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In re General Growth Properties

May 6, 2010


The opinion of the court was delivered by: James B. Zagel United States District Judge

Judge James B. Zagel


Plaintiffs filed an amended consolidated class action complaint against Defendants alleging violations of the Employee Retirement Income Security Act. Plaintiffs five count complaint alleges breaches of prudence and fiduciary duty stemming from Defendants' management of the General Growth 401(k) Savings Plan. Defendants Judy Herbst, Charles Lhotka, Heather Margulis, Michelle McGovern, Jean Schlemmer, Kate Sheehy, John Bucksbaum, and Robert Michaels now move to dismiss Plaintiffs' amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendant Bernard Freibaum also moves to dismiss Plaintiffs' amended complaint and has adopted and incorporated by reference Defendants Judy Herbst, Charles Lhotka, Heather Margulis, Michelle McGovern, Jean Schlemmer, Kate Sheehy, John Bucksbaum, and Robert Michaels' motion to dismiss. For the following reasons, Defendants' motions to dismiss are granted in part and denied in part.


Plaintiffs filed this consolidated class action complaint against Defendants for violations of the Employee Retirement Income Security Act ("ERISA"). Plaintiffs brought this action on behalf of the General Growth 401(k) Savings Plan (the "Plan") and all of its participants and beneficiaries. Plaintiffs allege that from April 30, 2007 to April 16, 2009 (the "Class Period"), the Plan acquired and held shares of General Growth common stock ("GGP Stock" or "Company Stock") which were offered as one of the retirement savings options to Participants in the Plan.

Plaintiffs allege that throughout the Class Period, Defendants allowed the Plan to acquire and hold GGP Stock even though they knew or should have known that the Company Stock was an imprudent investment.

General Growth is a self-administered real estate investment trust that began publicly trading in April 1993. General Growth filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on April 16, 2009. General Growth conducts most business through its operating partnership GGP Limited Partnership ("GGPLP"), in which it holds approximately a 98% ownership interest. GGPLP is the sponsor and administrator of the Plan. GGPLP also filed for bankruptcy protection on April 16, 2009.

Director Defendants

Defendants John Bucksbaum ("Bucksbaum"), Bernard Freibaum ("Freibaum"), and Robert A. Michaels ("Michaels") are referred to collectively as the "Director Defendants." These three individuals served the roles of Chief Executive Officer Executive Vice President, Chief Financial Officer, Chief Operating Officer, Director and President of the Company. These individuals also served on various Committees where they exercised discretionary authority or discretionary control over the Plan.

The Administrative Committee Defendants

GGPLP established the General Growth 401(k) Savings Plan Administrative Committee (the "Administrative Committee") to fulfill its responsibilities as Plan Administrator. The Plan Administrator has the sole authority to determine all questions of fact arising under the Plan. The Administrative Committee was generally responsible for selecting service providers, establishing policies and procedures, ensuring government compliance, and ensuring that the Plan operated according to its terms. During the Class Period, the Administrative Committee was comprised of Judy Herbst ("Herbst"), Charles Lhotka ("Lhotka"), Michelle R. McGovern ("McGovern") and Heather Margulis ("Margulis").

The Investment Committee Defendants

GGPLP administered the Plan along with members of the General Growth 401(k) Savings Plan Investment Committee (the "Investment Committee") which was appointed by GGPLP to perform Plan-related fiduciary functions and did so during the Class Period. The Investment Committee selected investment options for the plan, monitored investment strategies, performance and risk, and was charged with taking appropriate action if objectives were no longer being met or if the investment strategy is no longer appropriate. The Investment Committee was comprised of Bucksbum, Michaels, Lhotka, Herbst, Jean Schlemmer ("Schlemmer"), Freibaum, and Kate Sheehy ("Sheehy").*fn1 On June 18, 2008, the Investment Committee discussed potential restrictions on common stock. On September 23, 2008 a 20% cap was placed on individual plan holdings of common stock.

The Plan

The Plan is an "employee pension benefit plan" as defined by § 2(2)(A) of ERISA, 29 U.S.C. § 1002(2)(A). During the Class Period, the assets of the Plan were held in trust by Vanguard Fiduciary Trust Company pursuant to a trust agreement. All contributions made to the Plan constituted a form of deferred compensation. The Plan did not limit the ability of Plan fiduciaries to divest assets invested in the General Growth Properties, Inc. Stock Fund ("GGP Stock Fund") as prudence required.

General Growth Management, Inc. adopted the Plan on January 1, 1988 to enable employees to provide for their future. On January 1, 1997, the GGP Management, Inc. Savings Plan was merged into the Plan, and then on June 18, 1998, the General Growth Employee Stock Ownership Plan was also merged into the Plan. Prior to January 1, 2006, the Plan was known as the General Growth Management Savings and Employee Stock Ownership Plan, but thereafter, the Plan was renamed the General Growth 401(k) Savings Plan.

According to the Plan's Trust Agreement, the "Plan Administrator shall have the exclusive authority and discretion to select the investment funds" under the Plan. Throughout the Class Period, the Plan offered various investment options for participant contributions, including the GGP Stock Fund. The GGP Stock Fund was comprised of shares of Company Stock. The Plan did not require the fiduciaries to offer GGP Stock as a retirement option and provided that the trust would consist of investment funds "which may include a fund investing solely in shares of General Growth Properties, Inc. (the "GGP Stock Fund")." According to the summary plan description ("SPD"), General Growth's filings with the SEC were incorporated into the Plan's governing documents. The SPD states that "[t]he Securities and Exchange Commission ("SEC") allows General Growth Properties, Inc. to disclose important information to you by referring you to documents that have been previously filed by GGP with the SEC. This is called incorporation by reference." The SPD goes on to explain that filings which are incorporated by reference include GGP's annual report on Form 10-K, the Plan's annual report on Form 11-K, all other reports filed by GGP under Sections 13(a) or 15(d) of the 1934 Act, and the description of GGP's common stock. As of March 31, 2008, 39 participants had 100% of their Plan investment in GGP Stock.

In its 2008 Annual Report, the Company reported that its "operations focus was on developing projects." To finance these projects, Plaintiffs allege that General Growth secured billions of dollars in mortgage and construction loans. Plaintiffs argue however that Defendants knew or should have known that the nationwide subprime lending crisis and declines in consumer spending made expansion of real estate holdings "an ill-advised business plan."

Plaintiffs allege that the Company failed to disclose to the investing public or the Plan's Participants the adverse effect of the real estate market's collapse on the Company's real estate holdings, as well as the Company's inability to satisfy or refinance its substantial debt obligations. Plaintiffs assert that throughout the Class Period, Defendants issued materially inaccurate statements that misrepresented the strength of the Company's business and its ability to refinance its mortgages. As a result of these misrepresentations, Plaintiffs claim that GGP Stock traded at artificially inflated prices throughout the Class Period.

Plaintiffs point to statements made in the Company's financial results, quarterly reports, conference calls, press releases, letters to shareholders, and SEC filings made by various corporate officers. Plaintiffs allege that these statements were misleading because they were overly confident and concealed the truth regarding known risks, the value of Company Stock and the Company's substantial debt obligations. For example, on August 8, 2007, the Company announced favorable prospects for growth in its quarterly report form on Form 10-Q filed with the SEC. Again on October 31, 2007, the Company issued a press release announcing its financial results for the third quarter of 2007 and filed this press release with the SEC on Form 8-K. Plaintiffs cite numerous examples of allegedly false and misleading announcements and financial results released to the public and filed with the SEC.

On September 22, 2008, the Company issued a press release entitled "General Growth Pursues Debt Reduction and Strategic Alternatives." Plaintiffs allege that as a result of this article and its disclosures, General Growth's Stock price dropped from $21.42 per share on September 19, 2008, to $16.08 per share on the next trading day. On October 1, 2008, The Wall Street Journal published an article entitled "'General Growth Properties' High-Risk Strategies Hit Home-Big Debts Incurred to Build Up Firm, Executives' Stock." Among other things, this article discussed alleged insider stock sales by Company executives of approximately $112 million. Plaintiffs allege that subsequent to this article, General Growth's stock dropped from $14.62 to $7.59 overnight. Plaintiffs also cite to several other news articles which discussed executive stock sales, the company's debt, and its efforts to refinance. Plaintiffs allege that the continued drop in General Growth Stock price was a result of the artificial inflation caused by the Company's misleading public statements.

In a Form 10-Q SEC filing submitted on November 10, 2008, General Growth acknowledged the likelihood of bankruptcy as a result of its financing difficulties. Throughout the Class Period, Plaintiffs allege that GGP Stock decreased from a trading high of $65.81 on April 30, 2007 to $0.49 on November 11, 2008. On February 26, 2009, General Growth filed a Form 10-K with the SEC and acknowledged that it might file for bankruptcy protection due to the substantial amount of debt it was unable to refinance or extend. In that disclosure, it also acknowledged that the value of its common stock could be reduced to zero as a result of a bankruptcy filing.

On April 16, 2009 General Growth announced that it was filing for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. Consequently, the New York Stock Exchange Regulation, Inc. announced that General Growth's stock would be suspended immediately. On its last day of trading on the NYSE, General Growth common stock closed at $1.05 per share. On April 23, 2009, General Growth received a notice of delisting from the NYSE.

Plaintiffs allege that Defendants regularly communicated with Plan Participants regarding the performance, and future financial prospects of the Company and its Stock. Plaintiffs allege that Defendants "fostered a positive attitude toward the Company's Stock and/or allowed Participants in the Plan to follow their natural bias towards investing in the equities of their employer by not disclosing negative material information concerning investment in the Company's stock." As such, Plan Participants were unable to make informed decisions regarding their Plan investments. ...

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