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In Re: Advanta Corp. Erisa v. Advanta Corp.

September 30, 2011


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


Plaintiffs bring this action on behalf of themselves and other participants in Advanta Corp.'s Employee Stock Ownership Plan ("ESOP") and Employee Savings Plan ("Savings Plan") who held shares in Advanta common stock in their accounts between October 31, 2006 and November 8, 2009 (the "Class Period"). The claims are brought pursuant to the Employee Retirement Income Security Act ("ERISA"). *fn1

The Consolidated Class Action Complaint ("Complaint") alleges that Defendants, employees and officers of Advanta who administered the Plans during the relevant time, breached their duties of prudence, loyalty, and monitoring by continuing to offer Advanta stock as an investment option in the Plans after Defendants knew of serious problems that would have a negative effect on Advanta's stock price. Plaintiffs also allege that Defendants failed to provide complete and accurate information to participants in the Plans regarding Advanta's financial condition. Plaintiffs allege that the value of their investments fell along with Advanta's fortunes and stock price. Advanta, which is now in bankruptcy, is no longer a defendant. All Defendants move for dismissal of all counts set forth in the Complaint, for failure to state a claim under the Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth here, the Motion will be granted in part and denied in part.


Plaintiffs were participants in two retirement plans offered by Advanta to their employees: the ESOP and the Savings Plan. The ESOP was designed to encourage employee ownership of shares of the employer's stock. In this case, the contributions of Advanta stock within the ESOP were funded entirely by Advanta; participants were not permitted to contribute to the ESOP. *fn2 The Savings Plan was intended to "provide a means for employees to save for retirement" by permitting both participants and Advanta to contribute. *fn3 The Savings Plan offered a selection of investment options; one of these was the Company Stock Fund, which was invested primarily in Advanta stock. *fn4

To support their claims that investment in Advanta stock was not in the interests of the Plans' participants, Plaintiffs have filed the Complaint, detailing the fall of Advanta and the alleged wrongdoing of its officers and directors. Before its collapse, Advanta was a large issuer of credit cards to professionals and small businesses. *fn5 It operated its business primarily throughits subsidiary, Advanta Bank Corp. *fn6 Plaintiffs allege that Defendants knew or should have known that Advanta common stock was an imprudent investment for the Plans because its earnings masked what the Federal Deposit Insurance Company ("FDIC") determined were "unsafe, unsound, unfair, deceptive and illegal banking practices." *fn7 These allegedly illegal practices included a cash back reward program in which it was effectively impossible to earn the promised rewards, and an interest rate re-pricing scheme that indiscriminately raised interest rates, both of which caused quality customers to leave Advanta, and resulted in Advanta paying approximately $35 million in restitution. *fn8 Plaintiffs allege that Defendants knew that the company's policies had for years led to undisclosed losses, *fn9 but continued to hold Advanta stock in the Plans even while Advanta's senior executives and directors were selling their Advanta shares. *fn10 On October 31, 2006, the first day of the Class Period, Advanta Class B stock closed at $26.16 per share and Advanta Class A stock closed at $29.93 per share. *fn11 On July 2, 2009 (the last date for which a stock price is alleged), the Class B stock closed at 39 cents per share and Class A stock closed at 42 cents per share, a drop of almost 99 percent. *fn12

There are two groups of defendants. The first, the "Director Defendants," comprises the CEO and Chairman of the Board of Directors, Dennis Alter, and four members of the Board of Directors, Max Botel, Dana Becker Dunn, Ronald Lubner, and William Rosoff. The second group of Defendants, the "Administrative Committee Defendants," comprises Philip M. Browne, Paul Jeffers, David Weinstock, Michael Coco, John Moore, Jodi Plavner, Cathy Wilson, and Marci Wilf, all of whom served on the committees that administered the Plans.

Plaintiffs allege that Defendants breached their fiduciary duties to the Plans' participants. Count I alleges a failure to prudently and loyally manage the Plans' assets and to disclose information to the Plans' participants; Count II alleges a breach of the duty to avoid conflicts of interest; and Count III alleges a failure by the Director Defendants to adequately monitor other fiduciaries and provide them with accurate information. Defendants argue that all of the claims should be dismissed.


Dismissal of a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted is appropriate where a plaintiff's "plain statement" does not possess enough substance to show that plaintiff is entitled to relief. *fn13 In determining whether a motion to dismiss is appropriate the court must consider those facts alleged in the complaint, accepting the allegations as true and drawing all logical inferences in favor of the non-moving party. *fn14 Courts are not bound to accept as true legal conclusions couched as factual allegations. *fn15 Something more than a mere possibility of a claim must be alleged; the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." *fn16 A complaint must set forth "direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory." *fn17 The court has no duty to "conjure up unpleaded facts that might turn a frivolous . . . action into a substantial one." *fn18


A. Motion to Dismiss Count I Claims for Breach of Duty to Prudently and Loyally Manage

ERISA requires that fiduciaries discharge their duties solely in the interest of the beneficiaries and with care, skill, prudence, and diligence. *fn19 A failure to do so may give rise to liability, *fn20 provided that Plaintiffs can show that the breach of fiduciary duty caused a loss. *fn21 ERISA also provides that fiduciaries may invest in the employer's stock without running afoul of the duty to diversify investments. *fn22 in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision. However, the plaintiff may overcome that presumption by establishing that the fiduciary abused its discretion by investing in employer securities." *fn23 In addition, "ESOP fiduciaries are still required to act in accordance with the duties of loyalty and care that apply to fiduciaries of typical ERISA plans." *fn24 The Savings Plan is not an ESOP, but because the Savings Plan documents required that the investment options include a fund invested primarily in Advanta stock, the same presumption of prudence applies to the Savings Plan as to the ESOP. *fn25

To state a claim that Defendants abused their discretion by continuing to invest in and hold Advanta securities, Plaintiffs must plead facts sufficient to "show that the ERISA fiduciary could not have believed reasonably that continued adherence to the ESOP's direction was in keeping with the settlor's expectations of how a prudent trustee would operate." *fn26 The Complaint must allege "the type of dire situation which would require defendants to disobey the terms of the Plans by not offering the [employer's stock] as an investment option, or by divesting the Plans of [the employer's] securities." *fn27 In Moench, the Court reversed a grant of summary judgment where the evidence showed that the company's stock price fell from $18.25 per share to less than 25 cents per share, that regulators informed the board of directors of violations of law and regulation in subsidiary banks, and that the FDIC took control of a subsidiary, after which the company filed a petition for bankruptcy. *fn28 In Edgar, the Court of Appeals affirmed dismissal of the complaint where the corporation underwent developments "that were likely to have a negative effect on the company's earnings and, therefore, on the value of the company's stock," but where the price of the stock later rebounded. *fn29 In this case, Defendants argue that the Complaint alleges nothing more than a summary of Advanta's statements concerning its financial situation, citations to Advanta's stock price, and quotations from financial analysts' statements regarding Advanta. *fn30 This understates the overarching pattern of the facts alleged: ...

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