In Pension Benefit Guaranty Corporation v. Morgan Stanley Investment Management, Inc., Docket No. 10-4497-cv (2nd Cir. 2013), the Court considered the degree of factual detail needed in a complaint in order to establish a claim that a pension plan administrator purchased and continued to hold certain mortgage-backed securities imprudently and in violation of its fiduciary duties under ERISA.
In analyzing the case, the Court said that a claim of imprudence may be established if the complaint alleges facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident. In this case, however, the Court concluded that the plaintiff's complaint failed to allege facts supporting the plausible inference that the defendant knew, or should have known, that the mortgage-backed securities in question were imprudent investments.
The Court said that, in particular, the complaint relies on the decline in the market price of mortgage-backed securities generally, without specifying the securities at issue or presenting any facts to suggest that a reasonable investor would have viewed those particular securities as imprudent investments. A decline in market price of a type of security-even a precipitous one-does not, by itself, give rise to a reasonable inference that it was imprudent to purchase or hold that type of security. The complaint referred to "warning signs" that the price would decline, such as information about financial losses suffered by the issuers of the securities. However, the Court felt that none of these warning signs gave rise to a plausible inference that the defendant knew, or should have known, that the securities in question were imprudent investments, or that the defendant had breached its fiduciary duty by not selling those investments.
Based on the foregoing, the Court found that the plaintiffs failed to establish a claim of imprudent investment in violation of ERISA's prudence requirement.