Moreno v. Deutsche Bank: Employees Sufficiently Plead Claims for Breach of Fiduciary Duty and Prohibited Transactions
Monday, February 27, 2017 at 06:00AM
Bryston Gallegos

In Moreno v. Deutsche Bank Am.s Holding Corp., No. 15 Civ. 9936 (LGS), 2016 BL 342731 (S.D.N.Y. Oct. 13, 2016), the United States District Court for the Southern District of New York denied in part and granted in part defendants’ motion to dismiss plaintiffs’ amended class action complaint against Deutsche Bank Americas Holding Corp. (“DBAHC”), DBAHC Executive Committee, Deutsche Bank Matched Savings Plan Investment Committee (the “Investment Committee”), Richard O’Connell, Deutsche Investment Management Americas Inc. (“DIMA”), and RREEF America, LLC (“RREEF”) (collectively, “Defendants”). The court held that Ramon Moreno and Donald O’Halloran, individually and on behalf of those similarly situated (“Plaintiffs”), sufficiently pleaded claims for breach of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. 

According to the allegations, Plaintiffs, from 2009 until February 2013, participated in the Deutsche Bank Matched Savings Plan (the “Plan”), a 401(k) plan with $1.9 billion in assets that offered Deutsche Bank employees various investment options. According to the complaint, the Plan included three proprietary index funds that charged excessive fees in relation to other comparable index funds managed by the Vanguard Group” and actively managed proprietary funds that charged fees up to five times higher fees than comparable funds.  The proprietary funds also allegedly underperformed “as measured by benchmark indices.”  For at least two of the proprietary funds, “the Plan was the only defined contribution plan among roughly 1,400 such plans with more than $500 million in assets to hold these funds.”

On December 21, 2015, Plaintiffs filed a complaint alleging Defendants were fiduciaries and that they breached their fiduciary duties of loyalty and care in selecting and managing the Plan investments. Plaintiffs alleged that the Plan’s inclusion of propriety funds resulted in prohibited transactions because DBAHC entities received monthly payment for services rendered to the funds. Moreover, Plaintiffs asserted that DBAHC, DIMA, and RREEF conducted prohibited self-dealing transactions by receiving consideration for investment services provided by DIMA and RREEF, subsidiaries of DBAHC.

Defendants moved to dismiss the complaint, arguing that the action was barred by ERISA’s statute of limitations, that Plaintiffs failed to state a claim, and that RREEF and DIMA lack fiduciary status.

Under 29 U.S.C. § 1104, a fiduciary owes duties of loyalty and care to act solely in the interest of the participants in the plan.  The standard looks to “whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment.” Prohibited transactions between a plan and a common trust fund managed by a trust company which is supervised by a State or Federal agency are exempt under 29 U.S.C. § 1108(b)(8) if: (1) the transaction involves selling or purchasing fund interests; (2) the trust company is not overcompensated; and (3) the transaction is expressly permitted by an authoritative party.     

The court held that Plaintiffs’ claims were not barred under ERISA’s statute of limitations, 29 U.S.C. § 1113, because, according to the allegations, Plaintiffs did not have actual knowledge of the violations until shortly before the complaint was filed. Next, the court found that Plaintiffs plausibly alleged that Defendants violated the obligation of care by including excessively costly proprietary funds in the Plan.  “Equally important, the Complaint alleges that Defendants stood to benefit from the alleged excessive fees because Deutsche Bank entities were paid investment management fees by these proprietary funds.” 

With respect to the statute of limitations, the court disagreed with Defendant contention that the period had begun when the initial decision was made to include the proprietary funds in the Plan.  Instead, the court noted that the Complaint alleged that the prohibited transactions were periodic service fees paid to Deutsche Bank entities. 

The court, however, agreed with Defendants’ assertion that DIMA and RREEF lacked fiduciary status under 29 U.S.C. § 1002(21)(A) because the complaint failed to sufficiently allege that DIMA and RREEF were compensated for providing investment advice that influenced the Plan’s investment decisions.

For the above reasons, the court dismissed DIMA and RREEF from the action and denied Defendants’ motion to dismiss. 

The primary materials for this case may be found on the DU Corporate Governance website.

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