Second Circuit Further Curtails Duty Of Prudence Claims In Saint Vincent Catholic Medical Centers v. Morgan Stanley

In a line of recent cases, the 2nd Circuit has limited ERISA plaintiffs' claims for breach of the duty of prudence by holding that investments of benefit plan funds in employer securities pursuant to plans calling for such investments are presumptively prudent and dismissing claims at the motion to dismiss stage.1 On April 2, 2013, the 2nd Circuit Court of Appeals issued a decision in Saint Vincent Catholic Medical Centers et al. v. Morgan Stanley Investment Management Inc., further tightening the pleading standards for claims of breach of fiduciary duty by ERISA fiduciaries in a case that did not involve the presumption of prudence.

The Underlying Case

Saint Vincent's sponsored and administered the Saint Vincent Catholic Medical Centers Retirement Plan, a defined-benefit pension plan for Saint Vincent's retirees governed by ERISA. Saint Vincent's hired Morgan Stanley to manage the plan's fixed-income portfolio, about 35 percent of the plan's assets. As the portfolio's manager, Morgan Stanley was subject to the fiduciary duties imposed by ERISA.

Saint Vincent's also provided Morgan Stanley with written investment guidelines for managing the portfolio. The guidelines stated that the "primary investment objective for the Pension Plan shall be preservation of principal with emphasis on long-term growth to meet the future retirement liability of the Plan." The guidelines designated the Citigroup BIG index as the benchmark against which the portfolio's performance would be measured. Plaintiffs alleged that the selection of this index as a benchmark signaled that Morgan Stanley was expected to implement a "low-risk, conservative investment strategy."

The amended complaint alleged that Morgan Stanley breached its fiduciary duties under ERISA by deviating from the stated investment strategy and directing increasingly large amounts of the plan's assets into high-risk investments, particularly non-agency mortgage-backed securities that are not guaranteed by government-sponsored entities like Fannie Mae. Plaintiffs also alleged that Morgan Stanley failed properly to diversify the portfolio, imprudently and disproportionately exposing it to the mortgage securities markets. In addition, plaintiffs alleged that the portfolio's purported overconcentration in non-agency mortgage-backed securities caused it to underperform relative to the Citigroup BIG benchmark. Plaintiffs claimed that the consequent damages to the plan's assets exceeded $25 million.

The amended complaint also included two New York common-law counts for breach of fiduciary duty and breach of contract, alleging that Morgan Stanley mismanaged Saint Vincent's malpractice insurance fund in the same way.

The district court dismissed the complaint, finding it contained no allegations of inadequacy in Morgan...