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Baird v. Blackrock Institutional Trust Co., N.A.

United States District Court, N.D. California

September 3, 2019

CHARLES BAIRD, et al., Plaintiffs,
v.
BLACKROCK INSTITUTIONAL TRUST COMPANY, N.A., et al., Defendants.

          ORDER ON MOTIONS TO DISMISS AND ADMINISTRATIVE MOTIONS TO SEAL RE: DKT. NOS. 177, 178, 180, 181, 210, 211, 224, 225, 283

          HAYWOOD S. GILLIAM, JR. UNITED STATES DISTRICT JUDGE

         Pending before the Court are motions to dismiss the Second Amended Complaint (“SAC”), separately filed by the BlackRock Defendants (defined in Section I(B), infra) and Mercer Investment Consulting (“Mercer”). Dkt. Nos. 178 (“Mercer Mot.”), 181 (“Mot.”). The parties have also filed administrative motions to seal in connection with their briefs. Dkt. Nos. 177, 180, 210, 211, 224, 225, 283. For the reasons articulated below, the Court GRANTS IN PART AND DENIES IN PART the BlackRock Defendants' motion to dismiss, GRANTS Mercer's motion to dismiss, and GRANTS the administrative motions to seal.

         I. BACKGROUND

         This ERISA action arises from a complicated set of facts concerning the offering of certain investment options available in the BlackRock Retirement Savings Plan (the “BlackRock Plan” or “Plan”), a 401(k) plan offered by BlackRock, Inc. (“BlackRock”) to its employees. Plaintiffs Charles Baird and Laura Slayton are both participants in the BlackRock Plan. Dkt. No. 154 (“SAC”) ¶¶ 17, 22. For the purpose of deciding the motions to dismiss, the following allegations are taken as true.

         A. The BlackRock Plan

         Defendant BlackRock is one of the largest investment management companies and engages in various investment-related activities, such as securities lending, investment banking, and investment management. Id. ¶ 42. BlackRock is the sponsor of the BlackRock Plan. Id. The Management Development & Compensation Committee (“MDCC”) of the BlackRock Board of Directors oversees all of BlackRock's employee benefit plans. Id. ¶ 36. To assist with its oversight responsibilities, the MDCC created the “Retirement Committee, ” which is the Plan Administrator of the BlackRock Plan.[1] Id. ¶ 54. The Retirement Committee has two subcommittees: (1) the “Investment Committee, ”[2] which selects investments for the Plan, and (2) the “Administrative Committee, ”[3] which administers the BlackRock Plan. Mercer, a third-party consultant, provides investment advice to the Plan. Id. ¶ 83.

         The BlackRock Plan is funded by participants' voluntary contributions and employer matching contributions. Id. ¶ 96. The Retirement and Investment Committees select investment options for the Plan, and participants may choose options for the investment of their contributions. Id. ¶¶ 97-98. Depending on the funds selected, participants may have to pay varying fees and expenses. Id. ¶ 99. The investment options available in the Plan include collective trust investments (“CTIs”), which are similar to mutual funds but are only available to institutional investors (for example, 401(k) plans). Id. ¶¶ 164-65. Because they are not offered to individual investors, CTIs are generally exempt from certain regulatory requirements, such as the securities laws and associated disclosure requirements. Id. ¶ 165. Instead, CTIs are subject to the rules and regulations promulgated by the Department of Labor (“DOL”) and the Office of the Comptroller of the Currency (“OCC”). Id.

         The majority of the BlackRock Plan's assets are invested in CTIs, specifically CTIs that are sponsored by Defendant BlackRock Institutional Trust Company, N.A. (“BTC”). Id. ¶¶ 162- 66. BTC is a subsidiary of BlackRock and is a national banking association that operates as a limited purpose trust company. Id. ¶ 26. As the sponsor for many of these CTIs, BTC has discretionary authority to manage and invest the BlackRock Plan's assets held in the CTIs. Id. ¶ 30. Per an Investment Management Agreement dated November 23, 2010 (“IMA”), BTC is the investment manager for these BTC-sponsored CTIs. Id. ¶ 166.

         B. Plaintiffs' Allegations

         Plaintiffs filed this putative class action pursuant to §§ 502(a)(2) and (a)(3) of ERISA. SAC ¶ 1. Plaintiffs seek to represent two classes: the “BlackRock Plan Class, ” which consists of all participants and beneficiaries in the BlackRock Plan, and the “CTI Class, ” which consists of all participants and beneficiaries whose contributions were invested directly or indirectly in BTC-sponsored CTIs. Id. Plaintiffs bring this action against BlackRock, BTC, the MDCC, the Retirement Committee and its members, the Investment Committee and its members, the Administrative Committee and its members (collectively, the “BlackRock Defendants”), and Mercer (collectively with the BlackRock Defendants, “Defendants”). Id. ¶¶ 26-92.

         The core of Plaintiffs' voluminous complaint is the contention that the BlackRock Defendants improperly favored their own proprietary funds, including the BTC-sponsored CTIs, which led to unfavorable returns for the participants. See id. ¶¶ 118-285. Plaintiffs also allege that the BlackRock Defendants failed to disclose fees associated with the CTIs, as is required by the Investment Company Act and its regulations. Id. ¶¶ 286-303. The Court summarizes the main points of Plaintiffs' allegations below.

         Preferential Treatment of BlackRock Funds.

         The Retirement and Investment Committee Defendants allegedly had a pattern and practice of giving “preferential treatment” to BlackRock proprietary funds. Id. ¶¶ 118-33. To illustrate, Plaintiffs assert that BlackRock funds performing poorly and placed “on watch” were still available in the Plan's lineup, replacing non-BlackRock funds with higher ratings that were not placed “on watch.” Id. ¶¶ 123-28. As another example, Plaintiffs allege that the BlackRock Defendants failed to remove the underperforming and expensive BlackRock Low Duration Bond Fund. Id. ¶¶ 264-76. According to Plaintiff, “not a single non-affiliated fund has been added to the BlackRock Plan” since “at least 2010 to present.” Id. ¶ 130. This failure to diversify also allegedly concentrates risk, increasing the chance that a “systemic failure that would affect all funds.” Id. ¶¶ 281-85.

         Mercer “Rubber Stamped” Decisions.

         Plaintiffs allege that Mercer would tailor its recommendations to the Investment Committee based on what Mercer knew the Investment Committee wanted to hear: the Plan should only invest in BlackRock's proprietary funds. Id. ¶¶ 134-61. Plaintiffs give examples of Mercer allegedly providing inconsistent advice to the Investment Committee as compared to Mercer's non-BlackRock clients, such as advising non-BlackRock clients against investing in certain BlackRock funds that it then recommended to the Investment Committee. Id. ¶¶ 143-52. The BlackRock Defendants purportedly tried to “curry favor” with Mercer to obtain favorable ratings for their products. Id. ¶ 159.

         BTC-Sponsored CTIs Had Excessive Fees & Engaged in Risky Securities Lending.

         The SAC alleges that the Retirement and Investment Committees favored BTC-sponsored CTIs that were engaged in risky securities lending, to the benefit of the BlackRock Defendants but to the detriment of the participants. Id. ¶¶ 162-95. Plaintiffs posit that as of the end of 2016, approximately 94% of Plan assets were invested in BlackRock proprietary funds, many of them CTIs engaged in securities lending. Id. ¶¶ 173-74. Securities lending is a practice by which securities owned by CTIs are “temporarily transferred” to a borrower (for example, another banking institution or hedge fund). Id. ¶¶ 175-76. In exchange, the borrower posts cash collateral that generally exceeds the value of the borrowed securities. Id. ¶ 176. A CTI can use the cash to invest in a short term investment vehicle that may generate a return, and any return generated is income for the CTI. See id. The borrower then returns the securities to the CTI, and the CTI returns the initial cash collateral plus any reimbursement. See id. These securities lending transactions are typically done through a lending agent, which receives a portion of the income as a fee. See id. In this case, BTC is the lending agent, and Plaintiffs allege that it takes an excessive 50% fee of the income generated through these transactions, thereby purportedly diminishing the participants' return. Id. ¶ 181.

         Plaintiffs also claim that BTC used the cash collateral to invest in “overly risky BTC- sponsored ‘synthetic' short term investment funds” (“STIFs”), again to the disadvantage of the participants but to the benefit of the BlackRock Defendants. Id. ¶ 182. These STIFs were purportedly risky because BTC invested the STIFs in “imprudent investments.” Id. ¶ 420. The STIFs also charge a higher fee (measured as basis points, or “bps, ” which is a percentage of the asset base) than other market participants. Id. ¶ 185.

         Master-Feeder Structure Funds “Hide” Fees.

         BlackRock's LifePath funds, a series of target-date BTC-sponsored CTIs, are the Plan's default investment if a participant does not affirmatively select a specific investment option. Id. ¶ 196. Per Plaintiffs, these LifePath funds have a “master-feeder structure, ” which means that a “feeder fund” uses pooled capital from the participants to purchase shares of other master or feeder funds. Id. ¶ 198. The LifePath funds purportedly only invest in other BlackRock funds. Id. ¶ 199. This type of layered structure allegedly allows BlackRock to hide fees, which purportedly diminishes participants' returns while giving the BlackRock Defendants and other subsidiaries substantial compensation. Id. ¶¶ 202-04, 211-16. To emphasize this point, Plaintiffs claim that the target-date funds offered by BlackRock in the Federal Thrift Savings Plan (“TSP”), which are indexed to the same underlying assets as the LifePath funds and are also managed by BlackRock, outperformed the LifePath funds “by 5.6% on average during this period” because the TSP funds did not have LifePath's excessive fees. Id. ¶¶ 223-31.

         BlackRock Defendants Used Plan Funds to Seed CTIs.

         Plaintiffs also allege that the Retirement and Investment Committees used Plan funds to seed newly-launched BlackRock CTIs that were expensive and underperforming. Id. ¶¶ 244-63. In addition, these new CTIs were added to the Plan's lineup purportedly in violation of the Plan's investment guidelines, as some of the new CTIs only had a performance history of a couple months when the investment guidelines required a performance history of at least three years. Id. ¶¶ 260-63. Seeding the new BlackRock CTIs was allegedly harmful to the participants but beneficial to the BlackRock Defendants, as it made these new CTIs more attractive to the market and convinced other institutional investors to invest in them. Id. ¶¶ 258-59.

         Failure to Disclose Fees.

         According to Plaintiffs, the Administrative Committee, to which the Retirement Committee delegated the duty to ensure compliance with reporting and disclosure requirements, is required to disclose fees that would reduce the “alternative's rate of return.” Id. ¶¶ 286-91. This purportedly includes disclosure of securities lending fees, which were not disclosed and were “hidden” through the layered fund structures. Id. ¶¶ 186, 293-303. Because these fees were not disclosed, Plaintiffs allege that the participant disclosures were not adequate or accurate. Id. ¶ 303.

         CTI Class Allegations.

         Plaintiffs also seek to represent a class of all those who invested in BlackRock proprietary CTIs, including other employee plans that invested in those CTIs. Plaintiffs allege that BTC, as the trustee and investment manager to the BlackRock CTIs, is a fiduciary to the participants and beneficiaries of benefit plans that invest in the BlackRock CTIs. Id. ¶¶ 313-16. The allegations on behalf of the CTI Class arise from the same general set of facts alleged regarding excessive securities lending fees, improper preferential treatment in selecting proprietary CTIs, and BTC's imprudent portfolio management of the overly risky STIFs. Id. ¶¶ 331-480.

         C. Causes of Action

         Plaintiffs allege the following seven causes of action on behalf of the BlackRock Plan Class: (1) breach of fiduciary duties for failing to prudently monitor, select, and diversify investments, in violation of ERISA § 404, 29 U.S.C. § 1104, against the Retirement and Investment Committee Defendants; (2) engaging in party-in-interest transactions, in violation of ERISA § 406(a), 29 U.S.C. § 1106(a), against BlackRock, BTC, the Retirement Committee, and the Investment Committee Defendants; (3) engaging in prohibited transactions, in violation of ERISA § 406(b), 29 U.S.C. § 1106(b), against BTC, the Retirement Committee, and Investment Committee Defendants; (4) breach of fiduciary duties for failing to prudently provide investment advice and engaging in party-in-interest transactions, in violation of ERISA §§ 404 and 406, 29 U.S.C. §§ 1104 and 1106, against Mercer; (5) breach of fiduciary duties for failing to prudently disclose fees, in violation of ERISA § 404, 29 U.S.C. § 1104, against the Administrative Committee Defendants; (6) failure to monitor other fiduciaries, in violation of ERISA § 404, 29 U.S.C. § 1104, against BlackRock, the MDCC, the Retirement Committee, and Investment Committee Defendants; and (7) co-fiduciary liability under ERISA § 405, 29 U.S.C. § 1105, against all Defendants. Id. ¶¶ 502-76.

         Plaintiffs also allege the following three causes of action on behalf of the CTI Class against BlackRock and BTC, based on the “management of the BlackRock CTIs”: (8) violation of ERISA § 404, 29 U.S.C. § 1104; (9) violation of ERISA § 406, 29 U.S.C. § 1106; and (10) co-fiduciary liability under ERISA § 405, 29 U.S.C. § 1105. Id. ¶ 577-619.

         II. REQUEST FOR JUDICIAL NOTICE

         A. Legal Standard

         i. Judicial Notice

         In Khoja v. Orexigen Therapeutics, the Ninth Circuit clarified the judicial notice rule and incorporation by reference doctrine. See 899 F.3d 988 (9th Cir. 2018). Under Federal Rule of Evidence 201, a court may take judicial notice of a fact “not subject to reasonable dispute because it … can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b)(2). Accordingly, a court may take “judicial notice of matters of public record, ” but “cannot take judicial notice of disputed facts contained in such public records.” Khoja, 899 F.3d at 999 (citation and quotations omitted). The Ninth Circuit has clarified that if a court takes judicial notice of a document, it must specify what facts it judicially noticed from the document. Id. at 999. Further, “[j]ust because the document itself is susceptible to judicial notice does not mean that every assertion of fact within that document is judicially noticeable for its truth.” Id. As an example, the Ninth Circuit held that for a transcript of a conference call, the court may take judicial notice of the fact that there was a conference call on the specified date, but may not take judicial notice of a fact mentioned in the transcript, because the substance “is subject to varying interpretations, and there is a reasonable dispute as to what the [document] establishes.” Id. at 999-1000.

         ii. Incorporation by Reference

         Separately, the incorporation by reference doctrine is a judicially-created doctrine that allows a court to consider certain documents as though they were part of the complaint itself. Id. at 1002. This is to prevent plaintiffs from cherry-picking certain portions of documents that support their claims, while omitting portions that weaken their claims. Id. Incorporation by reference is appropriate “if the plaintiff refers exclusively to the document or the document forms the basis of plaintiff's claim.” Khoja, 899 F.3d at 1002. However, “the mere mention of the existence of a document is insufficient to incorporate the contents” of a document. Id. at 1002. And while a court “may assume [an incorporated document's] contents are true for purposes of a motion to dismiss … it is improper to assume the truth of an incorporated document if such assumptions only serve to dispute facts stated in a well-pleaded complaint.” Id.

         B. Discussion

         Defendants initially requested that the Court take judicial notice of or consider incorporated by reference the following long list of documents:

Exhibit

Document

BlackRock Ex. C

BlackRock Retirement Savings Plan - Guideline & Fee Agreement (October 17, 2016)

BlackRock Ex. D

Audited Financial Statements for Investment Funds for Employee Benefit Trusts, F Series (December 31, 2014)

BlackRock Ex. E

Audited Financial Statements for Investment Funds for Employee Benefit Trusts, E Series (December 31, 2014)

BlackRock Ex. F

Participant Disclosure of Plan (August 20, 2013)

BlackRock Ex. G

Participant Disclosure of Plan (October 13, 2016)

BlackRock Ex. H

“16 Things You Should Know: Information about BTC” (June 2010)

BlackRock Ex. I

Plan of BlackRock Institutional Trust Company, N.A. Investment Funds for Employee Benefit Trusts Funds (December 31, 2011) (“CTI Plan”)

BlackRock Ex. J

BlackRock Investment Management Agreement (November 23, 2010) (“IMA”)

BlackRock Ex. K

BlackRock Short-Term Investment Funds: Overview and Guidelines (“STIF Guidelines”)

BlackRock Ex. L

Blackrock Funds II (BlackRock Low Duration Fund) Prospectus (January 28, 2016)

BlackRock Ex. M

BlackRock Global Allocation Fund, Inc. Prospectus (February 28, 2014)

BlackRock Ex. N

Audited Financial Statements for Employee Benefit Trusts, U.S. Short Term Investment Series II (December 31, 2011)

BlackRock Ex. O

December 2016 and February 2017 Supplements to “16 Things You Should Know”

Mercer Ex. A

Form 5500, Annual Return/Report of BlackRock Employee Benefit Plan (2017)

Mercer Ex. B

Participant Fee Disclosure of Plan (March 17, 2017)

Mercer Ex. C

(BlackRock Ex. C)

BlackRock Retirement Savings Plan - Guideline & Fee Agreement (October 17, 2016)

Mercer Ex. D

(BlackRock Ex. F)

Participant Disclosure of Plan (August 20, 2013)

Mercer Ex. E

Federal Thrift Savings Fund Financial Statements (December 31, 2017 and 2016)

Mercer Ex. F

Form 5500, Annual Return/Report of the Vanguard Retirement and Savings Plan (2016)

Dkt. Nos. 179, 182. After a careful review of the exhibits and the parties' arguments, the Court found that it could not take judicial notice of or consider incorporated by reference the majority of Defendants' exhibits. For the majority, Defendants request that the Court consider the documents for the truth of the information contained in them to rebut Plaintiffs' allegations, which Khoja prohibits. See Khoja, 899 F.3d at 1014; see, e.g., Mot. at 2, 19 (citing BlackRock Exhibit C and seeking finding that, “contrary to the SAC, ” the “manner in which securities lending compensation accrues to BTC” was not unreasonable).

         Despite Defendants' contentions otherwise, many of these documents are not incorporated by reference. For example, the BlackRock Defendants argue that Exhibits F and G, which are participant fee disclosures, are incorporated by reference and judicially noticeable, but the SAC's brief references to the participant fee disclosures do not make them the “basis of plaintiff's claim.” See Khoja, 899 F.3d at 1002; Dkt. No. 181 at 8. The same is true of the “16 Things You Should Know” (“16 Things”) documents (BlackRock Exhibits H and O), which were referenced only twice in the SAC. See SAC ¶ 615. Those brief references do not establish that the “16 Things” documents are central to the claims, as Plaintiffs do not allege that those documents govern the Plan. See Khoja, 899 F.3d at 1002. And while some documents, such as the Fund Prospectuses and Form 5500 (BlackRock Exhibits L and M, and Mercer Exhibits A, E, and F), may be judicially noticeable for their existence, the Court may not take judicial notice of the truth of the information contained in them if Defendants are attempting to factually rebut Plaintiffs' allegations. Id. at 999-1000.

         Because Defendants submitted such voluminous materials beyond the SAC, the Court informed the parties that it was inclined to convert the motions to dismiss to motions for summary judgment, but afforded the parties a chance to submit supplemental briefing to identify issues that they believed could be resolved without the Court considering the extrinsic materials. Dkt. Nos. 276, 277. After supplemental briefing, Defendants withdrew the request as to some of their documents. Dkt. Nos. 280, 281. All parties now agree that BlackRock Exhibits I, J, and K are incorporated by reference and can be considered by the Court. See Dkt. Nos. 280, 281, 283-3. But the parties still disagree as to whether the Court may consider the following exhibits: the “16 Things” documents (BlackRock Exhibits H and O); the Fund Prospectuses (BlackRock Exhibits L and M); the 2017 Form 5500 of the Plan (Mercer Exhibit A); and the Plan participant fee disclosures (Mercer Exhibits B and D). See id.

         The parties' supplemental briefing does not persuade the Court that it may take judicial notice of the remaining disputed documents or find them to be incorporated by reference. In light of Khoja, the Court is mindful of the risk that the judicial notice rule and incorporation by reference doctrines can lead to the consideration of extrinsic evidence to resolve factual disputes, which is not proper at the pleading stage. See Rollins v. Dignity Health, 338 F.Supp.3d 1025, 1031 (N.D. Cal. 2018) (“[Defendant] is not explaining or arguing the allegations in Plaintiffs' FAC-it is trying to factually rebut them. As Khoja makes clear, to grant the request for judicial notice would improperly convert this Rule 12(b)(6) motion into a motion for summary judgment under Rule 56.”). Accordingly, the Court GRANTS Defendants' request for the Court to consider BlackRock Exhibits I, J, and K. The Court also takes judicial notice of BlackRock Exhibits L and M, but only to recognize their existence. The Court DENIES Defendants' requests as to all remaining exhibits.

         III. ...


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