fund resulting from the investment of Plan participants' contributions to the Stock Fund.

In Count II, Plaintiffs claim that the Old Waste Administrative Committee and its individual Trustee Members breached their fiduciary duty of loyalty under ERISA Section 404 by (1) failing to adequately inform Plan participants of the true risks of investing in the Stock Fund; (2) conveying inaccurate information about the risks associated with investing in the Stock Fund; (3) concealing from Plan participants facts regarding Old Waste's true financial condition; and (4) failing to disclose to Plan participants that purchases of unit shares in the Stock Fund and of Company Stock by the Stock Fund were at inflated prices.

In Count III, Plaintiffs allege that, to the extent Old Waste, the Old Waste Committees, and their individual Trustee Members contributed shares of Company Stock to the Old Waste Plan which were artificially inflated in value, the Plan acquired such shares for more than fair market value, and therefore, such contributions constituted prohibited exchanges of stock between the Plan and Old Waste, a party in interest with respect to the Plan, in violation of ERISA Section 406(a)(1)(A), 29 U.S.C. § 1106(a)(1)(A).

In Count IV, Plaintiffs maintain that Old Waste, the Old Waste Board of Directors, and its individual Members breached their fiduciary duties of loyalty and prudence under ERISA Section 404 by (1) failing to adequately monitor the performance of the Old Waste Committees; (2) failing to prevent the Old Waste Investment Committee from offering the Stock Fund as an investment option when they knew or should have known that it was not a prudent investment because Old Waste's financial statements did not report Old Waste's true financial condition; (3) failing to prevent the Old Waste Plan from engaging in prohibited transactions under ERISA involving Company Stock and unit shares of the Stock Fund; and (4) failing to provide the individual Trustee Members of the Old Waste Committees with accurate information regarding Old Waste's accounting irregularities.

In Count V, Plaintiffs contend that the Old Waste Fiduciaries further breached their fiduciary obligations under ERISA Sections 405(a)(2) and (3), 29 U.S.C. §§ 1105(a)(2) and (3), by enabling their co-fiduciaries to commit violations of ERISA as described in Counts I-IV and, with knowledge of such breaches, failing to make reasonable efforts to remedy them.

The next four Counts (VI-IX) of the Third Amended Complaint allege fiduciary breaches occurring in the Second Claim Period (July 15, 1999 through December 1, 1999) against Old Waste and the New Waste Fiduciaries, which include State Street. According to Plaintiffs, during the Second Claim Period, these Defendants "caused or permitted the Old Waste Plan to participate in the settlement of a securities class action in Illinois federal court that, according to Defendants, released all of the Plan's claims, including ERISA claims, arising from acquisitions of [Company Stock] during part of the First Claim Period. In so doing, Old Waste and the New Waste Fiduciaries breached their duties of loyalty and prudence and engaged in a prohibited transaction under ERISA by failing to conduct an adequate review and evaluation of the fairness of the Illinois settlement to the Old Waste Plan in light of the Plan's unique ERISA claims and the fact that the vast majority of the Plan's purchase transactions in the [Stock Fund] were not open-market transactions covered by the securities claims." Pls.' Opp'n to Defs.' Omnibus Mot. at 3.

In Count VI, Plaintiffs claim that State Street breached its fiduciary duties of loyalty and prudence under ERISA Section 404 by failing to adequately investigate and preserve the fiduciary breach claims alleged in Counts I through V. According to Plaintiffs, "[i]nstead of protecting those potential ERISA claims, which might have been asserted against the former fiduciaries of the Plan, State Street Bank caused the claims to be released in the Illinois Securities Litigation without investigating the value or viability of those claims, without determining whether the settlement ...


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