In re Tyco Litigation

In re Tyco Litigation                       MDL-02-1335      12/02/04

                     UNITED STATES DISTRICT COURT
                  FOR THE DISTRICT OF NEW HAMPSHIRE


In re Tyco International. Ltd.
Multidistrict Litigation (MDL 1335)
                                              MDL DOCKET NO. 02-1335-PB
                                              ERISA Action
                                              Case N o . 02-1357-PB
                                              Opinion No. 

                             MEMORANDOM AND ORDER

     The named plaintiffs in this class action are participants

in retirement plans (“Plans”) sponsored by Tyco International

(US) Inc. (“Tyco U S ” ) .    Plaintiffs invoke the Employee Retirement

Income Security Act (“ERISA”) in asserting breach of fiduciary

duty claims against Tyco U S , its parent corporation, Tyco

International Ltd. (“Tyco International”), the committee that

administered the Plans, and several former officers and directors

of Tyco US and its parent corporation.        The claims concern the

Tyco Stock Fund, which holds Tyco International stock and is one

of the Plans’ investment options. Plaintiffs charge in Count I

that defendants made material misstatements and omissions to

participants concerning Tyco International’s financial condition

and the risk characteristics of the fund.           They allege in Count
II that defendants were negligent in allowing participants to

invest in the fund.

    Defendants attack the complaint’s sufficiency on several

grounds.   They first argue that only the committee that

administered the Plans was a fiduciary.      Second, they assert that

plaintiffs’ claims are barred by Section 404(c) of ERISA, which

precludes certain breach of fiduciary claims for losses that were

caused by a participant’s own investment decisions. Next, they

contend that Count I fails because it does not allege any

actionable misstatements or omissions and Count II is deficient

because it does not sufficiently allege that defendants acted

imprudently.   Finally, they contend that the complaint must be

dismissed because ERISA does not authorize Plan participants to

recover monetary relief for fiduciary breaches.



                           I.   BACKGROUND

    Tyco US sponsors the seven retirement plans that are at

issue in this case. All seven plans are “individual account

plans.”    

(34).   Accordingly, each participant is

assigned an individual account and the participant’s benefits are



                                   -2-
“based solely upon the amount contributed to the account, and any

income, expenses, gains or losses, and any forfeitures of

accounts of other participants which may be allocated to such

participant’s account.”   

   Participants are permitted to

contribute to their accounts and Tyco US is required to make

matching contributions in amounts equal to a specified percentage

of a participant’s regular compensation.   Participants may choose

from among several different investment options and may transfer

funds from one investment to another at any time.

    The Tyco Stock Fund is one of several investment options

that are available under the Plans. The fund holds shares in

Tyco International stock.   Because it is a “unitized fund,” a

trustee designated by Tyco US holds title to the stock and

participants are assigned units in the fund.   The trustee

acquires stock by purchasing it on the open market.    Participants

are not permitted to invest more than 25% of their Plan assets in

the fund.

    The Tyco US Retirement Committee (“Committee”) is both the

administrator and a “named fiduciary” for all seven Plans. The

Board of Directors of Tyco US is responsible for appointing and



                                 -3-
removing members of the Committee. The Plans describe the

respective powers and duties of the Board and the Committee by

stating that

    [t]he Board of Directors of the Plan Sponsor and the
    Committee shall have only those specific powers,
    duties, responsibilities, and obligations as are
    specifically given them under this Plan and the Trust
    Agreement. In general, the Board of Directors of the
    Plan Sponsor shall have the sole responsibility for the
    appointment of the Retirement Committee. The Committee
    shall have the sole responsibility for the general
    administration of the Plan and for carrying out its
    provisions.

See, e.g., Plan II ¶ 8.1.   Each Plan also states that

    [t]he Board of Directors of the Plan Sponsor and the
    Committee and any other person who, by reason of his
    involvement in and under this Plan, shall be deemed to
    be a fiduciary within the meaning of Title I , Section
    3(21) of ERISA, shall discharge their Plan-related
    duties and responsibilities solely in the interests of
    the participants and their beneficiaries and with the
    care, skill, prudence and diligence under the
    circumstances then prevailing that a prudent man acting
    in like capacity and familiar with such matters would
    use in the conduct of an enterprise of like character
    and with like aims.

See, e.g., Plan II Art. XIII.

    Plaintiffs claim that the price of Tyco International’s

stock was grossly inflated during the class period as a result of

undisclosed looting and pervasive accounting fraud by its senior



                                -4-
management. As a result, class members who held units in the

Tyco Stock Fund during the class period allegedly suffered

substantial losses when the company’s true financial condition

was exposed.



                         II.    STANDARD OF REVIEW

     “[A] complaint should be dismissed [pursuant to Fed. R. Civ.

P. 12(b)(a)]. . . ‘only if it is clear that no relief could be

granted under any set of facts that could be proved consistent

with the allegations.’”        Gorski v . N.H. Dep’t of Corr., 

 (1st Cir. 2002) (quoting Hishon v . King & Spalding, 

 9 , 73 (1984)).   Accordingly, I must accept the complaint’s

factual allegations as true and draw all reasonable inferences

from those alleged facts in favor of the plaintiffs.        

Although the complaint is governed by the liberal pleading

standards of Fed. R. Civ. P. 8 ( a ) , it nevertheless “must set

forth factual allegations, either direct or inferential,

respecting each material element necessary to sustain recovery

under some actionable legal theory.”        United States ex rel.

Karvelas v . Melrose-Wakefield Hosp., 

 2 0 , 240 (1st Cir.

2004).

                                     -5-
                         III.     ANALYSIS1

A.   Fiduciary Status

     Defendants first argue that only the Committee and its

members can be held liable for a breach of fiduciary duty because

the Committee is the only entity that was named as a fiduciary

under the Plans.

     Retirement plans regulated under ERISA must have one or more

named fiduciaries. 

(a).       In addition, Section

3(21)(a) of ERISA provides that

     a person is a fiduciary with respect to a plan to the
     extent (i) he exercises any discretionary authority or
     discretionary control respecting management of such
     plan or exercises any authority or control respecting
     management or disposition of assets, (ii) he renders
     investment advice for a fee or other compensation,
     direct or indirect, with respect to any moneys or other
     property of such plan, or has any authority or respon-



     1
       Defendants contend that the named plaintiffs lack standing
to assert claims on behalf of participants in Plans I , V I , and
VII because none of the named plaintiffs was a participant in
these Plans. The short answer to this argument is that it should
be raised in an objection to a motion for class certification
rather than in a motion to dismiss. Plaintiffs plainly have
standing to seek relief for their own injuries. Whether they
also should be permitted to represent a class that includes
participants in related plans implicates prudential concerns that
must be analyzed under Fed. R. Civ. P. 2 3 . See Fallick v .
Nationwide Mut. Ins. Co., 

 1 0 , 422 (6th Cir. 1998).

                                  -6-
     sibility to do s o , or (iii) he has any discretionary
     authority or discretionary responsibility in the
     administration of such plan.

(21).   Several aspects of Section 3(21)(a)

require emphasis. First, the section provides a functional

rather than formal test of fiduciary status. Accordingly, a

person may owe fiduciary duties to a participant even though the

plan documents do not designate the person as a fiduciary.

Second, a person will be deemed to be a fiduciary only if he

either: (1) has or exercises discretion in administering the plan

or managing its assets; or (2) provides investment advice

concerning plan assets in exchange for compensation.     Finally, as

the First Circuit has recognized, “[f]iduciary status is not an

all or nothing proposition; the statutory language indicates that

a person is a plan fiduciary only ‘to the extent’ that he

possesses or exercises the requisite discretion and control.”

Beddall v . State S t . Bank & Trust Co., 

 2 , 18 (1st Cir.

1998).

     Plaintiffs argue that defendants other than the Committee

are liable because they qualify as fiduciaries under Section

3(21)(a).   Defendants respond by contending that they cannot be

considered fiduciaries under this section either because they did

                                 -7-
not exercise discretion or they were not administering the Plans

when they allegedly committed the acts on which plaintiffs’

claims are based.   I address this argument with respect to each

group of defendants in turn.

    1.   Bent and Heffernan

    Robert Bent and Kelly Heffernan were employees of Tyco U S .

Plaintiffs have sued them in their respective capacities as the

Clerk and an authorized signatory of the Committee.

    I agree with defendants that the complaint does not

sufficiently allege that either Bent or Heffernan owed fiduciary

duties to the plaintiffs. While the Committee plainly is a named

fiduciary, the complaint does not allege that either Bent or

Heffernan were members of the Committee. Nor is it reasonable to

assume that they were members simply because they allegedly

performed services on behalf of the Committee. Finally, I cannot

accept plaintiffs’ argument that Bent and Heffernan acted in a

fiduciary capacity because they signed SEC filings on behalf of

the Committee. The complaint does not claim that either

defendant exercised discretionary control over the administration

of the Plans when they signed the documents in question.



                                -8-
Ministerial actions of this sort do not give rise to fiduciary

responsibilities. See Beddall, 

 0 . Accordingly, I

dismiss all claims against Bent and Heffernan.

     2.   Tyco US

     Plaintiffs offer three arguments to support their claims

against Tyco U S . First, they contend that it was a fiduciary

because the Plans assign it discretionary authority with respect

to matters of Plan administration.    Next, they argue that it was

a fiduciary because it actually exercised such authority.

Finally, they contend that it is vicariously liable for the

fiduciary breaches of its employees who served on the Committee

based on the doctrine of respondeat superior.

          a.   Plan Documents

     The Plans identify Tyco US as the Plan Sponsor and state

that “the Plan Sponsor hereunder shall have and exercise all

rights, powers, and duties thereof with respect to the Plan and

the assets of the Plan.”   See, e.g., Plan II ¶ 10.2. Plaintiffs

claim that this passage makes Tyco US a fiduciary because it

gives the company discretionary authority with respect to matters

of Plan administration.



                                -9-
     Plaintiffs’ argument is based on a misreading of the above-

quoted passage. Paragraph 10.2 merely recognizes that Tyco US

has the powers and duties of a Plan Sponsor. The only power that

the Plans specifically assign to Tyco US in that capacity is the

power to amend the Plans. See Plan II ¶ 10.1. A Plan sponsor

generally does not act in a fiduciary capacity when it exercises

such power. See Lockheed Corp. v . Spink, 

 8 2 , 889-90

(1996).   Accordingly, the complaint does not sufficiently allege

that the Plan documents assign Tyco US discretionary authority

with respect to matters of Plan administration.

          b.   Exercise of Discretionary Authority

     Plaintiffs alternatively claim that Tyco US was a fiduciary

because it actually exercised discretionary authority in

administering the Plans. Plaintiffs base this argument on

actions that Tyco US allegedly took while operating the Tyco

Benefits Center. Several Plan documents advise participants to

contact the Center if they have questions concerning the Plans.

The documents also designate the Center as the point of contact

for participants who wish to reallocate investments, modify

contributions, or obtain distributions. Plaintiffs charge that

Tyco US necessarily engaged in discretionary acts of Plan

                               -10-
administration when, acting through the Center, it assisted

participants with such matters. I disagree.

     A Plan Sponsor does not become a fiduciary merely because it

performs ministerial duties with respect to matters of Plan

administration.   See Beddall, 

 0 . Responding to

routine requests for information and processing requests to

reallocate investments, change contributions, or make

distributions, ordinarily does not involve the kind of discretion

that is required to give rise to fiduciary responsibilities.

Plaintiffs thus do not identify any conduct by Tyco US that

supports the view that it engaged in discretionary acts of Plan

administration.

          c.   Respondeat Superior

     Plaintiffs alternatively invoke the doctrine of respondeat

superior in claiming that Tyco US is vicariously liable for the

fiduciary breaches of its employees who served on the Committee.

     The First Circuit has not identified the circumstances under

which an employer will be held vicariously liable for the

fiduciary breaches of its employees, and the few courts that have

addressed the question have taken divergent paths in doing s o .

The Fifth Circuit has suggested that an employer will be

                               -11-
vicariously liable for its employee’s actions only if it

“actively and knowingly” participated in an employee’s fiduciary

breaches.   See Am. Fed’n of Unions Local 102 Health & Welfare

Fund v . Equitable Life Assur. Soc. of the U.S., 

 5 8 , 665

(5th Cir. 1988).   The Sixth Circuit has concluded that an

employer can be held liable for an employee’s breaches of

fiduciary duty even if it was unaware of its employee’s

misconduct. See Hamilton v . Carell, 

 9 2 , 1002 (6th Cir.

2001)(dictum); see also Nat’l Football Scouting, Inc. v . Cont’l

Assur. Co., 

, 649 (10th Cir. 1991) (assuming that

respondeat superior doctrine applies to ERISA claims).     In

contrast, the Ninth Circuit has declined to hold an employer who

sponsors an ERISA plan liable for breaches of fiduciary duty

committed by employees who served on the Committee that

administered the Plan. See Gelardi v . Pertec Computer Corp., 

 (9th Cir. 1985).    District courts that have

addressed the issue are similarly split. Compare In re Reliant

Energy ERISA Litig., 336 F. Supp. 2d. 646, 657-58 (S.D. Tex.

2004) (applying respondeat superior),    Howell v . Motorola, Inc.,

 (N.D. Ill. 2004) and Kling v .

Fidelity Mgmt. Trust Co., 323 F. Supp. 2d. 1 3 2 , 146-47 (D. Mass.

                                -12-
2004) with Crowley ex rel. Corning Inc. Inv. Plan v . Corning,

Inc., 234 F. Supp. 2d. 2 2 2 , 228-29 (W.D.N.Y. 2002) (rejecting

respondeat superior) and Tool v . Nat’l Employee Benefit Servs,

Inc., 

 (N.D. Cal. 1996).

     I am not able to resolve defendants’ challenge to

plaintiffs’ respondeat superior claim on the present record.

While I do not doubt that an employer can be held vicariously

liable for the fiduciary breaches of its employees under certain

circumstances, I cannot determine how the doctrine applies in

this case without knowing more about the underlying facts.

Accordingly, I decline to dismiss plaintiffs’ claims against Tyco

US to the extent that they are based on a respondeat superior

theory.

     3.   Tyco US Board Members

     Plaintiffs argue that the Board of Directors of Tyco US owed

fiduciary duties to the Plans and their participants because it

acted in a fiduciary capacity when it appointed and retained

members of the Committee. I agree.

     When an entity is given the power to appoint and retain a

plan administrator, it is subject to a fiduciary duty to use



                                  -13-
reasonable care in exercising that power. See Am. Fed’n of

Unions Local 1 0 2 , 

; Leigh v . Engle, 

 (7th Cir. 1984); In re Reliant Energy ERISA Litig., 336 F.

Supp. 2d. at 656; In re Enron Corp. Sec., Derivative, & “ERISA”

Litig., 

 1 1 , 552 (S.D. Tex. 2003).   Whether the

directors of Tyco US breached this duty is a question of fact

that must be resolved at a later date.

     4.   Tyco International

     Plaintiffs offer three arguments to support their contention

that Tyco International was a fiduciary.    First, they claim that

Tyco International assumed fiduciary duties by disseminating

documents that it was required to either file with the SEC or

make available to Plan participants in order to comply with

federal securities laws.   Second, they argue that it was a

fiduciary because it is the alter ego of Tyco U S . Third, they

allege that it is vicariously liable for Kozlowski’s fiduciary

breaches under the doctrine of respondeat superior.

          a.   SEC Documents

     Plaintiffs claim that Tyco acted in a fiduciary capacity

when it disseminated SEC Form S-8s and Section 10(a) prospectuses

that incorporated by reference other allegedly misleading SEC

                                -14-
documents.2   Defendants respond by arguing that Tyco was acting

in a corporate capacity rather than a fiduciary capacity when it

disseminated the documents. To understand this issue, one must

know more about the relevant documents.

     The Securities Act of 1933 (“Securities Act”) requires

issuers of certain securities to file registration statements.

See 15 U.S.C. § 77e. Form S-8 is the statement that covers

“securities to be offered to employees pursuant to employee

benefit plans.”   

(b)(a).   The form is used to

register: (1) securities that an employer issues to its own

employees or employees of a parent or subsidiary; and (2)

interests in plans that offer such securities. See 

    A

registrant is required to incorporate certain prior SEC filings

     2
        Plaintiffs also allege that Tyco International acted in a
fiduciary capacity when it filed SEC Form 11-Ks on behalf of the
Committee. A Form 11-K is an annual report “with respect to
employee stock purchase, savings and similar plans, investments
in which constitute securities regulated under the Securities Act
of 1933.” Form 11-K at 1 . The form is signed by the plan’s
administrator and must be filed with the SEC. See 

 at 2 .
Plaintiffs do not allege that Tyco International prepared or
signed the Form 11-Ks. Instead, they merely assert that Tyco
International filed the forms with the SEC on behalf of the
Committee. Such conduct does not involve the exercise of
discretion. Thus, Tyco International was not acting in a
fiduciary capacity when it filed the Form 11-Ks on behalf of the
Committee.

                                -15-
by reference in a Form S-8.   See Form S-8 at 8 .   A Form S-8 must

be signed by the registrant, designated officers of the

registrant, and at least a majority of its directors. See 

 at

10 n.1. The Plan is also required to sign the form if the

security consists of interests in the Plan. See 

      Plaintiffs

charge that Tyco International prepared, signed, and filed the

Form S-8s at issue in this case.3

     Section 10(a) of the Securities Act requires issuers of

certain securities to prepare prospectuses. See 15 U.S.C. §

77J(a).   Special rules apply if a Form S-8 is used to register

the securities. For example, a prospectus need not be filed with

the SEC and the registrant may rely on Plan documents such as an

SPD to serve as the prospectus. See SEC Release N o . 280924 *5-6

(June 6, 1990).   A Section 10(a) prospectus must incorporate by

reference the same SEC filings that must be incorporated by

reference in a Form S-8.   See 

. The



     3
        Plaintiffs also argue that Tyco International’s former
directors and several of its officers are liable because they
signed the Form S-8s and were involved in the preparation of
other SEC filings. This argument fails for the same reason that
it is unavailing against Tyco International: the former
directors and officers were not administering the Plans when they
signed the forms.

                               -16-
prospectuses at issue consisted of SPDs and Plan Information

Statements.

     Whether Tyco International acted in a fiduciary capacity

when it disseminated Form S-8s and Section 10(a) prospectuses

depends upon whether it engaged in plan “management” or

“administration” when it disseminated the documents. The Supreme

Court addressed a somewhat similar question in Varity Corp. v .

Howe, 

 (1996).   There, the Court considered,

among other things, whether deceptive statements that an employer

and plan administrator made to its employees concerning the

security of their benefits could support a breach of fiduciary

duty claim.   In upholding the district court’s determination that

the defendant could be held liable for a breach of fiduciary

duty, the Court reasoned that the defendant was administering the

plan when it made the statements because: (1) the provision of

detailed information concerning the security of plan benefits is

a plan-related activity; (2) the statements at issue were made by

agents of the employer who were authorized to communicate to

participants in a fiduciary capacity; and (3) the participants

reasonably could have believed under the circumstances that the

employer was acting in a fiduciary capacity when its agents made

                               -17-
the statements. 

.

    Plaintiffs argue that Varity requires a similar conclusion

here because the Form S-8s and Section 10(a) prospectuses, like

the employer’s statements in Varity, provided participants with

detailed information concerning the security of their benefits.

This argument misreads Varity.    As I have explained, Varity holds

only that such statements may qualify as acts of plan

administration if they are made by a person who is authorized to

act in a fiduciary capacity.   This was not the case here because

Tyco International was acting solely as an issuer of stock rather

than a fiduciary when it disseminated the documents.

    There are also good reasons why the court’s reasoning in

Varity should not be extended to the present case. First, it

would be difficult to reconcile such a result within the language

of Section 3(21)(a), which rests a finding of fiduciary status in

this type of case on a determination that the defendant actively

participated in the administration of the Plan. Second, there is

little evidence in the legislative history of either the

Securities Act, which is the source of the disclosure

requirements, or ERISA to support the view that an issuer of

stock necessarily assumes fiduciary responsibilities in complying

                                 -18-
with its obligations under the securities laws if it chooses to

allow its employees to invest in its stock as a part of an

individual account plan. Although plaintiffs plainly had a right

to expect that Tyco International would refrain from making

material misstatements in its SEC filings, that expectation must

be enforced under the securities laws rather than ERISA.

Accordingly, I reject plaintiffs’ argument that Tyco

International was engaged in discretionary acts of Plan

administration when it disseminated the Form S-8s and Section
10(a) prospectuses.4

          b.   Alter Ego Liability

     Plaintiffs next argue that Tyco International is vicariously

liable for the fiduciary breaches of Tyco US because it is the



     4
        Plaintiffs specifically cite statements that Tyco
allegedly made in a prospectus update that it prepared in
response to the merger of Mallinkrodt, Inc. and a subsidiary of
Tyco International. The prospectus update explained to
participants in the prior Mallinkrodt plan that the plan’s option
to invest in the Mallinkrodt Fund would be replaced by the option
to invest in the Tyco Stock Fund following the merger.
Plaintiffs attach special significance to this document because
it states that Tyco International will be responsible for
disseminating the prospectus update to participants. This
argument is unavailing because, as I have explained, Tyco
International did not engage in discretionary acts of Plan
administration when it disseminated the prospectuses.

                               -19-
alter ego of its subsidiary.

     Although the First Circuit has yet to apply the alter ego

doctrine to a breach of fiduciary duty claim, it has identified

the conditions under which a parent corporation may be held

vicariously liable for its subsidiary’s obligation pursuant to

an ERISA-regulated plan to pay its retirees’ health insurance

premiums.   In United Elect., Radio & Mach. Workers v . 163

Pleasant S t . Corp., 

 (1st Cir. 1992), the court

explained that “litigants who insist that the corporate veil be

brushed aside must prove three things: lack of corporate

independence, fraudulent intent, and manifest injustice.”5    Id.

at 1093.



     5
        The court held in a later opinion that proof of a
wrongful anti-union motive was not always required to prove an
ERISA alter ego claim if the corporations in question shared
common ownership but were not in a parent-subsidiary
relationship. See Mass. Carpenters Cent. Collection Agency v
Belmont Concrete Corp., 

 0 4 , 308 (1st Cir. 1992). In
reaching this decision, however, the court stated that “we leave
to another day the issue of what role anti-union animus would
play in an ERISA suit for contributions to an employee benefit
fund where liability is sought to be imposed on a parent company
for the acts of its subsidiary on a veil piercing theory.” 

at 308 n.8. Thus, United Electrical remains good law and
continues to be relied on by the circuit as a correct description
of the federal common law veil piercing test. See, e.g.,
InterGen N.V. v . Grina, 

 3 4 , 148-49 (1st Cir. 2003).

                                -20-
     Construing the complaint in light of First Circuit

precedent, it is evident that plaintiffs have not pled

sufficient facts to state a claim that Tyco International is the

alter ego of Tyco U S . Plaintiffs do not allege a lack of

corporate independence between Tyco International and its

subsidiary except in conclusory terms. They do not assert that

Tyco International acted with fraudulent intent when it adopted

its corporate structure. Nor do they assert that Tyco US lacks

sufficient assets to pay any judgment that might be entered

against i t . Instead, plaintiffs base their argument entirely on

allegations that several officers of Tyco US also served as

officers of either Tyco International or one of its other

subsidiaries. Such allegations are not sufficient to state a

viable alter ego claim.   See InterGen, 

 (“[c]ommon

ownership and common management, without more, are insufficient

to override corporate separateness and pave the way for alter ego

liability”).

     5.   Kozlowski’s Statements

     Plaintiffs assert that Tyco International is liable on a

respondeat superior theory for misstatements and omissions that

Dennis Kozlowski, its former chief executive officer, allegedly

                               -21-
made to participants. I have reserved judgment as to when an

ERISA breach of fiduciary claim may be maintained using a

respondeat superior theory.   Accordingly, I decline to dismiss

plaintiffs’ claims against Tyco International to the extent that

they are based on Kozlowski’s alleged misstatements.6

B.   Section 404(c) Defense

     Section 404(c) of ERISA provides fiduciaries with an

affirmative defense to liability for injuries that are caused by

a participant’s exercise of control over assets in an individual

account plan. See 

(c)(1).   Defendants argue that

section 404(c) bars plaintiffs’ claims because their losses were

the result of their own poor investment decisions rather than

defendants’ misconduct.

     A section 404(c) defense has four elements: (1) the plan at

issue must provide for individual accounts; (2) the plan must

permit a participant to exercise control over the assets in his

account; (3) the participant must actually exercise control over

the assets; and (4) the loss or fiduciary breach on which the

     6
        I also decline to dismiss plaintiffs’ claims against
Kozlowski. Whether he was acting in a fiduciary capacity when he
made the statements that plaintiffs attribute to him presents a
question of fact that must be resolved at a later date.

                               -22-
claim is based must result from the participant’s exercise of

control.   See 

     Regulations issued by the Department of Labor elaborate on

the defense. See 

.404c-1. These regulations

state that the defense is unavailable if the fiduciary either

exercised “improper influence” over the participant or concealed

“material non-public facts” that it could have disclosed without

violating federal or state law.   See 

.404c-

1(c)(2).

     Although a defendant may raise an affirmative defense in a

Rule 12(b)(6) motion, the court may not grant the motion unless

the facts on which the defense is based are clear on the face of

the complaint. See Blackstone Realty, LLC v . FDIC, 

 (1st Cir. 2001).   Defendants cannot satisfy this standard

here because I cannot determine from the complaint whether

defendants exercised improper influence over the participants or

concealed material nonpublic information from them.   Accordingly,

I decline to dismiss the complaint pursuant to Section 404(c).

C.   Count I

     Plaintiffs charge in Count I that defendants breached their

fiduciary duties by negligently making material misstatements and

                               -23-
omissions concerning the Tyco Stock Fund.   They base their claim

in large part on statements concerning Tyco International’s

financial condition that the company made in its SEC filings.

Plaintiffs contend that these filings are attributable to the

Committee because the Committee incorporated the filings by

reference into Form S-8s, Form 11-Ks, Section 10(a) prospectuses,

and SPDs.   Plaintiffs also rely on statements that Kozlowski

allegedly made to participants concerning Tyco International’s

financial condition and certain statements concerning the risk

characteristics of the Tyco Stock Fund that defendants allegedly

made in several different Plan documents. Defendants challenge

Count I by arguing that the alleged misstatements and omissions

are not actionable under ERISA.7


     7
        Defendants also argue that plaintiffs have attempted to
attribute statements made by one defendant to other defendants
who played no role in making or disseminating the statements. 

 allows a fiduciary to be held liable for the
misconduct of a co-fiduciary in certain circumstances but
plaintiffs have not relied on this provision. Nevertheless, as I
have explained, it is conceivable that Tyco US could be held
liable for the Committee’s fiduciary breaches and Tyco
International could be held liable for Kozlowski’s fiduciary
breaches on a respondeat superior theory. Further, I have
determined that the directors of Tyco US may be held liable for
the Committee’s fiduciary breaches under certain circumstances if
they failed to properly oversee appointees to the Committee.
Whether a particular misstatement or omission should be

                               -24-
     I cannot evaluate defendants’ argument on the present

record.   Although the Supreme Court has determined that a

fiduciary can be held liable if it intentionally makes material

misstatements to participants in an effort to profit at their

expense, see Varity Corp., 

 0 2 , neither the Supreme

Court nor the First Circuit has yet determined whether a breach

of fiduciary duty claim can be premised on negligent

misrepresentations.   Although other courts have recognized such

claims in certain circumstances, see, e.g., Mathews v . Chevron

Corp., 

 (9th Cir. 2004); Krohn v . Huron Mem.

Hosp., 

 4 2 , 547 (6th Cir. 1999), I am reluctant to

express a view on this issue without the benefit of an

evidentiary record.

     I am also uncertain as to whether defendants can be held

liable for a failure to disclose material information.    The First

Circuit has suggested that a fiduciary may have a duty to

disclose material information if he has reason to know that the

failure to disclose the information would be harmful and either a



attributed to a particular defendant under one of these theories
is a question that can be resolved more reliably after the
evidentiary record has been developed.

                                -25-
participant has specifically requested the information or the

information concerns the plan as a whole. See Watson v .

Deaconess Waltham Hosp., 

 0 2 , 114-15 (1st Cir. 2002).   I

cannot determine whether the First Circuit’s reasoning is

applicable in this case because the parties have not attempted to

address the issue by applying the criteria that the First Circuit

suggests are dispositive. Accordingly, I decline to dismiss

Count I .

D.   Count II

     Plaintiffs claim in Count II that defendants are liable

because they negligently allowed participants to invest in the

Tyco Stock Fund even though they knew or reasonably should have

known that it was an unreasonably risky investment.    Defendants

challenge Count II on two grounds. First, they argue that they

cannot be charged with a breach of fiduciary duty for allowing

participants to invest in the Tyco Stock Fund because the Plans

did not give them the discretion to prevent such investments.

Second, they argue that the complaint does not sufficiently

allege that defendants acted imprudently.8


     8
        Defendants also claim that only the Committee can be held
liable for the conduct on which the claim is based. I agree that

                                -26-
    1.    Discretion to permit investments

    Defendants contend that they could not have prevented

participants from investing in the Tyco Stock Fund because the

Plans required the Committee to offer the Fund as an investment

option.   Defendants base this argument on the Plan’s definition

of the term “investment fund,” which states that “[t]he term

‘investment fund’ shall include a fund established by the trustee

at the direction of the Committee, which shall be invested

primarily in common shares of . . . Tyco International, Ltd. and

short-term interest income vehicles.”   Plan II ¶ 1.23.   In making

this argument, however, defendants overlook the Plan provision

that specifically describes the Committee’s powers and

responsibilities. That provision states that the Committee has

the power “to select appropriate investment vehicles, which may



the complaint does not sufficiently allege that either Tyco
International or Kozlowski were responsible for allowing
participants to invest in the Tyco Stock Fund. However, as I
have explained, Tyco US could be held vicariously liable for the
Committee’s actions on a respondeat superior theory. Similarly,
the directors of Tyco US could be liable for the Committee’s
actions if they breached their fiduciary duties with respect to
the appointment and retention of Committee members. Accordingly,
I dismiss Count II insofar as it asserts claims against Tyco
International and Kozlowski but otherwise deny defendants’
motions to dismiss this count.

                              -27-
include the Tyco Stock Fund . . . .”   Plan II ¶ 8.4(J) (emphasis

added).   When these two provisions are read together, it is

apparent that while the Tyco Stock Fund is an “investment fund,”

the Committee retains the power to determine whether participants

should be permitted to invest in the fund.   Thus, I reject

defendants’ contention that the Plans required that the Committee

give participants the opportunity to invest in the fund.

    2.    Negligence

    The complaint charges that defendants should have prevented

participants from investing in the Tyco Stock Fund because they

either knew or reasonably should have known that it was an

imprudent investment. Plaintiffs support this claim by relying

on multiple references in the public record during the class

period in which commentators raised questions concerning Tyco

International’s accounting practices. They also base their claim

in part on allegations that defendants either knew or should have

known of the undisclosed looting and accounting fraud that

allegedly was occurring at the company.   According to plaintiffs,

this combination of public and nonpublic information should have

caused the defendants to realize that the Tyco Stock Fund was an

imprudent investment.

                               -28-
     Defendants argue that the evidence cited in the complaint

will not support an imprudent investment claim.    In making this

argument they cite to case law that applies a presumption of

reasonableness to a plan administrator’s decision to invest in

employer securities.9   See, e.g., Moench v . Robertson, 

 (3d Cir. 1995); see also, Lalonde v . Textron, Inc., 

 , 3-4 (1st Cir. 2004).   They also argue that plaintiffs

cannot base their claim on nonpublic information because

defendants could not authorize trading on the basis of such

information without violating insider trading laws.    I reject

these arguments because the complaint is sufficient even if the

presumption of reasonableness applies and plaintiffs are forced

to support their claim solely with publicly available

information.



     9
        Plaintiffs argue that the presumption of reasonableness
applies only to Employee Stock Ownership Plans (“ESOPs”).
Because the Tyco Stock Fund is not an ESOP, they argue that the
presumption does not apply. Defendants respond by arguing that
the presumption applies to all “eligible individual account
plans,” see 

(d)(3)(A), because all such plans are
exempt from ERISA’s diversification requirement. See 

(a)(2); see also Wright v . O r . Metallurgical Corp., 

 (D. O r . 2002). Because I would not dismiss
Count II even if the presumption applies, I decline to resolve
this dispute at the present time.

                                -29-
E.   Available Relief

     Defendants next argue that plaintiffs’ claims must be

dismissed because they seek a form of relief that is not

available under ERISA.

     ERISA authorizes participants to sue fiduciaries on behalf

of a plan to recover losses to the plan that are caused by a

breach of fiduciary duty.     See 

 (a) and

1132(a)(2); see also Mass. Mut. Life Ins. C o . v . Russell, 

 3 4 , 140 (1985).   Although defendants argue that the

complaint seeks to recover for losses suffered by participants

rather than by the Plans, the complaint plainly seeks to recover

on behalf of both the Plans and their participants. Because the

complaint seeks a form of relief that is available under ERISA, I

decline to dismiss the complaint on this basis. Whether

plaintiffs will be able to prove that the Plans suffered

cognizable losses and whether ERISA also permits plaintiffs to

recover for losses that were suffered only by participants are

questions for another day.



                            IV.   CONCLUSION

     For the reasons set forth in this Memorandum and Order I

                                  -30-
grant defendants’ motions to dismiss all claims against Bent,

Heffernan, the former directors of Tyco International and the

former officers of Tyco International other than Kozlowski.           I

also dismiss Count II insofar as it asserts claims against Tyco

International and Kozlowski. Defendants’ motions to dismiss

(doc. nos. 8 , 9, 1 0 , 1 2 , 1 3 , and 14) are denied in all other

respects without prejudice to their right to renew their

arguments in properly supported motions for summary judgment

after discovery has been completed.

      SO ORDERED.




                                         Paul Barbadoro
                                         United States District Judge
December 2 , 2004

cc:   Counsel of Record




                                  -31-