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HOWELL v. MOTOROLA

September 23, 2004.

BRUCE G. HOWELL, on behalf of Himself and a Class a Persons Similarly Situated, Plaintiff,
v.
MOTOROLA, INC., THE PROFIT SHARING COMMITTEE OF MOTOROLA, INC., DAVID DEVONSHIRE, GLENN GIENKO, GARTH L. MILNE, RON MILLER, WILLIAM P. DECLERCK, RICHARD ENSTROM, RICK DORAZIL, CHRISTOPHER B. GALVIN, ROBERT L. GROWNEY, RONNIE C. CHAN, H. LAURANCE FULLER, ANNE P. JONES, DONALD R. JONES, JURY C. LEWENT, WALTER E. MASSEY, NICHOLAS NEGROPONTE, JOHN E. PEPPER, JR., SAMUEL C. SCOTT III, GARY L. TOOKER, B. KENNETH WEST, JOHN A. WHITE and CARL F. KOENEMANN, Defendants.



The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Bruce G. Howell has filed this putative class action lawsuit on behalf of the Motorola, Inc. 401(k) Profit Sharing Plan (the "Plan") and on behalf of "all Participants in the Plan for whose individual accounts the Plan purchased and/or held shares of" Motorola, Inc. ("Motorola") common stock from May 16, 2000 to the present (the "Class Period"). Defendant Motorola, which has substantial national and international operations in the telecommunications, electronics, computer, and satellite communications industries, was the Sponsor of the Plan during the Class Period. Defendants include certain Motorola officers, members of Motorola's Board of Directors, the Profit Sharing Committee which served as the Plan Administrator, and members of that Committee. Specifically, Christopher B. Galvin (Motorola's Chief Executive Officer and Chairman of the Board of Directors during all or part of the Class Period), Robert L. Growney (Motorola's Chief Operating Officer during all or part of the Class Period), Ronnie C. Chan, H. Laurance Fuller, Anne P. Jones, Donald R. Jones, Judy C. Lewent, Walter E. Massey, Nicholas Negroponte, John E. Pepper, Jr., Samuel C. Scott III, Gary L. Tooker, B. Kenneth West, and John A. White were members of Motorola's Board of Directors during all or part of the Class Period (the "Director Defendants"). Defendant Profit Sharing Committee of Motorola, Inc. (the "Committee"), as well as its six members-Defendants David Devonshire, Glenn Gienko, Garth L. Milne, Ron Miller, William P. DeClerck, and Richard Enstrom, constituted the Plan Administrator and "Named Fiduciary" of the Plan during all or part of the Class Period (the "Committee Defendants"). Defendant Rick Dorazil is Motorola's Vice President and Director, Global Rewards-Benefits. Defendant Carl F. Koenemann was at all times relevant to this action Motorola's Executive Vice President-Finance and Chief Financial Officer.

Plaintiff alleges that all Defendants violated section 502(a)(2) and (3) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1132(a)(2) and (3). Specifically, Plaintiff alleges that Defendants breached their fiduciary duties to the Plan and the Participants by (1) negligently permitting the Plan to purchase and hold shares of Motorola's common stock when it was imprudent to do so, (2) negligently misrepresenting and negligently failing to disclose material facts concerning the management of Plan assets to the Plan and the Participants, and (3) failing to appoint appropriate fiduciaries, to properly monitor those fiduciaries, and to provide sufficient information to enable the fiduciaries to fulfill their obligations under ERISA. These purported failures all relate to allegedly risky vendor financing agreements between Motorola and its business partners, including a contract with Telsim Mobil Telekomunikayson Hizmetleri A.S. ("Telsim"), a Turkish mobile telecommunications company, as well as a purported liquidity crisis and unspecified problems with at least two Motorola lines of business. Plaintiff claims that Defendants' failure to disclose this information to the public or to dispose of Motorola's shares under these circumstances constituted a violation of section 404(a)(1)(B) of ERISA, 29 U.S.C. § 1104(a)(1)(B), and Department of Labor regulation 29 C.F.R. § 2550.404a-1(b)(2). Defendants seek to dismiss the complaint pursuant to FED. R. CIV. P. 12(b)(6). For the reasons set forth here, Defendants' motion to dismiss is granted in part and denied in part.

  FACTUAL BACKGROUND

  I. Motorola's Purported Problems During Class Period

  As discussed below, the chief focus of Plaintiff's allegations of mismanagement and concealment is Motorola's relationship with Telsim. That relationship has been described in other reported opinions and will not be exhaustively analyzed here. See, e.g., In re Motorola Sec. Litig., No. 03 C 287, 2004 WL 2032769 (N.D. Ill. Sept. 9, 2004); Motorola Credit Corp. v. Uzan, 274 F. Supp. 2d 481, 491 (S.D.N.Y. 2003) (Rakoff, J.). Accordingly to Plaintiff's Complaint, Motorola's Form 10-Q*fn1 for the first quarter of 2000, which it filed with the SEC on May 16, 2000, stated that Motorola had "signed an agreement with Telsim, which is estimated to have a sales potential of at least $1.5 billion over three years. Under this agreement, the Company expects to provide infrastructure equipment, wireless phones and associated services to expand the countrywide GSM network in Turkey." (Cmplt. ¶¶ 1, 20.) Plaintiff alleges that this statement was misleading in several respects. First, this supposed $1.5 billion agreement required Motorola to provide $1.7 billion in vendor financing. Second, there were unspecified "serious ongoing problems in the Motorola-Telsim relationship." Third, Telsim had made numerous unspecified complaints about the systems it had purchased from Motorola, some of these claims were legitimate, while others were made in order to justify Telsim's failure to repay any portion of the loan. Fourth, during the Class Period, unnamed Motorola and Telsim officials frequently discussed the need either for sale of Telsim to a third party or for a "strategic partnership"*fn2 to address problems in the Motorola-Telsim relationship. Fifth, "there was a huge risk to Motorola's shareholders if Telsim defaulted on its agreement with Motorola, which it did during the Class Period." Sixth, during the Class Period, Motorola took unspecified actions that "severely damaged Telsim's name, brand, retail sales and subscriber growth."

  Plaintiff makes a handful of additional allegations that do not relate directed to Telsim: Plaintiff alleges that Motorola had provided vendor financing to other unidentified customers, so that Motorola's total vendor financing commitment during an unspecified period of time totaled approximately $2.9 billion. He asserts, further, that during the Class Period, "Motorola experienced a liquidity crisis" that endangered its credit rating. Finally, "major portions of Motorola's lines of business, including its semiconductor business and its business of providing base stations for wireless service providers and other nonconsumer telecom gear, were experiencing substantial difficulties during the Class Period." (Id. ¶¶ 3(a), 50, 58, 60.)

  II. Defendants

  A. Motorola

  Plaintiff claims that Defendant Motorola itself is a fiduciary of the Plan on four grounds: (1) Motorola's Board of Directors controlled the Plan Committee; (2) Motorola filed the Plan's annual reports on Form 11-K with the SEC; (3) relevant portions of Motorola's Summary Plan Description ("SPD") "constitute part of a prospectus covering securities that have been registered under the Securities Exchange Act of 1993"; and (4) Motorola's filings either were incorporated by reference into the Plan's SPD or otherwise were made available to the Participants during the Class Period. (Id. ¶¶ 56, 59(a), 88.) Plaintiff alleges that Motorola breached its fiduciary duties by allowing the Plan to purchase and hold a large number of shares of Motorola common stock and by failing to sell those shares at a time when it was imprudent to hold Motorola stock. (Id. ¶ 57.) Plaintiff also contends that "Motorola negligently made materially false or misleading public statements which caused the common stock of Motorola to be an imprudent investment," and that specifically, its quarterly reports on Form 10-Q and its annual reports on Form 10-K "negligently misrepresented Motorola's relationship with Telsim" in that it failed to disclose Motorola's difficulties, including its relationship with Telsim, described above. (Id. ¶¶ 3(a), 59, 60.) In addition, Plaintiff claims that "Motorola should have known that the[] public statements it negligently issued [regarding the Telsim relationship] during the Class Period were materially false and misleading and should have known that th[is] adverse information caused the common stock of Motorola to be an imprudent investment." (Id. ¶ 61.)

  To support its contention that Motorola breached its fiduciary duties in purchasing and holding Motorola common stock when it was an imprudent investment, Plaintiff cites several public statements regarding the Telsim transaction. First, on or about April 6, 2001, Bloomberg News published an analysis of Motorola's debt problems, including its loan to Telsim, noting that the company was owed "a staggering $1.7 billion by a single customer in an emerging market country." (Id. ¶ 62.)*fn3 Second, in a 2002 book, Arthur Levitt, chairman of the SEC from July 1993 to February 2001, opined that "Motorola should ask itself: why is it in shareholders' interest to invest in a company that fails to disclose an enormous risk taken with their money?" (Id. ¶ 64 (citing ARTHUR LEVITT, TAKE ON THE STREET: WHAT WALL STREET AND CORPORATE AMERICA DON'T WANT YOU TO KNOW 167 (2002)). Finally, on May 2, 2003, unidentified individuals affiliated with Telsim published a notice in the Wall Street Journal complaining that "Motorola management has severely and knowingly damaged the Telsim brand, its retail sales, and its subscriber growth. These are, of course, the very sources of income from which the loans [to Motorola] could be repaid." (Id. ¶ 63.)

  Plaintiff also claims that Motorola "cause[d] the Plan to offer the common stock of Motorola as an investment option." (Id. ¶ 88.) According to Plaintiff, "Motorola negligently misrepresented and negligently failed to disclose material information [regarding Motorola's difficulties, including its relationship with Telsim, discussed above] in the SPD and in its SEC filings during the Class Period." (Id. ¶ 89.) Alternatively, Plaintiff claims that Motorola is liable under the principle of respondeat superior for the actions of Director Defendants, as the Directors were compensated by Motorola and "acted solely in the scope of their agency for Motorola." (Id. ¶¶ 36, 106.)

  B. Director Defendants

  Plaintiff contends that Director Defendants had the power to appoint and remove members of the Committee, and were obligated to appoint to the Committee only persons "who would refuse to offer Motorola common stock as a retirement investment available to Participants" if that stock were not a prudent investment. (Id. ¶¶ 17, 35, 37, 69, 70, 103.) In addition, Plaintiff alleges that Director Defendants had the ability, authority, and responsibility to monitor Committee Defendants and other fiduciaries of the Plan, "and had the affirmative obligation to provide the Committee Defendants with all information available to the Director Defendants that the Director Defendants should have known would be important to . . . Committee Defendants in managing the Plan and the Plan's assets in a prudent manner." (Id. ¶ 17.) According to Plaintiff, Director Defendants violated these obligations when they appointed as members of the Committee one or more Motorola employees who, "by definition," lacked the necessary independence, knowledge, and skill to carry out their responsibility and were therefore influenced or controlled by Motorola or the Director Defendants with respect to the Plan management and investment. (Id. ¶¶ 35, 56(a), 70(b), 103(b)-(c).) Plaintiff also urges that Director Defendants failed to monitor Committee members' performance or to provide them with information that Director Defendants knew or should have known the Committee members needed. (Id. ¶ 70(c)-(d), 103(d).) According to Plaintiff, Director Defendants should have known that Motorola was making available to the Participants the allegedly misleading SPD and SEC filings. (Id. ¶ 90.) Plaintiff contends, further, that Director Defendants themselves "exercised discretionary authority or control respecting management of the Plan or management of the disposition of its assets." (Id. ¶ 68.) C. Committee Defendants

  Plaintiff alleges that Committee Defendants had "complete authority and discretion to control and manage the operation and administration of the Plan." (Id. ¶¶ 38, 92.) Plaintiff urges that Committee Defendants breached their fiduciary duties to Participants by offering Motorola common stock as an investment option at a time when Motorola stock was not a prudent investment. (Id. ¶¶ 39, 73.) According to Plaintiff, "Committee Defendants had a duty to ascertain the true state of affairs at Motorola, including with respect to the extremely significant Motorola-Telsim relationship [discussed above], and to fully inform the Participants concerning these material facts." (Id. ¶ 92.)

  D. Rick Dorazil

  Defendant Rick Dorazil,*fn4 who served as the Plan's "404(c) Fiduciary," signed the Plan's 2000 and 2001 Forms 11-K,*fn5 which were filed with the SEC on June 27, 2001 and June 27, 2002, respectively. (Id. ¶¶ 13, 74.) Plaintiff alleges that Dorazil should have known that Motorola was disseminating the Plan's SPD to Participants and making Motorola's SEC filings available to Participants during the Class Period. (Id. ¶¶ 14, 87.) Plaintiff further claims that Dorazil should have known that these documents contained misleading information (discussed above), should have prevented them from being made available to the Participants, and should have ensured that correct information was being disseminated. (Id.) According to Plaintiff, Dorazil also "exercised discretionary authority or control respecting management of the Plan or management or disposition of its assets." (Id. ¶ 75.) E. Carl Koenemann

  Defendant Carl F. Koenemann was responsible for preparing the SEC filings that were incorporated into the SPD. (Id. ¶¶ 42, 77.) According to Plaintiff, Koenemann acted as a fiduciary with respect to the Plan and "was in a unique position to inform the Director Defendants and the Committee Defendants of the true facts concerning the Motorola-Telsim relationship and other material facts" (discussed above) and either failed to do so or, alternatively, "succeeded in doing so but acquiesced in the concealment from Participants of this important information." (Id. ¶¶ 18, 77.) Plaintiff alleges that, like Dorazil, Koenemann exercised discretion with respect to Plan management and Plan assets. (Id. ¶ 78.)

  F. Allegations Against All Defendants

  Plaintiff urges that all Defendants should have ceased purchasing shares of Motorola common stock and offering Motorola common stock as an investment option, and should have sold all shares that the Plan held of Motorola common stock. (Id. ¶ 51.) According to Plaintiff, Defendants failed to consider the risks inherent in Motorola common stock (because of Motorola's difficulties, including its relationship with Telsim, discussed above) when evaluating the prudence of such stock as a Plan investment option. (Id.) Plaintiff also maintains that all Defendants should have known the facts regarding the Telsim transaction and "should have known that the Plan should not have invested such massive amounts in the common stock of Motorola." (Id. ¶ 80.)

  III. Motorola 401(k) Profit Sharing Plan

  The Plan is a participant-directed, defined contribution plan that permits Participants to choose from nine investment options pursuant to ERISA § 404(c) and to shift among options at any time. (Def. Mem., at 4-5; Exs. A-D to Def.' Mem.)*fn6 One such investment option is the "Motorola Stock Fund," which is an investment fund consisting solely of Motorola common stock. (Cmplt. ¶¶ 2, 34(d).) As of December 31, 1999, the Plan's investments totaled $6,980,926,000, of which approximately $1,547,214,000, or 22%, was invested in Motorola common stock. (Id. ¶ 48.) As of December 31, 2000, the Plan's investments totaled $6,003,900,000, of which approximately $906,146,000, or 15%, was invested in Motorola common stock. (Id.)

  Plaintiff notes that "[t]he SPD and Motorola's SEC filings constituted representations made in a fiduciary capacity by all Defendants." (Id. ¶ 44.) The SPD included a chart comparing the relative risk of the various investment options available under the Plan and identifying the Motorola Stock Fund as the riskiest investment option. Nevertheless, Plaintiff urges that the chart concealed the extent of risk involved in Motorola's relationship with Telsim, as well as the fact that when employees invest exclusively or primarily in their employer's stock, they take on a much greater risk than they would accept with a more diversified portfolio. Plaintiff claims, therefore, that all Defendants "failed to adequately inform the Participants concerning the true extent of the risk involved in choosing the common stock of Motorola as a retirement investment." (Id. ¶ 57.)

  DISCUSSION

  Under section 404(a)(1)(B) of ERISA and its implementing regulations, fiduciaries of an employee benefit plan are obligated to act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104(a)(1)(B). This so-called "prudence rule" requires that a fiduciary

 
give[] appropriate consideration to those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the plan's investment portfolio with respect to which the fiduciary has investment duties.
29 C.F.R. § 2550.404a-1(b)(1). "Appropriate consideration" includes:
(i) A determination by the fiduciary that the particular investment or investment course of action is reasonably designed, as part of the portfolio (or, where applicable, that portion of the plan portfolio with respect to which the fiduciary has investment duties), to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action, and
(ii) Consideration of the following factors as they relate to such portion of the portfolio:
(A) The composition of the portfolio with regard ...

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