Chevron Defendants Win Again in Excess Fee Lawsuit

By Nevin Adams • June 06, 2017 • 0 Comments
Plaintiffs have fallen short in their second attempt to convince a federal judge of the merits of their case in an excessive fee class action suit.

The original lawsuit, filed in February 2016 by St. Louis-based Schlichter, Bogard & Denton, challenges the $19 billion Chevron plan’s decision to offer the Vanguard Prime Money Market Fund, rather than a lower-cost and better-performing stable value fund. The suit claims that the plan’s investment policy statement (IPS) required the plan fiduciaries to “[u]nderstand[] the risk and return characteristics of each investment option” in the plan and to offer one investment option that will “provide a high degree of safety and capital preservation.” The IPS also required the plan fiduciaries to “seek maximum current income … consistent with preservation of capital and liquidity.” Moreover, while the Chevron plan moved to lower-priced share classes in 2012, the suit claims that those options were available to the plan “many years” before the plan made those changes.

Last August the court granted defendants’ motion to dismiss the complaint for failure to state a claim, but allowed the plaintiffs to amend their complaint and repetition, which they did a month later.

In White v. Chevron Corp., 2017 BL 183229, N.D. Cal., No. 4:16-cv-0793-PJH, 5/31/17, the plaintiffs assert six causes of action in the amended complaint:

1. a claim of breach of duties of loyalty/prudence, and failure to comply with the plan’s investment policy statement in selecting a money market fund instead of a “stable value fund;”
2. a claim of breach of duties of loyalty/prudence based on unreasonable investment management fees;
3. a claim of breach of duties of loyalty/prudence based on excessive administrative fees charged by the Vanguard Group, Inc. (the plan’s recordkeeper);
4. a claim of breach of duties of loyalty/prudence based on causing the plan to engage Vanguard as recordkeeper — alleged to be a “prohibited transaction” constituting an exchange of property between the Plan and a party in interest;
5. a claim of breach of duties of loyalty/prudence, and failure to comply with the IPS in connection with failing to remove the ARTVX Fund from the plan lineup before they did remove it; and
6. a claim of breach of fiduciary duty by failing to monitor fiduciaries.

For their part, the defendants once again sought to dismiss the amended complaint for failure to state a claim.

The Amended Complaint(s)

In reconsidering the amended complaint, Judge Phyllis J. Hamilton of the U.S. District Court for the Northern District of California (who was the judge in the previous case) noted that while the plaintiffs alleged that the defendants “caused the Plan’s investment lineup to remain largely unchanged” since 2002, she said that was “contradicted by other allegations showing that during the proposed class period, defendants moved certain funds to different share classes, added funds, and removed funds.” She noted that participants could also choose to allocate up to 50% of the funds invested in their accounts among additional investments offered through Vanguard Brokerage Services (including several thousand mutual funds from Vanguard and other companies).

New Conflict Alleged

In a new claim, plaintiffs alleged that Vanguard mutual funds cast proxy votes on behalf of their shareholders for the securities in their portfolio, and that Vanguard “typically votes its proxies ‘as a block’ to ensure ‘the same position being taken across all of the funds.'” They then went on to claim that in voting its proxies:

  • Vanguard “overwhelmingly” supports “management sponsored proposals regarding executive compensation and matters of corporate governance of companies in the Standard & Poor’s 500-stock index;”

  • in the past year, “Vanguard rejected 100% of shareholder-sponsored proposals seeking to require appointment of an independent chairman of the company’s board;” and

  • Vanguard generally either abstains or votes against proposals requesting financial information regarding risks of climate change to a company or other environmental issues.

Moreover, the plaintiffs argued that Vanguard, which held $13 billion of Chevron stock, was the largest institutional holder of Chevron stock, and that Vanguard “has consistently voted in favor of Chevron management proposals and against Chevron shareholder-originated proposals.” Moreover, that “conflicts of interest” arose from the fact that Vanguard both owned significant amounts of Chevron stock, and also “was doing business with Chevron as the Plan’s investment provider” — conflicts the plaintiffs say could have been avoided if the plan fiduciaries had hired “a pure recordkeeper to provide the same level of services to Plan participants…”

Essentially, Judge Hamilton writes, “plaintiffs contend that Vanguard’s practice of regularly voting in favor of Chevron on shareholder resolutions motivated defendants to retain Vanguard as the Plan’s recordkeeper on a no-bid basis,” and that they claimed that choosing the higher-revenue-sharing Vanguard investments furthered this “scheme” to benefit Vanguard in return for Vanguard’s favorable voting of its large holding of Chevron stock.

‘Entirely Speculative’

However, she found these allegations to be “…entirely speculative, and unsupported by any facts, other than ‘facts’ alleged on information and belief or based on pure conjecture.” Moreover, she noted that the facts… “show that, despite any purported ‘conflict,’ Chevron repeatedly took actions to reduce Vanguard’s fees over the class period.”

Hamilton said that there were no facts showing that the plan fiduciaries were aware of Vanguard’s allegedly “pro-management” voting position, or that it influenced Chevron’s retention of Vanguard in any way, and that — as defendants noted in their motion, Vanguard had been “lauded as the ‘gold standard’ in other similar actions (where Vanguard was not the recordkeeper), is a significant shareholder in just about every public company, simply because of its outsized role in index fund investing.” She notes that there were no facts to show that Vanguard did anything unique with respect to Chevron, rather that Vanguard took pro-management positions for all companies across the S&P 500, and as a block, across all of its funds, “regardless of whether it provided retirement services to such companies.”


A new allegation in the amended complaint is that Chevron was motivated to retain the ARTVX Fund until April 2014 (despite poor performance in 2012 and 2013) in order to drive more revenue-sharing money to Vanguard for its recordkeeping role, allegedly in compensation for its proxy-voting policy. But Judge Hamilton found that claim to be “contradicted by materials on which plaintiffs rely.” She notes that beginning in 2012 (and before the time plaintiffs claim defendants should have removed the ARTVX Fund from the Plan lineup), “all revenue sharing from ARTVX was rebated to the plan.” Judge Hamilton went on to state that, “even if Vanguard had continued to receive ARTVX revenue-sharing, plaintiffs do not and cannot allege that there were no equivalent small-cap funds paying just as much,” and that the plaintiffs “…provide no factual basis for their speculation that Plan fiduciaries tolerated ARTVX’s alleged underperformance for the purpose of benefitting Vanguard.”

The court found that this cause of action did not plead facts sufficient to state a claim, particularly in that the plan fiduciaries removed it in April 2014, and did so while it was still outperforming its benchmark on a long-term trailing basis. Judge Hamilton also found that plaintiffs’ characterization of the fund’s performance “included a substantial period after the defendants had removed the fund,” and that plaintiffs appeared to concede that the period of “consistent” underperformance did not begin until “around 2012.” Ultimately, the court held that plaintiffs “continue to base this claim solely on the fact that the Fund did not perform well, which approach the court has already rejected.”

Market ‘Timing’?

The court found further that plaintiffs had pled no facts showing that the plan fiduciaries failed to evaluate whether a stable value fund or some other option would provide a higher rate of return and/or failed to evaluate the relative risks and benefits of money market funds vs. other capital preservation options. Moreover, the court found that plaintiffs’ almost total reliance of the relative performance of stable value and money market funds over the previous six years was an improper hindsight-based challenge to the plan fiduciaries’ decision-making.

Essentially, Judge Hamilton found that the plaintiffs alleged no new facts in support of their allegations regarding the money market fund selection, and as the court previously held in the Aug. 29, 2016, order, “[w]ithout some facts that raise an inference of imprudence in the selection of the money market fund — apart from the fact that stable value funds may provide a somewhat higher return than money market funds — plaintiffs have failed to state a claim.”

The court found an “obvious, alternative explanation” for the selection of higher-cost funds — that “those share classes paid the Plan’s recordkeeping expenses before the Plan’s fiduciaries negotiated a flat, per-participant fee in 2012 in exchange for moving to the cheaper, institutional share classes.” Judge Hamilton said what was still missing were any factual allegations sufficient to create a plausible inference that defendants’ process of selecting funds and their monitoring of the funds was imprudent.

Judge Hamilton previously ruled that any claim alleging that Vanguard’s recordkeeping fees were excessive failed to state a claim because plaintiffs failed to allege what those fees were and how they were excessive, and in response she noted that the plaintiffs “have estimated the amount of Vanguard’s incremental compensation for recordkeeping services in 2010 and 2011, and have compared that guess to the fees Chevron negotiated with Vanguard in 2012, after a substantial increase in plan assets.”

Aside from what she said were “flaws in plaintiffs’ guesswork on the amount of recordkeeping fees in 2010 and 2011 and the non-existent ‘conflicts,'” Judge Hamilton said the claim still fell short, boiling down to “an assertion that Chevron should have foreseen that the market would go up — and that Plan assets would increase as a result — and renegotiated its asset-based fee arrangement sooner than March 2012.” And if that weren’t enough, she also found that the claim here was time-barred, since the amended filing questioned the reasonableness of administrative fees charged prior to March 31, 2012, and includes allegations only as to the fees allegedly paid in 2010 and 2011 — beyond the three-year statute of limitations.

Thus, “because plaintiffs have failed to correct the deficiencies identified by the court in its prior order, and because the sole new claim fails for the reasons set forth in this order, the court finds that further leave to amend would be futile,” and Judge Hamilton dismissed the case with prejudice.

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