Deutsche Bank Employees Granted Class Certification in 401(k) LawsuitPrint Article
- Posted on: Sep 25 2017
On September 5, 2017, Judge Lorna G. Schofield of the United States District Court for the Southern District of New York certified a class of Deutsche Bank employees who had filed an action under the Employee Retirement Income Security Act (“ERISA”), alleging self-dealing in the company’s retirement plan – the Deutsche Bank Matched Savings Plan (the “Plan”). In particular, the Plaintiffs alleged that Deutsche Bank and the other defendants violated their fiduciary duties by loading the Plan with expensive funds that earned fees for the bank. The class includes between 22,000 and 32,000 current and former participants in the Plan.
What is a Class Action?
A class action is a type of lawsuit in which one or more persons bring an action on behalf of a group of persons, referred to as the “class.” Under federal law, the Federal Rules of Civil Procedure govern class actions. While the subject matter of class actions can vary widely, certain factors must be present for a court to certify an action as a class action: the issues in dispute are common to all members of the class; the issues predominate over all others, and the members of the class are so numerous as to make it impracticable to bring them all before the court.
Moreno v. Deutsche Bank Americas Holding Corp.
The plaintiffs claimed that as of 2009, the Plan had approximately $1.9 billion in assets and offered participants 22 “designated investment alternatives,” 10 of which were “proprietary Deutsche Bank mutual funds.” The gravamen of the complaint concerned Defendants’ inclusion of proprietary mutual funds among the Plan’s offerings. According to the Plaintiffs, “Deutsche Bank earned millions of dollars in investment management fees by retaining [these proprietary mutual funds] in the plan.”
The complaint alleged that the Plan included three proprietary index funds that charged excessive fees in relation to other comparable index funds. The complaint also alleged that the Plan included actively managed proprietary funds in which Deutsche Bank charged management fees two to five times higher than “other actively managed funds in the same style,” and that such funds “consistently underperformed as measured by benchmark indices.” Plaintiffs further alleged that Deutsche Bank failed to include the least expensive share class for each of its offered proprietary funds and failed to rationally control recordkeeping costs.
The Court found that these allegations satisfied the commonality element of Rule 23(a). Noting that “numerous courts have found commonality where plaintiffs challenge a 401(k) plan’s retention of investment products, including proprietary funds, alleging excessive fees,” the Court held that “numerous questions,” such as “whether each Defendant was a fiduciary” and whether Defendants were conflicted or acting imprudently would “generate common answers apt to drive the resolution of Defendants’ liability.” (Citation and internal quotation marks omitted.) Judge Schofield rejected the Defendants’ argument that the Plaintiffs could not show commonality because none of the alleged breaches affected all class members, holding that “[c]ommonality … does not mean that all issues must be identical as to each [class] member.” The Defendants argued that “12,000 class members never invested in a single proprietary fund at any point during the relevant period.”
The Defendants also argued that resolving this action involved “a massive series of individualized analyses that turn on when and in which funds each participant invested.” Again, the Court rejected the argument, holding that Defendants “misapprehends Plaintiffs’ claims, which are brought on behalf of the Plan. Liability is determined based on Defendants’ not Plaintiffs’ decisions.”
As to the typicality and adequacy of representation elements, the Court found that the Plaintiffs satisfied both requirements. First, the Court found that “each class member’s claim arises from the same course of events and each class member makes similar legal arguments to prove the defendant’s liability.” (Citations omitted.) For example, the Plaintiff’s “claims arise from the same course of events – their participation in the Plan” and involve “similar legal arguments to prove liability – that Defendants mismanaged the Plan in violation of ERISA and continue to do so today.” Such allegations, held the Court, are “sufficient to show typicality.” Second, the Court found that the Plaintiffs were adequate representatives of the class because they and the class “share[d] an interest in remedying any alleged mismanagement of the Plan in violation of ERISA,” “d[id] not appear to have interests antagonistic to other class members,” and retained competent counsel to represent the interests of the class. The Court found “unpersuasive” the Defendants’ argument that the Plaintiffs were not adequate class representatives because they did not understand the case, noting that the claims “involve technical financial decisions affecting billions of dollars in assets and Plan fiduciaries’ compliance with the requirements of ERISA.” “It is understandable,” therefore, “that Plaintiffs, who are not lawyers or investment professionals, may have had difficulty answering questions about the claims.”
Finally, the Court found that the Plaintiffs satisfied Rule 23(b)(1)(B), which permits class certification if prosecuting separate actions by or against individual class members would create a risk of adjudications with respect to individual class members that, as a practical matter, would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests.
Noting that a breach of fiduciary duty is a classic example of a Rule 23(b)(1)(B) case, and that the “the structure of ERISA favors the principles enumerated under Rule 23(b)(1)(B),” the Court found that the Plaintiffs satisfied the rule: the “Defendants’ alleged conduct was uniform with respect to each participant,” and that adjudicating Plaintiffs’ claims … would dispose of the interests of the other participants or substantially impair or impede their ability to protect their interests.” The Court went on to say that “Plaintiffs allege Defendants’ conduct affected members of a class of thousands similarly as each were exposed to the same investment options and seek to restore losses to the Plan’s assets, which are comprised of the individual accounts that allegedly paid excessive fees,” and remove “Defendants as fiduciaries,” in addition to “other equitable relief.” “Such relief, if ordered,” held the Court, “would as a practical matter dispose of the interests of non-party participants.”
Notably, the Court ruled that although there was split over whether class certification under Rule 23(b)(1) for breach of fiduciary duty under ERISA is appropriate in the wake of recent Supreme Court decisions, the majority of courts “have held that it is.”
Plaintiffs do not assert harms based on Defendants’ misconduct that is specific to his or her individual account. Rather, named Plaintiffs – whose collective participation in the Plan covers the entire class period – challenge Defendants’ process for selecting and retaining the investment options presented to all Plan participants. Adjudicating their claims challenging Defendants’ management of the Plan as a whole would necessarily affect the resolution of any concurrent or future actions by other Plan participants. [Citations and internal quotation marks omitted.]
The Court further found that although Rule 23(b)(2) does not permit the combination of “individualized awards of monetary damages,” the same is not true with regard to Rule 23(b)(1)(B), which is the rule under which the Plaintiffs were proceeding: “Plaintiffs’ class claims under Rule 23(b)(1) are derivative in nature, not individualized.… Any monetary relief will be paid to the Plan … and the Plan fiduciaries would be responsible for allocating the recovery among participants.” (Citations and internal quotation marks omitted.)
Other 401(k) Class Action Lawsuits
This ruling follows more than two dozen proposed class actions in the past three years against financial firms challenging in-house investment products in employees’ 401(k) plans. Firms targeted by proposed class actions include JP Morgan Chase Bank, Charles Schwab, and Morgan Stanley, among others. The overarching issue in these lawsuits is that the firms violated their fiduciary duties under ERISA by packing their 401(k) plans with in-house funds that earn high fees, rather than providing participants less expensive options available through other investments.
Although it remains to be seen whether the class will prevail in its claims against Deutsche Bank, Moreno is important because of the Court’s analysis of Rule 23(b)(1), in particular, its adoption of the majority rule that Rule 23(b)(1) is an appropriate vehicle for resolution of breach of fiduciary duty claims under ERISA. The fact there is a split among the district courts makes the issue ripe for review by the Circuit Courts of Appeal, and possibly the United States Supreme Court. This Blog will continue to follow the issue as it develops.