The opinion of the court was delivered by: Anita B. Brody, J.
Plaintiff Michael Dann ("Dann") is a participant in a 401(k) employee retirement savings plan sponsored by Lincoln National Corporation ("LNC," "Lincoln National," or "Company") that held Company common stock as an investment. Dann brings this purported class action on behalf of the LNC Employees' Savings and Retirement Plan (the "Employees' Plan"), the Lincoln National Life Insurance Company Agents' Savings and Profit-Sharing Plan (the "Agents' Plan"), and the Delaware Management Holdings, Inc. Employees' Savings and 401(k) Plan (the "Delaware Plan") (collectively, the "Plans").
Participants in each one of the Plans chose how their contributions were invested. One of their investment options was an employee stock ownership plan ("ESOP"), which invested primarily in LNC common stock. During the alleged Class Period, which began on February 4, 2008, LNC common stock lost a significant percentage of its value. Dann brings this action under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001, et seq., alleging that it was imprudent for the Plans to invest in LNC common stock and that Defendants*fn1 breached their fiduciary duty by failing to provide plan participants with complete and accurate information about investing in LNC (Count I). Dann also contends that Defendants Lincoln National and Dennis Glass ("Glass"), Lincoln National's CEO, President, and Board member during the Class Period, failed to adequately monitor the other fiduciaries and failed to provide them with accurate information (Count II).
Defendants move to dismiss the Amended Complaint, arguing: (1) that Dann lacks standing to bring this action on behalf of the Agents' Plan and the Delaware Plan, and (2) that Defendants are entitled to a presumption of prudence for their decision to invest in LNC common stock, met their disclosure obligations, and never made misleading statements about the risks associated with investing in LNC.
For the reasons that follow, I will deny Defendants' Motion to Dismiss.
Lincoln National, through various subsidiaries, sells wealth protection, accumulation, and retirement income products and solutions. As part of its business model, Lincoln National collects cash on the sales of insurance policies and annuities and then invests those funds with the goal of earning a profitable return. As financial markets struggled in 2008 and 2009, Lincoln National became increasingly exposed to heavy losses because of its investments in mortgage-backed securities, structured investment products, and other derivative securities. Dann contends that because Defendants knew or should have known of the Company's exposure to investment losses, it was imprudent to continue investing Plan assets in Company stock. Further, Dann alleges that Defendants failure to disclose the Company's exposure to investment losses prevented plan participants from making informed investment decisions.
Each of the Plans is an "employee pension benefit plan," as defined by ERISA. See 29 U.S.C. § 1002(2)(A). Each Plan described its purpose and nature in similar terms:
The purpose of the Plan is to reward participating [Employees or Agents] for their service and to provide them and their Beneficiaries with the retirement, death, and other benefits provided by the Plan. The Plan is a defined contribution profit sharing plan with a cash or deferred arrangement and matching contributions, as well as an ESOP component.
Employees' Plan § 1.4; Agents' Plan § 1.3; Delaware Plan § 1.4.*fn3 LNC employees who chose to participate in the Plans had individual investment accounts holding their contributions. Participants could invest their contributions in any of the investment options offered under the Plans.*fn4 One of these investment options was the LNC Common Stock Fund, which invested primarily in Company stock and was designated as an ESOP. Employees' Plan § 13.1; Agents' Plan § 13.1; Delaware Plan § 13.1 ("The Company has designated the LNC Common Stock Fund as the ESOP portion of the Plan, which is a stock bonus plan invested primarily in qualifying employer securities.").
Each of the Plans provided a Summary Plan Description & Prospectus ("SPD") to educate plan participants about their investment options. The SPDs warned participants:
The selection of Investment Options is your sole responsibility, to be made in careful consideration of your investment needs and objectives. You should be aware that the stock market fluctuates daily and impacts the value of your account, either positively or negatively.
Employees' Plan SPD at 8; Delaware Plan SPD at 6. See also Agents' Plan SPD at 33. Further, with respect to the LNC Common Stock Account, the SPDs provided the following information:
* Investment Objectives: This Investment Option is referred to as an Employee Stock Ownership Plan. It is designed to provide participants with the opportunity to invest in employer securities.
* Investment Strategies: To achieve its objective, this Investment Option invests exclusively in shares of LNC Common Stock.
* Primary Risk: Investment-Style Risk; Inflation Risk and Market Risk. This is a non-diversified Investment Option, investing in the stock of a single issuer. It is therefore a riskier investment than an Investment Option that invests in a diversified pool of stocks of companies with similar characteristics as this Account.
Employees' Plan SPD at 28; Agents' Plan SPD at 50; Delaware Plan SPD at 26.
Despite the increased risks associated with ESOPs, many employees chose to invest in the LNC Common Stock Fund. At the beginning of 2008, for example, the Employees' Plan held 2,676,381 shares of LNC common stock, valued at approximately $155,818,902. (Am. Compl. ¶ 44.) On February 4, 2008, LNC common stock closed at $55.30 per share. During 2008 and 2009, the value of LNC common stock declined because of losses in Lincoln National's investment portfolio, which were primarily attributable to losses in financial services fixed income securities, collateralized debt obligations, home-equity asset-backed securities, commercial mortgage-backed securities, and non-agency backed pass through residential mortgage-backed securities. Dann alleges: "despite the continuously mounting losses in the Company's investment portfolio--and the inevitable impact upon its stock price, Defendants took no action whatsoever to protect the Plans' assets from their substantial investment in the LNC Common Stock Fund." (Am. Compl. ¶ 119.) Instead, Defendants actually increased the Plans' holdings in Company stock. By year-end, although the Employees' Plan increased the number of shares it held to 3,485,115, the value of those shares fell to $65,659,563, dropping $90,159,339. (Am. Compl. ¶ 44.) Similarly, the value of the Agents' Plan's holdings in LNC common stock fell by $25,547,401, and the value of the Delaware Plan's holdings fell by $5,446,477. (Am. Compl. ¶¶ 53, 59.) By May 5, 2009, the price of LNC common stock fell to $11.71 per share.
The Amended Complaint outlines the declining value of LNC common stock. In September 2008, the Company publicly disclosed its exposure to counterparty risk on derivative instruments with affiliates of Lehman Brothers and its exposure to investments in Lehman Brothers and Washington Mutual securities. Dann contends that "Lincoln National's holdings of securities issued by Washington Mutual and Lehman were particularly risky" and that the Company's "losses were preceded by numerous warnings signs and/or ratings agency downgrades." (Am. Compl. ¶ 124.)
On October 9, 2008, LNC common stock lost more than a third of its value. On October 10, 2008, Lincoln National announced third quarter gross investment losses of approximately $400 million, and stated that it would cut its dividend by 50%, from 41.5 cents per share to 21 cents per share. On November 17, 2008, LNC announced that it had applied to participate in the U.S. Treasury's Troubled Assets Relief Program ("TARP"). On November 19, 2008, shares of LNC common stock fell by another 40%. LNC common stock fell from $51.51 per share on September 2, 2008 to $13.73 per share on November 28, 2008.
After a rebound in December 2008 and January 2009, the Company's financial troubles continued. On March 14, 2009, A.M. Best Company, a ratings agency, downgraded the issuer credit and debt ratings of LNC and its subsidiaries from "aa" to "aa-." On March 19, 2009, Moody's Investor Service downgraded LNC's senior debt rating from "A3" to "Baa1." On the same day, the Company announced that it had nearly $1 billion in debt due in 2009. On May 5, 2009, after the Company reported a first quarter loss of $579 million, or $2.27 per share, the price of LNC common stocked closed at $11.71 per share. By September 2009, however, LNC common stock rebounded to above $23 per share.
Dann contends that, throughout this time, Defendants should have discontinued the LNC Common Stock Fund as an investment option and divested the Plans' assets from LNC common stock because they knew or should have known that, due to the Company's exposure to losses stemming from problems within the financial services sector, LNC common stock was an imprudent investment for the Plans' assets. The Amended Complaint contains numerous allegations, supported by references to newspaper articles, congressional hearings, and economic studies, suggesting that a prudent fiduciary should have known of the impending collapse in the subprime lending industry and mortgage-backed securities market. (Am. Compl. ¶¶ 95-109.) Dann further alleges that some Defendants suffered from conflicts of interests because their compensation was tied to the price of LNC common stock, creating an incentive to keep the Plans' assets heavily invested in LNC.
Finally, Dann contends that as the value of the Company's investment portfolio deteriorated in 2008 and 2009, Defendants breached their duty of disclosure by (1) failing to reveal LNC's exposure to investment portfolio losses to plan participants and (2) issuing false and misleading statements that understated the level of risk. Some instances of alleged misrepresentations include:
* On February 4, 2008, the Company reported that its net income for the fourth quarter of 2007 included net realized losses on investments of $71 million, or $0.26 per diluted share. On the same day, Defendant Glass, Lincoln National's CEO, stated that the Company was "well positioned for the future" and that ...