Third Time No Charm for Stable Value Fund Suit

A suit that alleged a stable value investment was imprudent has been dismissed by a federal judge.

The suit, Barchock v. CVS Health Corp., (2017 BL 127046, D.R.I., No. 1:16-cv-00061-ML-PAS, 4/18/17), alleged that fund manager Galliard failed to exercise appropriate prudence with respect to the investment allocation in the stable value fund, one of the investment options in the CVS plan, and that CVS failed in its duty to monitor Galliard’s investment management.

Previous Attempts

Plaintiffs in the case had already fallen short twice before. The plaintiffs’ first pleading (in the words of the court) offered “…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 objected, made a motion to amend their complaint, and were allowed to do so. “With this fleet of facts, navigating with far more precision than before,” said Judge Sullivan, who also heard that case, the plaintiffs allege inference of a breach of the duty of prudent management that they say arises from an examination of three aspects of the CVS Stable Value Fund’s asset allocation. They make those arguments with a complaint “…now loaded to the scuppers with factual allegations in support of each.” In the amended complaint, the plaintiff argued that there was excessive liquidity in the fund’s asset allocation and that the too-brief duration of the investments caused by an excessive percentage invested in short-term TIFs resulted in suppressed returns.

However, Judge Sullivan noted that, “While this Complaint contains far more ballast than its predecessor, I find that 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 Fund’s allocation did not maximize returns.” And, while she acknowledged that the new claims – 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,” she found that they were “insufficient to permit an inference of imprudence.” Moreover, she noted that 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,” that “with no plausible allegation that Galliard committed a breach of its duty as investment manager.”

Third Time

In this third round, Senior Judge Mary M. Lisi of the U.S. District Court for the District of Rhode Island, noted that the plaintiffs “…suggest that the Stable Value Fund (1) was excessively concentrated in investments with ultra-short durations, and (2) maintained excessive liquidity far beyond any reasonable need for it,” and that as a result they were injured “in the form of significantly lower crediting rates than they would have received had the Stable Value Fund been prudently managed in accordance with industry standards regarding duration and liquidity.”

That said, she also cited the defendant’s position was that “by plaintiffs’ own account, the CVS Stable Value Fund was at all times structured to meet – and did in fact meet – its stated investment objectives: ‘to preserve capital while generating a steady rate of return higher than money market funds provide.’” Moreover, the plaintiffs’ contentions that the fund could have “predictably” earned higher returns by means of a different investment allocation, constitutes “improper hindsight critique.” As for the plaintiffs’ reliance on industry averages to support a claim of the defendants’ imprudent investment in higher cash and cash-equivalent holdings, the defendants note that “the salient question is whether the [Fund]’s portfolio conformed to its investment objective,” which it concededly did.

However, Judge Lisi noted that the plaintiffs in this case were not asserting that they incurred losses because Galliard deviated from the plan’s disclosed investment objective; “rather, they have commenced this litigation because their investments, when considered in hindsight, might have yielded higher gains if Galliard had elected to allocate the Fund’s investment more in line with the industry average.”

At which point Judge Lisi noted that the well-established test of prudence is “one of conduct, and not a test of the result of the performance of the investment,” that in this case the fund was invested in conformance with its stated objective and whether that strategy was prudent “cannot be measured in hindsight.”

And thus, “Plaintiffs’ Complaint is insufficient to withstand the Defendants’ motion to dismiss.”

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