CVS Participants' Stable Value Fund Suit Fails Again

U.S. Magistrate Judge Patricia A. Sullivan of the U.S. District Court for the District of Rhode Island has recommended that claims in a suit against CVS Health Corporation, its Benefits Plan Committee and its stable value fund manager Galliard Capital Management be dismissed.

Sullivan previously recommended that the plaintiffs’ first complaint be dismissed because they offered “the Court nothing from which to conclude that the Stable Value Fund’s short-term fixed income holdings were unreasonable in view of all the considerations a prudent fiduciary might have found relevant, much less that the Fund’s fiduciaries failed to use appropriate methods to investigate and make those investment allocation decisions.”

The plaintiffs filed an amended complaint and the defendants again filed a motion to dismiss.

Sullivan found the new material adds little more than substantial factual support for the allegation found to be legally insufficient in the first go-round—that hindsight reveals that the stable value fund’s allocation did not maximize returns. In addition, Sullivan said that although the plaintiffs’ new claim—that the fund’s asset allocation, the duration of the fund’s investments and the fund’s performance deviated from industry averages—rest firmly on a substantial factual foundation, they too are insufficient to permit an inference of imprudence.

Sullivan noted in her opinion that fiduciaries are not required to predict the future, and cannot be held liable for deciding to avoid risks that, in hindsight, could have been tolerated. Nor are they held to the standard of looking to the average and copying what they see.

Sullivan pointed out the absence of any allegation permitting the inference that Galliard Capital Management, Inc. failed to adhere to the plan’s guidelines and investment objectives: to preserve capital while generating a steady rate of return higher than money market funds provide. Instead, the complaint relies on its detailed comparison of industry averages to the fund’s investment duration, asset allocation and (to a limited extent) performance.

According to Sullivan, an industry average is simply an arithmetic mean derived from a diversity of investment approaches among fund managers. The weighted averages relied on by plaintiffs are merely data points calculated from a range, potentially a wide range, of measures of investment duration, asset allocation and fund performance, from an array of managers, some more, and some less, risk-averse.

“Deviation from the average, standing alone, means nothing,” Sullivan wrote. “What matters is whether the duration of the investments and the allocation of the assets chosen by Galliard conformed to the Plan’s disclosed investment objective of preserving capital while generating a higher rate of return than a money market fund; when they do (as the Complaint concedes), Plaintiffs must present more than just a failure to adhere to the mean. Put differently, the new allegations may plausibly allege that various features of the CVS Stable Value Fund deviated from industry averages, but, without more, that does not permit an inference either of imprudence or prudence.”

Regarding performance, Sullivan found the amended complaint lacks facts from which a plausible inference of an imprudent process arises; it contains only the conclusory and somewhat vague allegation that the CVS stable value fund “predictably underperformed substantially compared to stable value funds that presumably adopted accepted principles of stable value fund investing.” In support of this allegation, the complaint alleges that Galliard disregarded the fundamentals of stable value investing in favor of “an unthinking commitment to money-market type ‘fire-and-forget’ asset placement,” a strategy pursued by a manager who invests but then ignores the investment’s performance. However, Sullivan found this conclusory assertion is supported by no plausible facts, and to the contrary, the complaint’s facts belie the allegation in that they demonstrate that, at least annually, Galliard attended to the investments by tweaking the cash allocation up and down.

Sullivan wrote the “amended pleading is laden with facts that plausibly buttress their core claim that, with the prescience of a crystal ball’s forecast of the future, the CVS Stable Value Fund managers could have delivered better returns for the investors. That does not state a claim.”

In count two of the amended complaint the plaintiffs’ allege that CVS failed to exercise its duty as a fiduciary to select and monitor its investment manager, Galliard. But Sullivan found that because a monitoring fiduciary does “not fail in the discharge of its duty to select and monitor” if the investment manager “did not commit a breach,” and with no plausible allegation that Galliard committed a breach of its duty as investment manager, count two also fails to state a claim.