United States District Court, N.D. California
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
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.
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.
The BlackRock Plan
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. Id. ¶ 54. The Retirement
Committee has two subcommittees: (1) the “Investment
Committee, ” which selects investments for the Plan,
and (2) the “Administrative Committee,
” which administers the BlackRock Plan.
Mercer, a third-party consultant, provides investment advice
to the Plan. Id. ¶ 83.
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.
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.
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.
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.
Treatment of BlackRock Funds.
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.
“Rubber Stamped” Decisions.
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.
CTIs Had Excessive Fees & Engaged in Risky Securities
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.
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.
Structure Funds “Hide” Fees.
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.
Defendants Used Plan Funds to Seed CTIs.
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.
to Disclose Fees.
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.
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.
Causes of Action
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.
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.
REQUEST FOR JUDICIAL NOTICE
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
Incorporation by Reference
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.
initially requested that the Court take judicial notice of or
consider incorporated by reference the following long list of
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,
BlackRock Ex. E
Audited Financial Statements for Investment Funds
for Employee Benefit Trusts, E Series (December 31,
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).
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
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.
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