Citigroup Proprietary Fund Suit Gets Class Certification

A federal judge has granted class certification in a lawsuit alleging Citigroup violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by offering and keeping affiliated funds in its 401(k) plans when better-performing, lower-cost funds were available.

In 2014, U.S. District Judge Sidney H. Stein of the U.S. District Court for the Southern District of New York found the participants’ claims were not filed outside ERISA’s statute of limitations. In 2015, a third lead plaintiff was added to the suit and Stein rejected arguments from defendants that the new plaintiff did not fall within the statute of limitations. In his latest order, he revised his previous decision and struck the third plaintiff as a named plaintiff in the lawsuit.

Also, before moving on to the matter of class certification, Stein addressed the defendants argument that the remaining two named plaintiffs did not have standing to bring claims regarding affiliated funds in which they did not invest.  Of the nine affiliated funds through which they allege the plan suffered losses, the two lead plaintiffs only invested in one.

Citing prior case law, Stein said that in the context of class actions, a named plaintiff who has constitutional standing to raise claims based on his own injuries may also have “class standing” to assert “other claims, unrelated to those injuries,” on behalf of unnamed class members. “The fact that only some of these alleged losses manifested themselves in the named plaintiffs’ individual accounts does not deprive plaintiffs of their standing to seek redress on behalf of the Plan for the broader injuries the Plan incurred. Proving the ‘interrelated and overlapping’ duty of prudence and loyalty claims that are at issue in this case will require an inquiry into defendants’ conduct in managing the Plan, which plaintiffs allege was uniform and not dependent on the idiosyncratic characteristics of any proprietary funds,” he wrote in his order.

In addressing each of the factors for determining class certification, Stein agreed with defendants that some of the questions enumerated by plaintiffs are inadequate to establish commonality. For example, the claim that the affiliated funds’ fee were excessive compared to alternatives requires fund‐by‐fund analysis and cannot generate answers that are common to the entire class plaintiffs seek to represent, he said. However, he found that plaintiffs have established commonality by identifying at least two questions that are capable of class-wide resolution: whether the defendants improperly favored proprietary funds in order to benefit Citigroup at the expense of plan participants, and whether the defendants failed to prudently and loyally monitor the plan’s investments.

Stein also addressed the defendants’ argument that commonality is not met because some class members’ knowledge may fall outside of ERISA’s statute of limitations. Citing prior case law, he said “bald speculation that some class members might have had knowledge cannot be enough to forestall certification.” In addition, Stein said the basis of defendants’ speculation—that class members, who are or were Citigroup employees, would be aware that the affiliated funds were proprietary and would also be privy to their expense ratios—does not suffice to establish the kind of “specific knowledge of the actual breach of duty” required to start the clock on ERISA’s three‐year limitations period.

Finally, Stein rejected the defendants’ argument which suggested the fact that Citigroup employees “routinely” sign releases waiving all claims against Citigroup, including claims brought under the ERISA statute, precludes certification. “In cases brought on behalf of a plan, most courts have held that ‘individuals do not have the authority to release a defined contribution plan’s right to recover for breaches of fiduciary duty;’ the consent of the plan is required for a release of 29 U.S.C. § 1132(a)(2) claims,” he wrote in his motion.

According to the motion, the class that the plaintiffs seek to have the court certify extends from October 18, 2001, to September 4, 2007. September 4, 2007, is the date on which defendants removed all of the affiliated funds except the Citi Institutional Liquid Reserves Fund from the plan. However, none of the affiliated funds were actually managed or offered by Citigroup affiliates after December 1, 2005—the date on which Citigroup sold its asset management business to Legg Mason. So, Stein agreed with the defendants that none of the claims in the case are viable after December 1, 2005.

He certified a group of all participants in the Citigroup 401(k) plan who invested in any of the nine affiliated funds from October 18, 2001, to December 1, 2005, excluding the defendants, their beneficiaries, and their immediate families.