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Barchock v. CVS Health Corp.

United States District Court, D. Rhode Island

April 18, 2017

MARY BARCHOCK, THOMAS WASECKO, and STACY WELLER, Plaintiffs,
v.
CVS HEALTH CORPORATION, THE BENEFITS PLAN COMMITTEE OF CVS HEALTH CORPORATION, and GALLIARD CAPITAL MANAGEMENT, INC., Defendants.

          MEMORANDUM AND ORDER

          MARY M. LISI, SENIOR UNITED STATES DISTRICT JUDGE

         The Plaintiffs[1] in this case, which was brought under Sections 502(a)(2) and 502(a)(3) of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §1132(a)(2) and §1132(a)(3), are participants in the Employee Stock Ownership Plan (the “Plan”) of CVS Health Corporation and Affiliated Companies (“CVS”) sponsored by CVS and managed by Galliard Capital Management, Inc. (“Galliard”). According to the Plaintiffs, the Defendants breached their fiduciary duties owed to the Plaintiffs and to the Plan by “imprudently investing too much of the Plan's Stable Value Fund assets in ultra-short-term cash management funds that provided extremely low investment returns.” First Amended Complaint (the “Complaint”)(ECF No. 30) at ¶2.

         The matter is before the Court on review of the second Report and Recommendation ("R&R") issued in the case by Magistrate Judge Sullivan (ECF No. 38). Because the Plaintiffs filed a timely objection to the R&R, the Court reviews de novo those portions of the R&R to which an objection has been made. See Fed.R.Civ.P. 72(b). The Court has thoroughly reviewed and considered the Complaint, the Defendants' motion to dismiss the Complaint (ECF No. 32), the Plaintiffs' response (ECF No. 34), the R&R, the Plaintiffs' objections thereto (ECF No. 39), and the Defendants' response (ECF No. 40). Having done so, the Court now adopts the R&R in its entirety. Accordingly, the Defendants' motion to dismiss the Complaint is GRANTED.

         I. Factual Summary[2]

         The Plaintiffs are participants in the Employee Stock Ownership Plan of CVS Health Corporation and Affiliated Companies, which is sponsored by CVS and administered by the Benefits Plan Committee (as designated by the CVS Board of Directors, the “Committee”). The Plan offers various investment options, [3] including the Stable Value Fund (the “Fund”) managed by Galliard. As stated in the audited financial statement attached to the Plan's 2013 Annual Return on Form 5500, [4] the Fund “seeks to preserve capital while generating a steady rate of return higher than money market funds provide.” Complaint ¶27. Unlike other, more aggressive lifestyle funds designed for “younger participants farther from retirement who can wait out the downside of market cycles and have a higher risk tolerance, ” Complaint ¶9, the Fund is designed for investors who are older and closer to retirement and likely to be more risk-averse.

         The Plaintiffs suggest that the Stable Value Fund (1) was excessively concentrated in investments with ultra-short durations, and (2) maintained excessive liquidity “far beyond any reasonable need for it.” Complaint at ¶26. The Plaintiffs further assert that, as a result of this approach, they were injured “in the form of significantly lower crediting rates than they would have received had the Stable Value Fund been prudently managed in accordance with industry standards regarding duration and liquidity.” Id.

         In specific terms, the Plaintiffs take issue with having received lower returns because during the years in question, the Defendants allocated more than half of the Fund's assets in the EB Temporary Investment Fund, invested primarily in cash and so-called cash equivalents. Complaint ¶29. According to the Plaintiffs, the EB Temporary Investment Fund was used by other investors as a short-term investment option and offered only a low rate of return. Complaint ¶¶30, 32. The Complaint asserts that during the same time period, another large portion of the Fund was invested in the Wells Fargo Stable Value Fund D, of which Galliard is a wholly owned subsidiary, and which invests all of its assets into the Wells Fargo Synthetic Stable Value Fund (the “WF Synthetic Value Fund”). Plaintiffs note that in the period between 2010 and 2012, the WF Synthetic Value Fund invested less than ten percent of its asset in interest-bearing cash or cash equivalents, from which they infer that Galliard “well understood...that it was not necessary to maintain such a large percentage of cash or cash equivalents in a stable value fund.” Complaint ¶¶37, 36.

         The Plaintiffs note that, when compared to other stable value fund investment averages (as documented in SVIA [Stable Value Investment Association] reports) the investment of the Fund in cash or cash equivalents “was a severe outlier and categorically imprudent.” Complaint ¶45 (emphasis in original). The Plaintiffs further assert that the large investment in cash depressed the Fund's performance by acting as “an enormous drag on the overall Stable Value Fund portfolio” and because it involved payment of an unnecessary liquidity premium. Complaint ¶46.

         Pointing out that the portion of the Fund that was invested in other liquid, capital preservation assets provided a significantly higher return than the EB Temporary Investment Fund, Complaint ¶51, the Plaintiffs conclude that (1) other investments with higher returns would have been readily available; and (2) “excessive allocation” to the EB Temporary Investment Fund constitutes “imprudence in the management of the Stable Value Fund.” Complaint ¶61. Although it is unstated how the actual performance of the Fund varied from the average performance of other stable value funds, the Plaintiffs suggest that if the Fund's allocation to cash investments had instead been “invested in the same manner as the other assets of the [Fund], ” the Fund would have yielded higher earnings. Complaint ¶52.

         In sum, the Plaintiffs assert claims of fiduciary breach against the Defendants by alleging that (1) Galliard caused the Fund to invest in “securities with extremely low yields, low durations, and excessive liquidity compared to what should be expected from prudently managed stable value fund investments, ” Complaint ¶81; and (2) CVS and the Committee failed to monitor and supervise Galliard, and to cause Galliard to change its investment conduct. Complaint ¶82. The Plaintiffs' assertions are bolstered primarily by comparisons between investment characteristics of the Fund, i.e., the percentage of investments allocated to cash and the duration of investments, with investment averages of other stable value funds, as summarized in the SVIA Survey. See, e.g., Complaint ¶¶ 17, 23, 24, 44, 45, 47, 48.

         On behalf of those Plan participants who invested in the Fund and/or who were invested in the Moderate Lifestyle Fund and/or the Conservative Lifestyle Fund from six years before the filing of this action until the time of trial, the Plaintiffs seek monetary damages for the asserted loss of benefits resulting from the Defendants' alleged breach of their fiduciary duty, injunctive relief, and attorneys' fees and costs. Complaint at ¶¶27-28.

         II. Procedural History

         The Plaintiffs brought a first complaint (the “Initial Complaint”) on February 11, 2016 (ECF No. 1), asserting-as they do in the instant Complaint-that Defendants “knew or should have known that the Plan's Stable Value Fund assets should have been invested in securities that would have provided a significantly higher yield with no material additional investment, credit, or liquidity risk.” Initial Complaint at ¶2. On April 14, 2016, the Defendants filed a motion to dismiss the Initial Complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted, Defs.' Mem. at 5-6 (ECF No. 15-1), in response to which the Plaintiffs filed an objection on April 28, 2016 (ECF No. 19). The Defendants filed a reply on May 9, 2016 (ECF No.20).

         Following a hearing on the Defendants' motion to dismiss on June 10, 2016, Magistrate Judge Sullivan issued a first R&R on June 24, 2016, in which she recommended that the Defendants' motion be granted and the Initial Complaint be dismissed. R&R at 11 (ECF No. 24). Plaintiffs promptly filed an objection to the R&R on July 8, 2016 (ECF No. 27), to which the Defendants filed a response in opposition on July 25, 2016 (ECF No. 29). In the ...


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