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Johnson v. Radian Group

May 26, 2010


The opinion of the court was delivered by: McLaughlin, J.


Plaintiff Jeanette Johnson brings suit under § 502 of the Employee Retirement Income Security Act ("ERISA") on behalf of participants in the Radian Group, Inc. Savings Incentive Plan ("the Radian Plan" or "the Plan") whose accounts held company stock or units in the Radian Common Stock Fund from February 6, 2007, through July 15, 2008.*fn1 The defendants are Radian Group, Inc. ("Radian"), the Radian Compensation and Benefits Committee ("Plan Committee" or "Committee"),*fn2 Sanford A. Ibrahim, C. Robert Quint, Robert E. Croner, and Christine M. Kerly.*fn3 The plaintiff alleges that the defendants breached their fiduciary duties to prudently and loyally manage the Plan and to not mislead Plan participants about the risks associated with Radian stock in relation to Radian's investment in Credit-Based Asset Servicing and Securitization, L.L.C. ("C-BASS"). According to the plaintiff, Plan participants suffered substantial losses because of the defendants' fiduciary breaches, and she seeks to obligate the defendants to restore these losses to the Plan.

The plaintiff filed her class action complaint ("CAC") on April 29, 2008. On July 16, 2009, upon consideration of the defendants' motion to dismiss, the parties' briefs, and an oral argument on the motion, the Court dismissed the plaintiff's complaint without prejudice because the plaintiff failed to state a claim for breach of fiduciary duty. Johnson v. Radian Group, Inc., No. 08-2007, 2009 U.S. Dist. LEXIS 61334 (E.D. Pa. July 17, 2009). The plaintiff then filed an amended class action complaint ("ACAC") on August 17, 2009, which the defendants move to dismiss.*fn4 Because the Court finds that the plaintiff has once again failed to allege a breach of fiduciary duty, the Court will grant the defendants' motion and dismiss this case with prejudice.

I. The Court's Earlier Decision*fn5

Radian is a credit enhancement company that offers mortgage insurance and other financial services and products to financial institutions, including mortgage lenders. For the purposes of ERISA, Radian is the "sponsor" of the Plan at issue. Johnson, 2009 U.S. Dist. LEXIS 61334, at *5-6.

The Plan is a 401(k) employee pension benefits plan through which Radian employees have the option of making tax-deferred contributions from their salary. The company matches up to 6% of the participants' eligible compensation. The Plan is an "eligible individual account plan" ("EIAP") within the meaning of ERISA,*fn6 and a "defined contribution plan." Id. at *6-7.

In its earlier decision, the Court took notice of several Plan documents*fn7 that explained that matching contributions are to be made in either cash or shares of Radian stock, at the company's election. All matching contributions, however, "shall be invested in Company Stock until such time as the Participant may transfer all or portion of Company Stock to one or more" other investment media. Since January 1, 2007, Plan participants have been free to transfer all matching contributions to the investment funds of their choice; previously, they had to wait until their investments vested. Participants were advised specifically in a "Summary of Material Modifications" that they "should be aware that maintenance of a diversified and balanced portfolio of plan investments can be a key step towards ensuring long term retirement security." Id. at *7-8.

The Court also took notice that Plan participants are offered a range of investment options with more than twenty-five different investment funds, including Radian company stock. With respect to investing in company stock, participants were warned in an "Investment Policy Statement" that company stock is unique among the Plan's other investment options in that it invests solely in the common shares of Radian Group Inc. Investment in a single security poses both company-specific and industry/sector risks for participants. The value of the stock can be greatly affected by issues that arise within Radian Group Inc. or within its industry. Therefore, it is much more difficult to anticipate the risk characteristics of this option versus the diversified fund options available under the Plan.

Id. at * 8-9. Participants were also advised that "investment funds are subject to varying degrees of risk due to market fluctuations," and the Plan does not guarantee any specific level of benefits:

Contributions to the Radian Group Inc. Stock Fund will be used to purchase shares of the common stock of Radian Group Inc. at prevailing market prices. . . . The Fund is not diversified and its performance depends entirely on the performance of Radian Group Inc. Common Stock. As with other stock, the value of Radian Group Inc. Common Stock will fluctuate and your investment in this Fund will increase or decrease accordingly.

Id. at *9-10.

Besides acting as the Plan's sponsor, Radian was also the "Plan Administrator" for purposes of ERISA, as was the Plan Committee. As of January 1, 2007, the Plan was amended and Robert E. Croner became the Plan Administrator. Both before and after the January 2007 amendments, however, the Plan Committee was the fiduciary responsible for selecting the investment options offered under the Plan. Id. at *10-11.

During the class period, Radian engaged in three business segments: (1) mortgage insurance, (2) financial guaranty, and (3) financial services. Radian's financial services segment consisted of interests held in Sherman Financial Services Group, L.L.C. ("Sherman"), and C-BASS. Radian did not wholly own C-BASS; rather, Radian held a 46% interest in C-BASS, as did MGIC Investment Corporation ("MGIC"),*fn8 another provider of private mortgage insurance. On February 6, 2007, Radian and MGIC announced that they intended to merge, and as part of their merger, they agreed to sell half of their combined interest in C-BASS. Id. at *11-12, 14.

According to the plaintiff, the subprime mortgage crisis, coupled by C-BASS's business model, caused "a monumental liquidity crisis" for C-BASS. Prior to and during the class period, the subprime mortgage market deteriorated significantly, giving rise to a material increase in mortgage loan defaults. C-BASS was particularly vulnerable to these effects because C-BASS did not originate the loans it serviced and securitized, and it accepted the first risk of nonpayment. Id. at *12-13.

The plaintiff alleged that, despite the danger of its investment in C-BASS, Radian failed to disclose this danger to the Plan or its participants. Instead, it made statements indicating that its investment in C-BASS was strong, so as to inflate the price of Radian stock and not jeopardize the merger with MGIC. Radian also continued to imprudently offer company stock as an investment option and to match employee Plan contributions with Radian stock. Id. at *13-14, 28-29.

The CAC details several statements made by Radian, Ibrahim, and Quint in SEC filings and on conference calls with investors, which she argues are incorporated by reference into the Plan. The statements related to Radian's third quarter, fourth quarter, and fiscal year results for 2006, and its first and second quarter results for 2007. The statements also included Radian's Form 11-K annual report for the Plan filed with the SEC on June 29, 2007. According to the plaintiff, the defendants failed to disclose in these statements that Radian's $468 million investment in C-BASS was materially impaired because C-BASS was receiving margin calls and C-BASS's investments were declining in value at a significant rate. Id. at *15-24.

On July 30, 2007, Radian issued a press release announcing that the value of its investment in C-BASS was "materially impaired" as of July 29, 2007. On July 31, 2007, C-BASS issued a press release that it met $290 million in lender margin calls during the first six months of 2007, and an additional $260 million in margin calls during the first 24 days of July. MGIC issued a press release on August 7, 2007, that in light of C-BASS's impairment, and despite Radian's disagreement, MGIC was not required to complete the pending merger with Radian.*fn9 On October 2, 2007, Radian filed a Form 8-K with the SEC, announcing that Deloitte & Touche, L.L.P., who had previously served as Radian's independent auditor, declined to stand for reappointment for 2007. On November 2, 2007, Radian filed a Form 8-K announcing that Radian would take an impairment charge on its entire investment in C-BASS. It also announced that it could not be certain of the carrying value of a $50 million unsecured credit facility that it had provided to C-BASS. Id. at *24-28.

The Court granted the defendants' motion to dismiss because it found that the plaintiff failed to allege a breach of fiduciary duty based on the duties of prudence, disclosure, and loyalty. As such, the Court dismissed the plaintiff's duty to monitor claim and her claims of co-fiduciary liability and vicarious liability, which were derivative of her fiduciary breach claims. In dismissing the claims, the Court applied Rule 8(a) of the Federal Rules of Civil Procedure. The plaintiff had alleged throughout the CAC that the defendants knew or recklessly ignored certain facts, which would ordinarily subject the plaintiff's complaint to the heightened pleading standards of Rule 9(b) of the Federal Rules. See, e.g., Urban v. Comcast Corp., No. 08-773, 2008 U.S. Dist. LEXIS 87445, at *23-26 (E.D. Pa. Oct. 28, 2008). In her opposition brief and during oral argument, however, the plaintiff specifically disavowed that she alleged anything more than negligence, such that Rule 8(a) governed. Johnson, 2009 U.S. Dist. LEXIS 61334, at *30-33.

With respect to the plaintiff's duty of prudence claim, the Court first held that the presumption of prudence, as articulated by the United States Court of Appeals for the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), applied to the defendants. It explained the rationale and workings of the presumption, noting that Moench struck a balance between holding fiduciaries responsible while acknowledging their special circumstances in managing plans that encourage investment in employer stock. In such instances, fiduciaries are entitled to a presumption in the first instance that they acted consistently with ERISA, and they are judged under an abuse of discretion standard. Johnson, 2009 U.S. Dist. LEXIS 61334, at *34-43.

In applying the presumption of prudence, the Court held that the plaintiff failed to demonstrate that the defendants "could not have believed reasonably that continued adherence to the [Plan's] direction was in keeping with the settlor's expectations of how a prudent trustee would operate." Id. at *40, 44 (quoting Moench, 62 F.3d at 571).*fn10

First, the Court found that the plaintiff had failed to allege sufficient facts to demonstrate that C-BASS was facing a "monumental liquidity crisis," such that the defendants should have known that their investment in C-BASS was impaired before they announced as such on July 30, 2007. It was undisputed, and in fact, alleged, that C-BASS met its margin calls from lenders in the regular course of business up until the end of July 2007. To the extent that no liquidity crisis existed prior to the impairment announcement, the Plan fiduciaries could not have known of the alleged crisis, and their actions throughout the class period could not have been imprudent. Id. at *45-46.

Second, even if the CAC did demonstrate that C-BASS faced this crisis, the complaint did not establish that Radian's ongoing viability as a company was implicated. The plaintiff did not allege: (1) that the Plan fiduciaries failed to follow the Plan; (2) that the value of Radian's entire portfolio was impaired; (3) any information about the value of Radian's other investments; (4) any information about the value of Radian's mortgage insurance and financial guaranty sectors; (5) any information about Radian's investment in Sherman; or (6) any information about the portion of Radian's business that C-BASS constituted, or whether C-BASS was a primary investment. Id. at *46-48.

Third, any downward trend in the value of Radian stock that may have coincided with the alleged impairment of Radian's investment in C-BASS was not sufficient to establish that the defendants abused their discretion. Fiduciaries are not bound to depart from ESOP or EIAP plan provisions whenever they are merely aware of circumstances that may impair the value of company stock. Indeed, they may face liability if they divest the employer's stock in an act of caution only to find that the company stock then thrives. Id. at *48 (citing Wright v. Ore. Metallurgical Corp., 360 F.3d 1090, 1099 (9th Cir. 2004)); Id. at *40.

The Court next dismissed the plaintiff's duty of disclosure claim, which was premised on the defendants' alleged failure to provide Plan participants with all material information regarding the value of and the risks associated with an investment in the Radian stock fund. The plaintiff relied on Radian's SEC filings and conference calls, which, she claimed, failed to timely disclose the C-BASS impairment and inflated the value of Radian stock.*fn11

The Court held first that, because the plaintiff had failed to allege a monumental liquidity crisis at C-BASS, the defendants could not have been aware that their statements were allegedly misleading. Id. at *52.

Second, the allegedly misleading statements included in the CAC in fact advised investors of the market risks presented by the company's involvement in the subprime market. For example, Radian noted on its Form 10-K filed with the SEC on March 1, 2007, that "[a]s a holder of credit risk, our results are subject to macroeconomic conditions and specific events that impact the credit performance of the underlying insured assets." It warned that "the significant credit spread widening that has occurred in the subprime mortgage market . . . could produce . . . losses for C-BASS during the first quarter." Id. at *55-56.

Radian also reported in April 2007 that its income was down in its financial services segment "primarily as a result of an operating loss at C-BASS." It revealed C-BASS's losses in the first quarter for 2007, based on the "subprime mortgage market disruption," and noted that "C-BASS incurred a loss of approximately $15 million as credit losses and ...

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