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In re McKesson HBOC

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION


July 29, 2005

IN RE MCKESSON HBOC, INC. ERISA LITIGATION

[TENTATIVE] ORDER (1) GRANTING DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' CONSOLIDATED AMENDED COMPLAINT AND (2) DENYING PLAINTIFFS' MOTION FOR LEAVE TO FILE A SECOND CONSOLIDATED AMENDED COMPLAINT [Re Docket Nos. 84, 100, 116, 118, 120, 122, 123, 124, 291].

The opinion of the court was delivered by: Ronald M. Whyte United States District Judge

Christine Chang and James Huffman ("plaintiffs"), former participants in McKesson Corporation's Profit-Sharing Investment Plan ("the Plan"), bring a class action lawsuit against multiple defendants for their alleged breaches of fiduciary duties under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001, et seq. On January 12, 1999 McKesson Corporation merged with HBOC to form McKesson HBOC. Later that year, McKesson HBOC announced that HBOC had engaged in accounting irregularities. As a result, McKesson HBOC's stock price plummeted and the Plan lost hundreds of millions of dollars in value. In March 2003 several defendants moved to dismiss plaintiffs' consolidated amended complaint ("CAC"), including: (1) McKesson HBOC, Inc. and HBO & Company; (2) Charles W. McCall, a former officer and director of HBOC and Chairman of the Board of Directors of the post- merger company for several months; (3) Mark A. Pulido, a former member of both McKesson Corporation's Board of Directors before the merger and the post-merger company for several months, (4) the McKesson Corporation Outside Directors;*fn1 and (5) the HBOC Outside Directors.*fn2 Plaintiffs opposed the motions. On May 10, 2005 the court granted preliminary approval of a settlement between plaintiffs and (1) HBOC and (2) its former officers and directors. The court thus stayed plaintiffs' claims against the HBOC subclass. On May 25, 2005 plaintiffs filed a motion for leave to file a second amended consolidated complaint ("SCAC"). The defendants other than the HBOC subclass oppose the motion. The court has reviewed the papers and considered the arguments of counsel. For the reasons discussed below, the courtgrants defendants' motions to dismiss the CAC and denies plaintiffs' motion for leave to file the SCAC.

I. BACKGROUND

A. Factual Background

On December 31, 2002 plaintiffs filed the CAC.*fn3 Plaintiffs assert claims against McKesson HBOC, Inc, the members of McKesson Corporation's Board of Directors before the January 12, 1999 merger, and the members of McKesson HBOC's Board of Directors after the January 12, 1999 merger. CAC ¶¶ 17, 22. The CAC also named the Plan as a nominal defendant. Id. at ¶ 24.

1. The Plan

The Plan is an "employee pension benefit plan" within the meaning of ERISA § 3(2)(A), 28 U.S.C. § 1002(2)(A). CAC ¶ 66. McKesson Corporation is the named fiduciary and administrator of the Plan. Id. at ¶ 19. The McKesson Corporation Compensation Committee is responsible for (1) selecting trustees and investment advisors and managers, and (2) the overall investment policy of the Plan. The McKesson Corporation Board of Directors have the authority to determine the investment policies and guidelines to be implemented by the Compensation Committee. Id. at ¶ 20.

Participants may make "basic contributions of between 2% and 6% . . . and supplemental contributions of between 6% and 10%" of their salary to the Plan. Id. at ¶ 69. The Plan also contains an Employee Stock Ownership Plan ("ESOP") component under which McKesson Corporation "'matche[s]' up to the first 6% of each participant's salary-deferral contributions" and makes supplemental contributions based on an employee's age and length of service. Id. at ¶¶ 71-72. Although the Plan allows McKesson Corporation to choose between initially contributing cash or company stock, it requires fiduciaries to convert cash contributions into company stock "as soon as practicable." McKesson Plan at § 4.3(a) & (c). Plaintiffs allege that "virtually 100%" of the Plan's assets "other than each participant's salary-deferral contributions was held and invested in . . . [c]ompany [s]tock" and that company stock "comprised approximately 75% of the overall value of the . . . Plan assets." CAC ¶¶ 75-76. The Plan does not allow participants to direct sales of company contributions until they reach the age of fifty-five, or when their age plus years of service exceed sixty-five years. Id. at ¶ 77. Thus, participants "could not safely diversify" their holdings. Id.

2. The Merger

In mid-1998, McKesson Corporation and HBOC began to discuss the prospect of merging. HBOC had hired Arthur Andersen ("Andersen") to audit its 1996 and 1997 financial statements and to review its first and second quarter 1998 financial statements. Id. at ¶ 88. McKesson Corporation retained Deloitte & Touche LLP ("Deloitte") to perform accounting due diligence of HBOC. Id. at ¶ 87. Deloitte reviewed Andersen's audit work papers. Id. at ¶ 88. Deloitte also spoke with HBOC accounting personnel and reviewed additional financial schedules. Id. at ¶ 89. On July 12, 1998, Deloitte reported four accounting problems: (1) in 1996 and 1997, HBOC had recognized revenue from customer transactions before the customer had actually committed to purchase, violating generally accepted accounting principles ("GAAP"); (2) HBOC had overstated revenue by failing to defer revenue from maintenance service contracts in violation of GAAP; (3) HBOC had established excess reserves related to acquisitions, and had improperly used these reserves in 1997 and the first and second quarters of 1998; and (4) HBOC had understated the reserve for potentially uncollectible customer accounts receivable by approximately $10 million to $25 million. Id. at ¶¶ 90-100. Deloitte presented these findings to the McKesson Corporation Board-including Pulido, Richard Hawkins, McKesson Corporation's Chief Financial Officer, and Heidi Yodowitz, McKesson Corporation's Controller-in a meeting on July 13, 1998. Id. at ¶ 101. In addition, Deloitte stated that it was highly likely that the United States Securities and Exchange Commission ("SEC") would require HBOC to restate its financials. Id. Thus, on July 15, 1998 McKesson Corporation announced that it would not merge with HBOC. Id. at ¶ 102.

On August 19, 1998 the Center for Financial Research and Analysis-an independent financial research organization-reported that HBOC's revenue recognition had probably been too aggressive ("the CFRA Report"). Id. at ¶ 103. The CFRA Report noted several problems with HBOC's bookkeeping, including: (1) an increase in HBOC's accounts receivable, including unbilled balances; (2) a decrease in HBOC's cash flow from operations compared to reported net income; (3) questionable acquisition-related special charges; and (4) the reversal of charges into net income. Id. at ¶¶ 103-104. These problems were "in most respects identical" to the problems Deloitte identified. Id. at ¶ 105. The CFRA Report also noted that "several insiders had sold a significant number of HBOC shares during 1998." Id. at ¶ 106.

However, on October 13, 1998 McKesson Corporation and HBOC again discussed merging. Id. at ¶ 108. McKesson Corporation and HBOC agreed to a share exchange ratio of 0.37 McKesson Corporation shares for each share of HBOC. This was an 11% premium over the closing price of HBOC stock on October 16, 1998, but was more favorable to McKesson Corporation than previously-agreed-upon exchange ratios. Id. at ¶¶ 108-109. Deloitte updated its accounting due diligence, finding the same four accounting problems as in its earlier report. Id. at ¶ 113. Deloitte expressed these concerns to McKesson Corporation's Board. Id. at ¶ 114. McKesson Corporation's Board and Directors thus "knew . . . that HBOC's financial statements were suspect and there was a substantial risk that the SEC would require" HBOC to restate them. Id. at ¶ 116. Despite the fact that McKesson Corporation received a "Fairness Opinion" from Bear Stearns, McKesson Corporation's Board members knew that it was "incomplete" because they had "instructed Bear Stearns to ignore the information uncovered by Deloitte." Id. at ¶¶ 118-121. McKesson Corporation's Board and Directors also knew that "[t]he proposed merger . . . raised many substantial and very legitimate risk factors": that (1) 75% of all mergers fail to achieve expected results, (2) McKesson Corporation and HBOC were very different, and (3) both companies "had [recently] acquired numerous other businesses." Id. at ¶ 122. Finally, Pulido, McCall and Bergonzi "had a financial interest in seeing to it that the merger was completed, in the form of stock options and restricted stock that would vest." Id. Nevertheless, the shareholders of both companies approved the merger on January 12, 1999. Id. at ¶¶ 125-126. HBOC became a wholly-owned subsidiary of McKesson and the two companies became known as McKesson HBOC. Id. at ¶ 12.

On April 1, 1999, several months after the merger of the companies, McKesson merged HBOC's employee benefits plan with the Plan. Id. at ¶ 25. Participants in the HBOC Plan received 0.37 shares of McKesson HBOC stock for each HBOC share held in their accounts. Id. at ¶ 127. However, "the McKesson [HBOC] Plan [f]iduciaries failed to consider whether the investment policies and guidelines for the McKesson [Corporation] Plan remained prudent, or whether [c]ompany [c]ontributions should be made in cash in lieu of McKesson [HBOC] [c]ompany [s]tock." Id. at ¶ 129.

3. The Post-Merger Accounting Restatements

On April 28, 1999 McKesson HBOC announced that HBOC had improperly recorded $16 million in software revenue during the first three quarters of the fiscal year ending March 31, 1999 and $26.2 million in the fourth quarter. Id. at ¶¶ 131-132. McKesson HBOC reversed these sales. The company also noted that the audit process was ongoing and that it might identify additional contingent sales. Id. at ¶ 131. The company also adjusted its fiscal year 2000 earnings per share projection downward and announced that it expected software revenues of the HBOC subsidiary to decrease from fiscal 1999. Id. After this announcement, McKesson HBOC's stock decreased from a closing price of $65.75 on April 27, 1999, to a closing price of $34.50 on April 28, 1999. Id. at ¶ 133.

On May 25, 1999 McKesson HBOC announced that it was making additional downward adjustments to software revenues and earnings for the March 31, 1999 fiscal year and quarters. Id. at ¶ 134. The company also stated that it might be required to make similar adjustments with respect to previous fiscal years. Id. These revisions all related to the HBOC subsidiary. Id. McKesson HBOC noted that the company's review of HBOC's financial statements was ongoing, and that it was delaying issuing its financial results for the March 31, 1999 fiscal year. Id. After this announcement, McKesson HBOC's stock decreased from a closing price of $38.18 on May 24, 1999, to a closing price of $33.50 on May 25, 1999. Id. at ¶ 135.

On July 14, 1999 McKesson HBOC announced that it had completed its investigation and was restating revenues by $245.8 million for the March 31, 1999 fiscal year, $48.8 million for the March 31, 1998 fiscal year, and $33.2 million for the March 31, 1997 fiscal year. Id. at ¶ 136. McKesson HBOC also noted that it would revise its net income downward by $152.2 million for the March 31, 1999 fiscal year, $25.8 million for the March 31, 1998 fiscal year, and $13.5 million for the March 31, 1997 fiscal year. Id. In addition, McKesson HBOC noted that it would recognize only some of these reversed revenues in the future. Id. at ¶ 137. The average closing price of McKesson HBOC stock for the months of May, June, July, and August 1999, were $33.14, $31.31, $30.22, and $30.46, respectively. Id. at ¶ 244. Yet during this time, the Plan fiduciaries "failed to consider whether the investment policies and guidelines for the . . . Plan remained prudent . . . ." Id. at ¶ 140.

B. Procedural Background

Discovery in this action was stayed pending the stay of discovery in In re McKesson HBOC Securities Litigation ("the Securities Litigation"). On September 30, 2002 the court granted the Defendants' Motions to Dismiss the Chang Plaintiffs' First Amended Complaint. See In re McKesson HBOC, Inc. ERISA Litigation, 2002 WL 31431588 (N.D. Cal. 2002) ("the September Order"). After the hearing on the motions to dismiss the FAC and prior to the issuance of the September Order, the court consolidated Adams v. McKesson Information Sys., C-02-00685 RMW, with Chang v. McKesson, C-00-20030 RMW. The court recaptioned the action In re McKesson ERISA Litigation.

1. The September Order

In the September Order, the court concluded that the McKesson Corporation Board and Compensation Committee and McKesson HBOC Board and Compensation Committee are ERISA fiduciaries "with regard to the investment policies of the . . . Plan and [thus] are proper defendants for the alleged breaches of fiduciary duty arising out of investment policy." September Order at *9-*10. However, the court held that plaintiffs could only seek redress from McKesson HBOC itself on their claims stemming from its decision to contribute stock, rather than cash, to the Plan. Id. at *10.

The court addressed plaintiffs' argument that defendants breached their duties under ERISA by following the Plan's terms and investing in McKesson Corporation or McKesson HBOC stock. The court explained that ERISA exempts ESOPs from its general duty of diversification. See 29 U.S.C. § 1104(a)(2). The court then noted that two out-of-circuit cases, Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995) and Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995), hold that "ERISA imposes fiduciary duties upon ESOP fiduciaries which may require the[m] to deviate from a plan requirement to invest in company stock." September Order at *4. The court expressed doubts about these cases:

The logic of Moench and Kuper is not compelling. If there is no duty to diversify ESOP plan assets under the statute, it logically follows that there can be no claim for breach of fiduciary duty arising out of a failure to diversify, or in other words, arising out of allowing the plan to become heavily weighted in company stock. Both cases in effect hold that ERISA's fiduciary duty of prudent investment trumps the express statutory exemption from the duty to diversify.

Id. at *5. Moreover, the court noted that Moench and Kuper "may be distinguishable" on the grounds that both cases involved ESOP plans that required the companies to make contributions "primarily" in company stock, while the Plan requires McKesson HBOC to make all contributions either (1) in stock or (2) in cash that is converted to stock "as soon as practicable." Id. Thus, the court reasoned, the Plan fiduciaries have less discretion than the fiduciaries in Moench and Kuper. Id. Nevertheless, because the Plan gave fiduciaries some discretion-the choice between making contributions in stock or cash-the court determined that it could not foreclose the possibility that the fiduciaries could be liable for abusing this discretion. The court set forth a framework to evaluate this issue:

Assuming that Moench and Kuper apply, then an ESOP fiduciary may not blindly follow an ESOP plan's directive to invest in company stock and may be liable for breach of fiduciary duty if such investment was imprudent. However, these cases recognize that there is a presumption that the fiduciary's decision to follow the plan was reasonable and the presumption may be rebutted by showing that a prudent fiduciary acting under similar circumstances would have made a different investment decision and that the fiduciary abused his, her or its discretion by following the Plan and investing in employer securities. Plaintiffs must also demonstrate a causal link, specifically, that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.

Id. at *5 (citations omitted).

The court then applied this standard and held that the FAC was deficient in several ways. First, the court concluded that plaintiffs failed to allege "facts, not mere conclusions," that defendants abused their discretion by allowing the Plan to become overly weighted in company stock before the merger. Id. at *6.

Second, the court considered plaintiffs' claim that defendants breached their duties by failing to divest the Plan of company stock after the merger but before the announcement of HBOC's accounting irregularities. The court determined that this theory was flawed because plaintiffs had failed to articulate what lawful conduct defendants could have taken to stop the Plan from declining in value. Indeed, the court reasoned, the McKesson HBOC fiduciaries could only have (1) sold the stock without disclosing HBOC's wrongdoing, thus engaging in illegal insider trading or (2) disclosed the improprieties, causing the stock price to fall immediately. Id. at *6-*7. Thus, the court held that plaintiffs failed to allege that this purported breach caused the Plan's losses. Id. at *7.

Third, the court evaluated plaintiffs' assertion that defendants breached their duties by continuing to invest in company stock after the merger. Id. at *8. Defendants claimed that (1) the company increased the number of shares it contributed after the merger to accommodate the lower stock price and (2) company stock has outperformed the market since the fallout over HBOC's wrongdoing. Id. The court rejected defendants' arguments, holding that they were "evidentiary in nature and go beyond what may properly be considered on a motion to dismiss." Id. However, the court dismissed this count with leave to plead the underlying facts with greater specificity. Id.

Fourth, the court acknowledged that, if plead in more detail, plaintiffs could state a claim for McKesson HBOC's failure to make contributions in the form of cash, as opposed to stock. Id. Finally, the court dismissed plaintiffs' co-fiduciary liability claims because they failed to explain (1) what duties defendants breached, (2) which defendants knew about these breaches, (3) how each defendant did not make reasonable efforts to remedy the breaches, (4) what acts defendants took to conceal information, and (5) what damages or harm resulted. Id. at *17.

2. The CAC

Plaintiffs' seventh cause of action claims that individual McKesson Corporation Board members breached their fiduciary duties of prudence, loyalty, and diversification under ERISA § 404, 29 U.S.C. § 1104 ("section 404") during the period before the January 12, 1999 merger. CAC ¶¶ 196-220. Plaintiffs' eighth cause of action alleges that individual McKesson HBOC Board members breached their section 404 duties between January 12, 1999 through April 20, 1999: after the merger but before McKesson HBOC publicized HBOC's accounting irregularities. Id. at ¶¶ 221-235. Plaintiffs' ninth cause of action asserts that the individual McKesson HBOC Board members breached their section 404 duties after the announcement on April 28, 1999. Id. at ¶¶ 236-251. Plaintiffs' tenth cause of action claims that McKesson HBOC (1) breached its duties under section 404 by making contributions in stock rather than cash and (2) is liable for the individual Board members' wrongdoing "under the law of agency, including the principles of vicarious liability and respondeat superior." Id. at ¶¶ 252-258.*fn4 Plaintiffs' twelfth cause of action alleges that defendants are liable for co-fiduciary liability under ERISA § 405(a), 29 U.S.C. §§ 1105(a)(2)-(3) ("section 405"). Id. at ¶¶ 272-277. Plaintiffs' thirteen cause of action claims that McCall is liable under section 404 and under equitable principles. Id. at ¶¶ 278-281.

3. The Proposed SCAC

On May 25, 2005 plaintiffs requested leave to file the SCAC.*fn5 The SCAC adds citations and quotes from articles to support the proposition that "75% of mergers fail to achieve expected results." SCAC ¶ 122(a). The SCAC also alleges that McKesson HBOC, McCall, Pulido, Bergonzi, and Hawkins engaged in a variety of post-merger wrongdoing, including improperly recognizing revenue from thirty-seven contracts in the first quarter after the merger. Id. at ¶ 140A. One contract in particular, with Data General Corporation, led to McKesson HBOC's improper recognition of $20 million in revenues. Id. McCall and Hawkins were "directly involved" in the Data General transaction. Id. at ¶ 140B, 140D(d). Bergonzi "knew of and participated in" this fraud. Id. at ¶ 140D(a). Pulido also knew about the fraud and yet failed to make the 1999 plan contribution in cash. Id. at ¶ 140C. Moreover, "[d]efendants neither considered nor evaluated the prudence of the investment policy of the . . . Plan regarding its holdings in McKesson [HBOC] stock, or whether to continue contributing cash or . . . [s]tock to the Plan . . . at any time during this timeframe . . . ." Id. at ¶ 140E (emphasis in original). Finally, McKesson HBOC's decision to contribute stock in 1999 occurred on April 26, 1999-after the company knew that it was going to have to restate its earnings-and was therefore imprudent.

II. ANALYSIS

A. Legal Standards

1. Motions to Dismiss

Dismissal under Federal Rule of Civil Procedure Rule 12(b)(6) is proper only when a complaint exhibits either a "lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). The court must accept the facts alleged in the complaint as true. Id. "A complaint should not be dismissed 'unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Gilligan v. Jamco Dev.Corp., 108 F.3d 246, 248 (9th Cir. 1997) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).*fn6

2. Motion for Leave to Amend

Federal Rule of Civil Procedure 15(a) instructs courts to give leave to amend "when justice so requires." Courts weigh four factors when deciding whether the grant leave to amend: "undue delay, bad faith or dilatory motive, futility of amendment, and prejudice to the opposing party." Serpa v. SBC Telecomms., Inc., 318 F. Supp. 2d 865, 870 (N.D. Cal. 2004). "The party opposing amendment bears the burden" of proving that leave is inappropriate. DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 187 (9th Cir. 1987). Futility alone can be grounds for denying a motion for leave to amend. See Allen v. City of Beverly Hills, 911 F.2d 367, 374 (9th Cir. 1990).

B. Motion to Dismiss

ERISA section 502(a) allows participants to seek relief on behalf of an ERISA plan. See 29 U.S.C. § 1132(a)(2). Under ERISA section 409 ("section 409"), any ERISA plan fiduciary who breaches a fiduciary duty may be personally liable for any losses resulting from the breach. See 29 U.S.C. § 1109(a).

1. Section 404

Plaintiffs first allege that defendants breached their ERISA fiduciary duties of prudence, loyalty, and diversification. Section 404 requires ERISA fiduciaries to discharge their duties (1) "solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries" and (2) with "the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims." 29 U.S.C. § 1104(a)(1)(A) and (B). In addition, section 404 requires fiduciaries to "diversif[y] the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so." 29 U.S.C. § 1104(a)(1)(C). However, section 404 also provides that "acquisition or holding" of ESOPs do not violate "the diversification requirement" and "the prudence requirement (only to the extent that it requires diversification)." 29 U.S.C. § 1104(a)(2).

Moench considered the relationship between these provisions. In that case, Statewide Bancorp ("Statewide") offered an ESOP that required assets to be invested "primarily" in Statewide stock. However, Statewide's ESOP Committee interpreted the plan to mandate investment in Statewide stock. Statewide's common stock fell from $18.25 per share in 1989 to less than 25 cents per share in 1991, when it filed for bankruptcy. Despite repeated warnings from federal authorities and Statewide insiders, "the Committee [never] met to discuss any possible effects on the ESOP or any actions that it should take." Moench, 62 F.3d at 559. Moench, a participant in the ESOP, then sued for breach of section 404. The district court granted summary judgment in favor of the Committee, reasoning that the Committee's interpretation of the ESOP was entitled substantial deference. Id. at 562.

The Third Circuit disagreed. The Third Circuit first held that because "[t]he Committee points to nothing in the record indicating that it . . . actually deliberated, discussed or interpreted the plan in any formal manner," a de novo standard of review applied to its interpretation of the ESOP. Id. at 568. Thus, construing the ESOP, the Third Circuit determined that it "did not absolutely require the Committee to invest exclusively in Statewide stock." Id. at 568. The Third Circuit then considered whether the Committee could ever be liable for investing solely in Statewide stock in light of the fact that ESOPs are "'designed to invest primarily in qualifying employer securities'" and thus, "unlike pension plans, are not intended to guarantee retirement benefits." Id. (quoting 29 U.S.C. § 1107(d)(6)(A)). The Third Circuit explained that "under normal circumstances, ESOP fiduciaries cannot be taken to task for failing to diversify investments, regardless of how prudent diversification would be under the terms of an ordinary non-ESOP pension plan." Id. Nevertheless, analogizing to trust law, the Third Circuit reasoned that "there may come a time" when investing in company stock "no longer serve the purpose of the trust, or the settlor's intent."

Id. at 571. Accordingly, the Third Circuit held that an abuse of discretion standard applied to an ESOP fiduciary's decision to continue investing in employer securities:

[W]e hold that in the first instance, an ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision. However, the plaintiff may overcome that presumption by establishing that the fiduciary abused its discretion by investing in employer securities. In attempting to rebut the presumption, the plaintiff may introduce evidence that 'owing to circumstances not known to the settlor and not anticipated by him [the making of such investment] would defeat or substantially impair the accomplishment of the purposes of the trust.' As in all trust cases, in reviewing the fiduciary's actions, the court must be governed by the intent behind the trust-in other words, the plaintiff must show that the ERISA fiduciary could not have believed reasonably that continued adherence to the ESOP's direction was in keeping with the settlor's expectations of how a prudent trustee would operate.

Id. at 571 (quoting Restatement (Second) Trusts § 227, com. g). The Third Circuit remanded the case for the district court to evaluate whether "the precipitous decline in the price of Statewide stock, as well as the Committee's knowledge of its impending collapse and its members' own conflicted status" constituted "changed circumstances to such an extent that the Committee properly could effectuate the purposes of the trust only by deviating from the trust's direction . . . ." Id. at 572.

In Kuper, the Sixth Circuit adopted Moench's abuse-of-discretion standard. Quantum Chemical Corporation sold its Emery Division to Henkel Corporation. The agreement provided that Henkel would accept a trust-to-trust transfer of Quantum employees' ESOP assets. However, the transfer did not actually occur until a year and a half after Henkel purchased Emery. While the transfer was pending, Quantum's stock price declined from $50 per share to $10. Although the ESOP provided only that it was "designed to invest primarily" in Quantum stock, no members of the Quantum benefits committee ever considered diversifying or liquidating the plan. Kuper, 66 F.3d at 1450-51. Plaintiffs sued under section 404. A bench trial resulted in a judgment for defendants.

The Sixth Circuit affirmed. The Sixth Circuit rejected plaintiffs' theory that defendants had breached their duties under section 404 by failing to consider diversifying or liquidating plan assets during the pendency of the trust-to-trust transfer. Id. at 1459-60. The Sixth Circuit reasoned that "a fiduciary's failure to investigate an investment decision alone is not sufficient to show that the decision was not reasonable. Instead, to show that an investment decision breached a fiduciary's duty to act reasonably . . . a plaintiff must show a causal link between the failure to investigate and the harm suffered by the plan." Id. Although plaintiffs had introduced evidence that (1) defendants were aware that Quantum's stock would likely decrease and (2) Quantum's CEO had sold his shares, the Sixth Circuit noted that defendants had also presented evidence that Quantum's stock price fluctuated and that "several investment advisors recommended holding Quantum stock." Id. at 1460. Thus, the Sixth Circuit held that plaintiffs had failed to rebut the Moench presumption that continuing to hold company stock was reasonable. Id. at 1459-60.

However, Wright v. Oregon Metallurgical Corp., 360 F.3d 1090 (9th Cir. 2004) casts doubt on whether Moench and Kuper are the law of this circuit. Oregon Metallurgical Group ("Oremet") established an ESOP that allowed participants to sell up to 40% of company shares in their accounts. As Oremet's stock price rose, participants requested greater diversification rights. Oremet thus amended the plan to permit participants to sell up to 85% of their company shares. Oremet then merged with Allegheny Teledyne. The price of Oremet stock increased from about $23 to about $33 per share in just four days. Plaintiffs petitioned Oremet to sell all their company stock, but Oremet refused. Eventually, the price of Oremet stock decreased to about $8 per share. Plaintiffs sued under section 404. The district court dismissed their claims.

The Ninth Circuit affirmed. Citing the September Order, the Ninth Circuit disapproved of Moench, noting that its "intermediate prudence standard is difficult to reconcile with ERISA's statutory text, which exempts EIAPs from the prudence requirement to the extent it requires diversification." Id. at 1097. The Ninth Circuit explained that "[i]nterpreting ERISA's prudence requirement to subject EIAPs to an albeit tempered duty to diversify arguably threatens to eviscerate congressional intent and the guiding rationale behind EIAPs themselves." Indeed, the Ninth Circuit commented, "[u]nlike traditional pension plans governed by ERISA, EIAPs-and ESOPs in particular-are not intended to guarantee retirement benefits and indeed, by their very nature, 'place[ ] employee retirement assets at much greater risk than does the typical diversified ERISA plan.'" Id. at 1097 n.2 (quoting Martin v. Feilen, 965 F.2d 660, 664 (8th Cir.1992) (alteration in original). Moreover, the Ninth Circuit reasoned, "[t]he Moench standard seems problematic to the extent that it inadvertently encourages corporate officers to utilize inside information for the exclusive benefit of the corporation and its employees. Such activities could potentially run afoul of the federal securities laws." Id. at 1098 n.4.

Nevertheless, the Ninth Circuit noted that "the facts of this case do not necessitate that we decide whether the duty to diversify survives the statutory text of § 1104(a)(2)" because "[p]laintiffs' prudence claim is unavailing under any existing approach." Id. at 1097-98. The Ninth Circuit reasoned that if there is no duty to diversify ESOPs, then "[d]efendants' refusal to diversify the [p]lan beyond the level of 85% clearly does not constitute an actionable violation of ERISA's prudence requirement." Id. at 1098. On the other hand, the Ninth Circuit reasoned, even if Moench applies, plaintiffs had failed to allege that Oremet's financial situation was so dire that plan fiduciaries abused their discretion by continuing to hold company stock:

The published accounts of Oremet's earnings and financial fundamentals during the relevant period, attached to the complaint, demonstrate that Oremet was far from the sort of deteriorating financial circumstances involved in Moench and was, in fact, profitable and paying substantial dividends throughout that period . . . . Mere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the Moench presumption . . . . The Moench standard does not compel fiduciaries to permit further diversification of EIAP pension plans upon each subsequent rise in share value attributed to a merger, or, for that matter, any other major corporate development.

Id. at 1098-99. Against this backdrop, the court now considers plaintiffs' claims.

a. Count Seven

Plaintiffs' seventh cause of action in the CAC alleges that McKesson Corporation's Board members breached their fiduciary duties before the January 12, 1999 merger. The pre-merger McKesson Corporation Board included Pulido-the CEO of McKesson Corporation and McKesson HBOC from April 1, 1997 until his resignation on July 15, 1999-and McKesson Corporation Outside Directors Friedman, Pietruski, Reichardt, and Seelenfreund. CAC ¶ 20.*fn7 Plaintiffs claim that the pre-merger McKesson Corporation Board members: (1) allowed the Plan to become saturated with McKesson Corporation stock; (2) failed to perform an adequate fiduciary review of the Plan in light of the merger's unique risks; and (3) continued to serve as fiduciaries despite a conflict of interest. CAC ¶¶ 198-220.

i. Failing to Diversify the Plan

Plaintiffs claim that on October 18, 1998-when McKesson Corporation announced that it was going to merge with HBOC-McKesson Corporation stock comprised (1) all of the ESOP portion of the Plan and (2) three-quarters of Plan's total assets. CAC ¶ 199. Plaintiffs note that a plan need only contain 50% employer securities to qualify as an ESOP. Id. at ¶ 204. Thus, plaintiffs argue that the pre-merger McKesson Corporation Board members breached their fiduciary duties by failing to diversify the Plan in light of its "over-concentration" in company stock.

Plaintiffs fail to state a claim under Wright. Plaintiffs contend that the merger was dangerous because (1) "HBOC's market capitalization was actually greater than McKesson [Corporation's]" (2) 75% of all mergers "fail to achieve the financial results contemplated by the parties," (3) McKesson Corporation and HBOC were "different businesses operating in different segments of the healthcare industry," (4) McKesson Corporation and HBOC had recently "acquired numerous other businesses," thus exacerbating "[t]he potential difficulties in integrating" the two companies, (5) the CFRA Report and Deloitte questioned HBOC's accounting practices, and (6) "[h]aving 'all your eggs in one basket' is necessarily and inherently risky." CAC ¶¶ 208-211 (emphasis in original).*fn8 At best, plaintiffs' allegations establish that a reasonable fiduciary would have recognized that the merger might cause loss to the Plan. Under Wright, the mere possibility of a decline in stock price is insufficient to state a claim under section 404. See Wright, 360 F.3d at 1099 ("[m]ere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the Moench presumption") (emphasis added). Because plaintiffs fail to allege that McKesson Corporation faced "the sort of deteriorating financial circumstances involved in Moench," Wright, 360 F.3d at 1098, the court dismisses this aspect of their seventh cause of action.*fn9

ii. Failing to Conduct a Fiduciary Review

Plaintiffs next allege that the pre-merger McKesson Corporation Board members breached their duties under section 404 by not "conduct[ing] a thorough ERISA fiduciary review for the purposes of determining the propriety of maintaining such a heavily weighted concentration of . . . Plan assets in McKesson [Corporation] stock" in anticipation of the merger. CAC ¶209. However, even if plaintiffs prove that the McKesson Corporation Board members failed to conduct such a review, "a fiduciary's failure to investigate an investment decision alone is not sufficient to show that the decision was not reasonable. Instead, to show that an investment decision breached a fiduciary's duty to act reasonably . . . a plaintiff must show a causal link between the failure to investigate and the harm suffered by the plan." Kuper, 66 F.3d at 1459; see also September Order at *5 (requiring plaintiffs to allege that "an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident"). As noted, continuing to invest in McKesson Corporation stock before the merger was not "improvident" within the meaning of Moench. Thus, the McKesson Corporation Board members cannot be liable for failing to investigate other investment options. The court dismisses plaintiffs' pre-merger failure to review claim.

iii. Conflict of Interest

Plaintiffs allege that Pulido, McCall, and Bergonzi had a conflict of interest because they stood to gain from the merger, even if it meant jeopardizing Plan assets. CAC ¶¶ 211-216. However, plaintiffs bring their seventh cause of action against "the [p]re-[m]erger [i]ndividual McKesson [Corporation] Board [m]embers." Id. at ¶ 197. Plaintiffs allege that Bergonzi and McCall worked for HBOC before the merger. Id. at ¶ 14. Thus, the court will evaluate plaintiffs' conflict of interest claim only as it pertains to Pulido. Plaintiffs allege that Pulido received "as much as $82.6 million" in stock options and restricted stock because of the merger. Id. at ¶ 211. This bare assertion does not support an actionable breach of duty under section 404. The fact that Pulido's McKesson HBOC stock vested more quickly because of the merger would seem to align his interest with other company shareholders. Pulido would gain little from a course of conduct that simultaneously increased the number of McKesson HBOC shares he held and drove McKesson HBOC's stock price down. In addition, ERISA expressly allows Board members to serve as ESOP fiduciaries. See 29 U.S.C. § 1108(c)(3). Recognizing a viable conflict of interest claim in these circumstances would likely require individuals such as Pulido to relinquish one of their posts before consummating any major deal. Congress has expressed a contrary intent. For these reasons, the court dismisses plaintiffs' seventh cause of action.

b. Count Eight

Plaintiffs' eighth cause of action asserts that the McKesson HBOC Board members breached their fiduciary duties through conduct that occurred (1) after the January 12, 1999 merger and (2) "after allegedly uncovering but before announcing [HBOC's] accounting irregularities on April 28, 1999." CAC ¶ 224. During this time, the McKesson HBOC Board members included Pulido, McCall, McKesson Corporation Oustide Directors Friendman, Reichardt and Seelenfruend, and HBOC Outside Directors Eckbert, Irby, Mayo, and Napier.*fn10 Id. at ¶ 21. The CAC alleges that the post-merger McKesson HBOC Board (1) failed to diversify the Plan, (2) failed to investigate the potential effect of the merger on the Plan, and (3) "plac[ed] themselves in a conflicted position which prevented them . . . from functioning with complete loyalty to the . . . Plan and its participants." CAC ¶¶ 221-235.

i. Failing to Diversify the Plan

There are at least two problems with plaintiffs' post-merger/pre-announcement failure to diversify claim. For one, plaintiffs fail to allege that McKesson HBOC stock actually declined in value after the merger. Accordingly, plaintiffs contend that it was imprudent to continue investing in company stock because, after discovering HBOC's accounting improprieties, the McKesson HBOC Board members knew that McKesson HBOC stock would likely decline. Because Wright requires plaintiffs to plead more than an actual significant downward stock trend to rebut the Moench presumption, plaintiffs' claims that the McKesson HBOC Board members should have recognized the potential for an imminent decline in company stock do not suffice.

In addition, the post-merger/pre-announcement McKesson HBOC Board members would have violated the securities laws if they divested the Plan of company stock before the company publicized HBOC's accounting irregularities. See September Order at *6-*8; Wright, 360 F.3d at 1098 n.4 (criticizing Moench "to the extent that it inadvertently encourages corporate officers to utilize inside information for the exclusive benefit of the corporation and its employees[, which] could potentially run afoul of the federal securities laws"); Employee Benefit Plans, Securities Act Release No. 33-6188, 1980 WL 29482, at *28, n.168 (Feb. 1, 1980) (noting that antifraud provisions apply to a plan's issuance of participation interests and stock purchases by employees). Of course, federal law prohibits trading on the basis of material, non-public information such as HBOC's as-yet-publicized improprieties. See, e.g., U.S. v. O'Hagan, 521 U.S. 642, 643 (1997) ("Under the 'traditional' or 'classical theory' of insider trading liability, a violation of § 10(b) and Rule 10b-5 occurs when a corporate insider trades in his corporation's securities on the basis of material, confidential information he has obtained by reason of his position.").

It is true that courts in other jurisdictions have determined, as a matter of public policy, that ERISA fiduciaries must disclose material nonpublic information. See, e.g., In re Xcel Energy, Inc. Sec., Derivative & ERISA Litig., 312 F. Supp. 2d 1165, 1181-82 (D. Minn. 2004) ("ERISA plan fiduciaries cannot use the securities laws to shield themselves from potential liability for alleged breaches of their statutory duties"). Moreover, in In re Syncor ERISA Litigation, 351 F. Supp. 2d 970, 984 (C.D. Cal. 2004), a California district court declined to follow the September Order's view of the interaction between ERISA and the securities laws. In that case, plaintiffs alleged, inter alia, that defendants had failed to provide plan fiduciaries with information that the company was involved in a bribery scheme. The court denied defendants' motion to dismiss, reasoning that (1) Wright's admonition that Moench was "problematic" to the extent in encouraged securities violations was dicta and (2) "'[a]s a matter of public policy, the statutes should be interpreted to require that persons follow the laws, not undermine them." Id. at 985 (quoting In re Enron, 284 F. Supp. 2d at 567) (emphasis in original).

Syncor relied heavily on In re Enron, 284 F. Supp. 2d 511 (S.D. Tex. 2003). Enron offered suggestions for dealing with the tension between ERISA and the securities laws when a section 404 fiduciary learns material, non-public information that threatens to impair the company's stock value. "First, and foremost," Enron reasoned, fiduciaries can "disclose the information to other shareholders and the public at large." Id. at 566. However, although this course of conduct complies with the securities laws, it would severely harm plan participants: indeed, any such disclosure would immediately cause the company's stock price to drop. See, e.g., West v. Prudential Securities, Inc., 282 F.3d 935, 938 (7th Cir. 2002) ("few propositions in economics are better established than the quick adjustment of securities prices to public information"). Enron also reasoned that selective disclosure to plan participants might be preferable because silence "would only serve to make the harm more widespread." Id. at 565. Yet there are strong countervailing policy considerations. Indeed, selective disclosure would benefit plan participants at the expense of general shareholders. Moreover, participants do not need a remedy under ERISA to obtain relief for a fiduciary's false statements or omissions; indeed, they can invoke the securities laws. In fact, as mentioned above, that is exactly what the Plan has done in this case.*fn11

Finally, nothing in ERISA's suggests that it renders federal securities statutes inapplicable. In fact, the opposite is true. For example, under section 404(c), a participant who exercises "independent control" over assets in his account relieves the plan fiduciary from accountability for any loss sustained. A participant's exercise of control is not "independent" if the "plan fiduciary has concealed material non-public facts regarding the investment . . . ." 29 C.F.R. 2550.404c-1(2)(ii). However, this rule does not apply when "the disclosure of such information by the plan fiduciary to the participant . . . would violate any provision of federal law . . . which is not preempted by [ERISA]." Id. ERISA does not preempt federal securities laws. See 29 U.S.C. § 1144(d); In the Matter of Cady, Roberts & Co., 40 S.E.C. 907, 1961 WL 60638 at *6 (Nov. 8, 1961) (explaining that a fiduciary may not engage in insider trading). Therefore, under a different subdivision of section 404, a fiduciary cannot be liable for failing to disclose material, non-public information. This suggests that a fiduciary also cannot be liable for failing to diversify a plan when doing so would mean engaging in insider trading. For these reasons, the court dismisses plaintiffs' failure to diversify claim during the post-merger/pre-announcement period.

ii. Failing to Conduct a Fiduciary Review

For the reasons stated above, plaintiffs' failure to investigate claim fails. Because the post-merger/pre-announcement McKesson HBOC Board members did not imprudently fail to diversify the Plan, plaintiffs cannot show that a reasonable investigation would have revealed that failing to diversify the plan was imprudent. See Kuper, 66 F.3d at 1459; September Order at *5.

iii. Conflict of Interest

Plaintiffs' conflict of interest claim alleges only that "insiders and corporate directors are reluctant to sell company stock from a plan at any time, since the plan serves as a ready market for the stock [and] supports the price of the stock; therefore, sales could undermine the price of shares in the marketplace." CA C ¶ 228. These vague statements do not comply with the court's requirement that plaintiffs plead "facts, not mere conclusions" in support of their claims. September Order at *6. For these reasons, the court dismisses plaintiffs' eighth cause of action.

c. Count Nine

Plaintiffs' ninth cause of action alleges that the McKesson HBOC Board members breached their duties of prudence and loyalty after April 28, 1999, when the company brought HBOC's wrongdoing to public light. CAC ¶ 237.

i. Duty of Prudence

Plaintiffs assert that McKesson HBOC's stock price fell from $65.75 per share to $34.50 per share the day after the announcement. Id. at ¶ 243. By May 2000, plaintiffs claim that McKesson HBOC stock was trading for just $15.75 per share. Id. at ¶ 244. Nevertheless, plaintiffs argue, the McKesson HBOC Board members did not consider divesting the Plan of company stock, therefore breaching their duty of prudence. Id. at ¶¶ 246-48.

Plaintiffs again fail to state a claim under Wright. Wright dismissed allegations that fiduciaries breached their duty of prudence by failing to permit plaintiffs to sell company stock when its price increased from $23 per share to $33 per share and then declined about 75% to $8 per share.

See Wright, 360 F.3d at 1095-96. Plaintiffs' allegations are nearly identical: that McKesson HBOC's stock price dropped about 75%: from $65.75 per share to$15.75 per share. Id. at ¶ 243-44. Neither Kuper nor Moench hold that a 75% decline in value is sufficient to rebut the Moench presumption. See Kuper, 66 F.3d at 1459-60 (holding after bench trial that decline of 80%, from $50 per share to $10 per share, did not rebut the Moench presumption); cf. Moench, 62 F.3d at 557, 572 (remanding case for district court to determine whether ESOP fiduciary's failure to sell company stock violated section 404 when company's stock price fell from $18.25 per share to less than 25 cents per share). Moreover, as in Wright, where the Ninth Circuit relied on the fact that Oremet "was, in fact, profitable and paying substantial dividends throughout that period," id. at 1099, plaintiffs reference documents in the CAC that elucidate that McKesson was at all relevant times a thriving company.*fn12 Miller Decl. Supp. McKesson HBOC's Mot. Dism. Ex. E.*fn13 Accordingly, the court dismisses this aspect of count nine.

ii. Duty of Loyalty

Plaintiffs allege that the McKesson HBOC Board members were conducting an ongoing internal audit process during this time. CAC ¶ 242. According to plaintiffs, the McKesson HBOC Board members "faced the specter that their position as Board Members, and any advance knowledge of additional improprieties that were uncovered at HBOC during the course of the investigation, would necessarily taint any decisions they should have considered as ERISA fiduciaries of the . . . Plan during this time frame." Id. Plaintiffs fail to allege a breach of the duty of loyalty. Instead, plaintiffs claim that defendants put themselves in a position where such a breach might have occurred. The court thus dismisses this aspect of count nine.

d. Counts Ten and Twelve

Plaintiffs' tenth cause of action claims that McKesson HBOC (1) breached its duties under section 404 by contributing stock rather than cash to the Plan and (2) is vicariously liable for its Board Members' breaches of duty under agency principles. CAC ¶¶ 253-58. Plaintiffs' twelfth cause of action alleges that the Plan fiduciaries are liable for each others' wrongdoing under section 405. CAC ¶¶ 274.

For the reasons stated above, McKesson HBOC cannot be liable for contributing stock to the Plan.*fn14 Notably, Moench and Kuper involved plans that required employers to invest "primarily" in company stock. See Moench, 62 F.3d at 557; Kuper, 66 F.3d at 1450. As such, the plans gave fiduciaries considerable discretion. Nevertheless, both cases applied the Moench presumption. Thus, the fact that the Plan gave McKesson HBOC the choice between investing in stock or converting cash into stock "as soon as practicable" does not render the Moench presumption inapplicable. See McKesson Plan at § 4.3(a) & (c). Thus, plaintiffs' claim fails.

In addition, both plaintiffs' allegations that (1) McKesson HBOC is liable via agency principles and (2) the Plan fiduciaries are liable under section 405 depend on the court determining that some Plan fiduciaries are liable under section 404. Because the court does not, the court dismisses these allegations.

e. Count Thirteen

Plaintiffs' thirteen cause of action alleges that McCall violated section 404 and should be required to make remedial relief under section 409. CAC ¶ 277. McCall became a member of the HBOC Board of Directors in 1991, and served as President and CEO of HBOC from 1991 until the merger. CAC ¶ 16. After the merger, McCall remained a member of the McKesson HBOC Board until June 21, 1999. Id. Plaintiffs allege that McCall participated in, directed, or otherwise knew of the accounting irregularities at HBOC. Id. at ¶ 278. Plaintiffs distinguish McCall from other fiduciaries who "may have first discovered the full extent of the accounting improprieties in April 1999, and may have been precluded from acting because of insider-trading restrictions." Pls.' Opp. Def. McCall's Mot. Dismiss at 2. Specifically, plaintiffs allege that Gilbertson implicated McCall after pleading guilty to committing accounting improprieties. Id. Therefore, plaintiffs contend, even if McCall was precluded from disclosing material nonpublic information to Plan participants, or from divesting the Plan of company stock, he should still be required to restore the losses he caused under principles of equity. Plaintiffs submit that absent equitable relief, McCall would "profit" from his alleged wrongdoings by hiding behind the securities laws. CAC ¶ 280. Finally, plaintiffs suggest that the equitable doctrine of unclean hands makes McCall liable.

However, McCall's alleged wrongdoings fall within the purview of federal securities laws. As plaintiffs have noted, the allegations of fact against McCall in the CAC "were adequate for the Court to find sufficient evidence of scienter-knowing and intentional fraudulent conduct-under the securities law[s], in the McKesson securities litigation." Pls.' Opp. Def. McCall's Motion Dismiss at 19. The court is unwilling to create new law under ERISA when plaintiffs may obtain the same relief elsewhere by conventional means. The court is also not aware of any case in which a plaintiff has received relief under the doctrine of unclean hands. Indeed, unclean hands is an equitable defense, not a cause of action. The court therefore dismisses plaintiffs' thirteenth cause of action.

C. Motion for Leave to Amend

1. Count Seven Under the SCAC

The SCAC's only change to count seven-plaintiffs' pre-merger breach claim-is additional citations for the proposition that "75% of all mergers fail to achieve expected results." SCAC ¶ 122(a). Under Wright and Moench, this allegation does not reveal that the pre-merger McKesson Corporation Board members abused their discretion by continuing to invest in company stock during the premerger/pre-announcement period. Thus, plaintiffs' proposed amendment is futile.

2. Count Eight Under the SCAC

With respect to plaintiffs' post-merger/pre-announcement claim, the SCAC adds allegations that McCall, Pulido, Hawkins, and Bergonzi "participated in" and "knew, or should have known, that fraudulent and illegal conduct which impaired McKesson [HBOC] [s]tock . . . occurred at McKesson [HBOC], under the direction of supervision of senior McKesson [HBOC] officers, from the first day of the merger with HBOC on January 12, 1999." SCAC ¶ 140A (emphasis in original).*fn15 Plaintiffs argue that an ESOP fiduciary who continues to invest in company stock despite being aware of or involved in fraud breaches their duties of loyalty and prudence.

a. Breach of Duty of Loyalty Claim

The flaw in plaintiffs' breach of loyalty claim is that none of their new allegations relate to the actual administration of the Plan. Indeed, the SCAC describes "improper recognition" of "thirty-seven contracts" and "use of and accounting for 'side letters' and other forms of contingencies." SCAC ¶¶ 140A-B. However, section 404 does not prohibit corporate wrongdoing that is wholly unrelated to plan administration. Indeed, that provision states that "a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries." 29 U.S.C. § 1104(1) (emphasis added). Although plaintiffs may have fraud or securities claims against McKesson HBOC, McCall, Pulido, Hawkins, and Bergonzi -and indeed, the Plan is a plaintiff in the related Securities Litigation-accepting plaintiffs' duty of loyalty theory here would extend section 404 beyond its express text. See In re WorldCom, Inc. ERISA Litig., 263 F. Supp. 2d 745, 767-68 (S.D. N.Y. 2003) (dismissing claim for breach of loyalty under section 404 despite claims of accounting fraud because "[t]he issue . . . is whether the defendant took an action to affect plan participants adversely while performing a fiduciary function" and "[p]laintiffs do not allege that [defendant's] personal investments caused him to take or fail to take any actions detrimental to the Plan while he was wearing his 'fiduciary hat') (emphasis added).

b. Breach of Duty of Prudence Claim

Plaintiffs assert that McCall, Pulido, Hawkins, and Bergonzi's alleged fraud rendered continued investment in McKesson HBOC stock imprudent during the pre-announcement period. Plaintiffs rely on Syncor, where high level managers at Syncor were involved in an international bribery scheme. Syncor, 351 F. Supp. 2d at 970. Another company's pre-merger due diligence revealed the wrongdoing, causing Syncor stock to lose half its value in just two trading days. Plaintiffs sued for violation of the duty of prudence. The court seized upon a line from Wright to hold that plaintiffs may rebut the Moench presumption by alleging either that (1) a company faced impending bankruptcy or (2) was being seriously mismanaged:

The Court in Wright did not state that a company must be on the brink of collapse. Wright cites to the Lalonde district court case which was subsequently overruled by the First Circuit. The Ninth Circuit relies on language in Lalonde stating that the presumption of reasonableness may be overcome when a decline in employer stock is combined with 'evidence that the company is on the brink of collapse or undergoing serious mismanagement.' The word 'or' indicates that the company may be on the brink of collapse or facing mismanagement.

Syncor, 351 F. Supp. 2d at 981-82 (citations omitted). The court then distinguished Wright on the grounds that the plaintiffs in the case at bar "ha[d] not merely alleged stock fluctuations" but had also "alleged that [d]efendants seriously mismanaged the company." Id. at 980. The court thus denied Syncor's motion to dismiss because plaintiffs had pled that the company knew or should have known about the bribery. Id. at 982.*fn16

The court respectfully submits that Syncor is not persuasive. For one, as Syncor acknowledged, Wright's passing reference to mismanagement alone rebutting the Moench presumption comes entirely from Lalonde v. Textron, Inc., 270 F. Supp. 2d 272 (D. R.I. 2003), which the First Circuit later overruled. See Lalonde v. Textron, Inc., 369 F.3d 1 (1st Cir. 2004). Moreover, Wright confirmed that it read Moench to require allegations of impending collapse by distinguishing Stein v. Smith, 270 F. Supp. 2d 157 (D. Mass. 2003) and Rankin v. Rots, 278 F.Supp. 2d 853 (E.D. Mich. 2003)-two cases that denied motions to dismiss under Moench-on the grounds that "the allegations in Smith clearly implicated the company's viability as an ongoing concern" and "in Rankin, the company at issue . . . went bankrupt." Wright, 360 F.3d at 1099 n.5. Finally, the court does not understand how misconduct that does not threaten participants' entire savings can rebut the Moench presumption.*fn17 ERISA is not a tort statute or a civility code. Accordingly, an investment is not imprudent simply because a bad actor makes it-an investment is imprudent only when it places a plan in serious jeopardy.*fn18 Finally, plaintiffs' proposed amendment does not cure the problem that selling McKesson HBOC stock to diversify the Plan on the basis of material, non-public information would have violated the securities laws.

Plaintiffs also argue that the SCAC alleges that the McKesson HBOC Board members never "considered nor evaluated the prudence of the investment policy of the McKesson [HBOC] Plan regarding its holdings in McKesson [HBOC] stock, or whether to continue contributing cash or . . . [s]tock to the Plan . . . at any time during this timeframe . . . ." Id. at ¶ 140E (emphasis in original). Plaintiffs claim that the Moench presumption cannot apply when fiduciaries never exercise their discretion. However, plaintiffs in Kuper made an identical claim. See Kuper, 66 F.3d at 1450-51 (alleging that no member of the Quantum benefits committee ever considered altering the ESOP). Kuper nevertheless applied the Moench presumption. The court thus rejects plaintiffs' argument. Because amendment would be futile, the court denies plaintiffs' motion for leave to file the SCAC.

III. ORDER

For the foregoing reasons, the court grants defendants' motions to dismiss and denies plaintiffs' motion for leave to file an amended complaint.


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