Davis Polk achieved a major victory on behalf of Morgan Stanley and certain of its officers and directors in two Employee Retirement Income Security Act of 1974 (“ERISA”) class actions arising from the bank’s 2007 subprime write-downs and the 2007-2008 financial crisis when the Second Circuit affirmed the district court’s March 2013 dismissal with prejudice of all claims in both actions.

Plaintiffs in these actions alleged that Morgan Stanley and certain of its senior executives should have foreseen the declines in the subprime mortgage market in the fall of 2007 and the market-wide liquidity crisis in the fall of 2008, and should have taken action to prevent resulting losses to the company’s ERISA plan participants. Plaintiffs claimed that Morgan Stanley and the individual defendants should not have invested the plans in Morgan Stanley stock during this time period and should have provided company contributions in cash rather than stock, among other claims.

Davis Polk moved to dismiss the actions on several grounds, including that the challenged conduct was not a fiduciary act under ERISA and in any event defendants were entitled to a “presumption of prudence” for plan-mandated investments in company stock. The district court dismissed both actions with prejudice on the ground that plaintiffs had failed to overcome the presumption. Plaintiffs appealed to the Second Circuit.

On May 29, 2014, the Second Circuit affirmed the district court’s dismissals on the ground that, as Davis Polk had argued, Morgan Stanley and the individual defendants were not acting as fiduciaries when engaging in the challenged conduct. The Second Circuit held that even if the defendants had discretion under the plans to fund company contributions in cash rather than stock, the exercise of that discretion did not constitute fiduciary conduct because it was a “settlor” function that involved a business decision to fund the plans, rather than a fiduciary decision regarding existing plan assets. The Second Circuit also affirmed the district court’s dismissals of the other claims.

The Davis Polk litigation team included partners Robert F. Wise Jr. and Charles S. Duggan, associates Elyse Jones Cowgill, Andrew Ditchfield, David C. Newman, Joanna Geneve-Third, Katherine A. Marshall, Juliana Murray, Sallie S. Kim and Stefanie W. Shih, former associates Daniel J. O’Neill, Jessica Kate Foschi and Wesley M. Mullen, and legal assistants Jen S. Eum and Paulina G. Brown. All members of the Davis Polk team are based in the New York office.

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