United States District Court, D. Rhode Island
MEMORANDUM AND ORDER
M. LISI, SENIOR UNITED STATES DISTRICT JUDGE
Plaintiffs 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.
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.
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,  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,  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.
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
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.
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.
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.
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.
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.
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).
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 ...