jon a. tostrud cuneo gilbert & laduca, l.l.p. los angeles...
TRANSCRIPT
Jon A. Tostrud CUNEO GILBERT & LaDUCA, L.L.P. 1801 Century Park East, Suite 2400 Los Angeles, California 90067 Telephone: (310) 556-9621 Facsimile: (310) 556-9622 [email protected] Eric E. Castelblanco LAW OFFICES OF ERIC E. CASTELBLANCO 8383 Wilshire Blvd., Suite 302 Beverly Hills, California 90211 Telephone: (323) 951-0180 Facsimile: (323) 951-0183 [email protected] Counsel for Plaintiffs *Additional Counsel on Signature Page
UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
LINDA SULLIVAN, IZILDA BORGES, MONIQUE ESTRADA, ROSA VALENCIA, TERRI FLORES, ROSA MARTINEZ, GLYNESS KYLES and all others similarly situated, Plaintiffs,
v.
FREMONT GENERAL CORPORATION, JAMES A. McINTYRE, LOUIS J. RAMPINO, WAYNE R. BAILEY, THOMAS W. HAYES, ROBERT F. LEWIS, RUSSELL K. MAYERFELD, DICKINSON C. ROSS, PATRICK E. LAMB, RAYMOND G. MEYERS, and JOHN and JANE DOES 1-20, Defendants.
Case No. _________________
COMPLAINT FOR BREACHES OF FIDUCIARY DUTY UNDER THE EMPLOYEE RETIREMENT INCOME SECURITIES ACT
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I. NATURE OF THE ACTION
1. This is a class action brought on behalf of the two pension plans identified below
pursuant to §502(a)(2) and (a)(3) of the Employee Retirement Income Security Act (“ERISA”),
29 U.S.C. §1132(a)(2) and (a)(3), against the fiduciaries of the Plan for violations of ERISA
from January 1, 2005 to the present (the “Class Period”).
2. Fremont General Corporation (“Fremont”) is a financial services holding
company which is engaged, primarily through its wholly-owned subsidiary, Fremont Investment
& Loan (“FIL”), in brokered subprime mortgage lending, nationwide commercial real estate
construction lending, and residential loan servicing.
3. Two plans sponsored by Fremont, the Fremont General Corporation Employee
Stock Ownership Plan (“ESOP”) and the Fremont General Corporation and Affiliated
Companies Investment Incentive Plan (“401(k) Plan”) are pension plans established and
sponsored by Fremont to provide pension benefits for Fremont’s employees and employees of
certain other participating employers (all Fremont affiliates).
4. Many documents have provided the basis for Plaintiffs’ claims asserted in this
complaint. These documents include: Fremont’s Securities and Exchange Commission (“SEC”)
filings including the Company’s proxy statements (Form 14A), current periodic reports (Form 8-
K), annual reports (Form 10-K), and the annual reports of the ESOP and 401(k) Plan (Form 11-
K); Forms 5500 (“Form 5500”) for the ESOP and 401(k) Plan filed with the United States
Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”); and other documents
describing the Plans.
5. Plaintiffs’ claims arise from the failure of the Defendants, who are fiduciaries of
the Plans (as detailed below), to act solely in the interest of the participants and beneficiaries of
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the Plans and to exercise the required care, skill, prudence and diligence in administering the
Plans and investing the assets of the Plans. The Plans have lost millions of dollars by investing in
Fremont General Corporation Common Stock (“Fremont Stock”).
6. Plaintiffs allege that Defendants violated their fiduciary duties to the Plans under
§§404, 405, and 406 of ERISA, 29 U.S.C. §§1104, 1105, and 1106, during the Class Period by
allowing imprudent investment of the Plans’ assets in Fremont Stock when they knew or should
have known that such investment was improperly risky and irresponsible in light of the
Company’s improper business practices including, among other practices:
(a) marketing and extending subprime mortgage and commercial construction
loans without adequate consideration of the borrower’s ability to repay and with an unreasonably
high risk of borrower default;
(b) operating with ineffective risk management policies and procedures, including
inadequate underwriting criteria;
(c) operating with inadequate liquidity in relation to the volatility of Fremont’s
business lines and assets;
(d) operating with a large volume of poor quality loans and in such a manner as to
produce low and unsustainable earnings;
(e) using highly subjective “gain on sale” accounting practices in an aggressive
and ill-founded manner resulting in overstatements of earnings that were subsequently reversed;
and
(f) using aggressive securitization practices, all of which constituted a highly risky
business strategy culminating in the collapse of the Company’s financial position and stock
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price. In short, during the Class Period, the Company faced dire financial circumstances as a
result of the aforementioned and other circumstances.
7. Thus, the Defendants knew, or should have known, that Fremont was in dire
financial condition and facing imminent collapse, and yet they continued to invest the Plans’
assets in Fremont Stock and encouraged the Plans’ participants to do the same.
8. Fremont executives, including the Defendants named herein, made the touting of
Company stock to Fremont employees a regular practice. Plaintiffs and their co-workers were
continually told how well Fremont was performing, how valuable the stock was and would
continue to be, and were encouraged to continue to purchase and hold Fremont Stock in their
401(k) accounts.
9. The present action seeks to vindicate the rights of the Plans as entities and seeks
to recover losses suffered by the Plans resulting from the breaches of fiduciary duty alleged
herein. The fiduciary breaches asserted affect all participants of the Plans who participated in the
Plans at the time of the losses. Under the authorization of ERISA, Plaintiffs, as plan participants,
bring this action on behalf of themselves and all participants and beneficiaries of the Plan during
the Class Period. Under §502(a)(3) of ERISA, 29 U.S.C. §1132(a)(3), Plaintiffs seek other
equitable relief from Defendants, including, without limitation, injunctive relief and, as available
under applicable law, constructive trust, restitution, equitable tracing, and other monetary relief.
II. JURISDICTION AND VENUE
10. Plaintiffs are authorized pursuant to §502(a)(2) and (3) of ERISA, 29 U.S.C. §
1132(a)(2) and (3) to bring the present action on behalf of the participants and beneficiaries of
the 401(k) Plan to obtain appropriate relief under §§502 and 409 of ERISA, 29 U.S.C. §§1132
and 1109.
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11. The Plans meet the following definitions provided by the statute:
(a) The Plans are “employee benefit plans” within the meaning of §3(3) of
ERISA, 29 U.S.C. § 1002(3),
(b) Plaintiffs are “participants” within the meaning of §3(7) of ERISA, 29 U.S.C.
§ 1002(7).
12. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §
1331 (federal question) and ERISA §502(e)(l), 29 U.S.C. § 1132(e)(l).
13. Venue is proper in this district pursuant to ERISA §502(e)(2), 29 U.S.C. §
1132(e)(2) because the Plans are administered in this district, some or all of the fiduciary
breaches for which relief is sought occurred in this district, and some Defendants reside and
transact business in this district.
III. CLASS ACTION ALLEGATIONS
14. Plaintiffs bring this class action pursuant to Rules 23(a), (b)(1), (b)(2) and (b)(3)
of the Federal Rules of Civil Procedure on behalf of themselves and a class (“Class”) of all
persons similarly situated, defined as follows:
All persons, other than the Defendants and their immediate family members, who
were participants in or beneficiaries of the Fremont General Corporation
Employee Stock Ownership Plan (“ESOP”) and the Fremont General Corporation
and Affiliated Companies Investment Incentive Plan (“401(k) Plan”) (collectively
the “Plans”), whose accounts included investments in Fremont Stock between
January 1, 2005 to the present.
15. Plaintiffs meet the following requirements of Rule 23(a) to bring this action on
behalf of the class:
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(a) Numerosity. The Class consists of several thousands of individuals and is so
numerous that joinder of all members as individual plaintiffs is impracticable.
(b) Commonality. Common questions of law and fact exist to all members of the
class and predominate over any questions affecting solely individual members
of the Class. These include:
(i) Whether Defendants each owed a fiduciary duty to Plaintiffs and
members of the Class for having the responsibility of selecting,
evaluating, and monitoring the investments of the Plans, including
Fremont Stock;
(ii) Whether Defendants breached their fiduciary duties to Plaintiffs
and members of the Class by failing to act prudently and solely in
the interests of the Plans’ participants and beneficiaries;
(iii) Whether Defendants violated ERISA; and
(iv) Whether the Plans and participants suffered losses as a result of
Defendants’ fiduciary breaches and, if so, what is the proper
measure of damages.
(c) Typicality. Plaintiffs’ claims are typical of the claims of the Class. To the
extent Plaintiffs seek relief on behalf of the Plans pursuant to ERISA §
502(a)(2), their claims on behalf of the Plans is not only typical to, but
identical to a claim under this section that could be brought by any other Class
member. Also, to the extent Plaintiffs seek relief under ERISA § 502(a)(3) on
behalf of themselves for equitable relief, that relief would affect all Class
members equally.
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(d) Adequacy. Plaintiffs will fairly and adequately protect the interests of the
Class and they have retained competent counsel experienced in class action
and complex litigation. Plaintiffs do not have any interests that are in conflict
with the interests of the Class as a whole.
16. A class action is the superior method for the fair and efficient adjudication of this
controversy per Rule 23(b) for the following reasons: (a) joinder of all members of the class is
impracticable; (b) prosecution of separate actions by the members of the Class would create a
risk of establishing incompatible standards of conduct for Defendants; (c) questions of law or
fact common to members of the Class predominate over any questions affecting only individual
members; (d) adjudications with respect to individual members of the Class would be dispositive
of the interests of the other members not parties to the adjudication or substantially impair or
impede the other members’ ability to protect their interests; (e) Defendants’ acted or refused to
act on grounds generally applicable to the class, thereby making appropriate final injunctive
relief or corresponding declaratory relief with respect to the class as a whole; and (f) a class
action is superior to the other available methods for the fair and efficient adjudication of this
controversy.
IV. PARTIES
17. Plaintiff Linda Sullivan is a former employee of Fremont. She is a participant in
both the ESOP and the 401(k) Plans during the Class Period. Plaintiff is a resident of Santa Ana,
California.
18. Plaintiff Izilda Borges is a former employee of Fremont. She is a participant in
both the ESOP and the 401(k) Plans during the Class Period. Plaintiff is a resident of Anaheim,
California.
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19. Plaintiff Monique Estrada is a former employee of Fremont. She in a participant
in both the ESOP and the 401(k) Plans during the Class Period. Plaintiff is a resident of Orange,
California.
20. Plaintiff Rosa Valencia is a former employee of Fremont. She is a participant in
both the ESOP and the 401(k) Plans during the Class Period. Plaintiff is a resident of Santa Ana,
California.
21. Plaintiff Terri Flores is a former employee of Fremont. She is a participant in
both the ESOP and the 401(k) Plans during the Class Period. Plaintiff is a resident of Whittier,
California.
22. Plaintiff Rosa Martinez is a former employee of Fremont. She is a participant in
both the ESOP and the 401(k) Plans during the Class Period. Plaintiff is a resident of Rancho
Cucamonga, California.
23. Plaintiff Glyness Kyles is a former employee of Fremont. She is a participant in
both the ESOP and the 401(k) Plans during the Class Period. Plaintiff is a resident of Long
Beach, California.
24. Defendant Fremont General Corporation (“Fremont”). Fremont is a Nevada
corporation, incorporated in 1972, with its principal place of business and main administrative
offices located at 2425 Olympic Boulevard, 3rd Floor East, Santa Monica, California. Fremont
is the Plan Administrator and a Named Fiduciary for the Plans. Fremont’s activities are divided
into residential real estate, commercial real estate and retail banking. Fremont’s lending
activities are primarily funded through deposit accounts insured to the maximum legal limit by
the Federal Deposit Insurance Corporation and advances from the Federal Home Loan Bank.
The Company’s commercial real estate division provides first mortgage financing, secured by
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property in 29 states, to developers. Fremont’s common stock is listed on the New York Stock
Exchange and trades under the ticker symbol “FMT.” Fremont, in addition to being a named
fiduciary in both Plans, has the sole and exclusive authority to appoint a committee for each of
the Plans and delegate fiduciary powers and duties to that committee.
25. Defendant Fremont General Corporation Board of Directors (“Fremont
Board”). Fremont’s actions are primarily carried out through the Fremont Board. Thus, the
Fremont Board exercises authority to select, monitor, retain, and remove members of the Plan
Committees by virtue of its power to appoint the Plan Committees. Additionally, the members
of the Board of Directors individually and independently exercised discretionary authority with
respect to the Plan-related duties they undertook. The following individual Defendants
(collectively referred to as “Fremont Board Members”) serve on the Fremont Board:
a. Defendant James A. McIntyre (“McIntyre”). McIntyre is Chairman of
the Fremont Board and has served as Chairman since 1989. From 1976 to 2004, McIntyre also
served as the Chief Executive Officer of Fremont. During the Class Period, Defendant McIntyre
sold over one million shares of Fremont Stock for a profit of approximately $19 million. On
January 4, 2007, shortly before the market became aware of the true nature of the company’s
financial well-being, Defendant McIntyre sold 142,214 shares of Fremont Stock for a profit of
more than $2.3 million. As a member of the Fremont Board, McIntyre had the authority to
select, monitor, retain, and remove the members of the Plan Committee by virtue of the Board’s
power to appoint the Plan Committee.
b. Defendant Louis J. Rampino (“Rampino”). Rampino is a member of the
Fremont Board. He has served as Fremont’s President since 1995 and as Fremont’s Chief
Executive Officer since 2004. Defendant Rampino has been a member of the Fremont Board
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since 1994 and currently serves as the Chairman of the Board of FIL (hereafter “FIL Board”).
From 1995 to 2004, Defendant Rampino sold over 400,000 shares of Fremont Stock for a profit
of approximately $8.5 million. On January 4, 2007, Defendant Rampino sold 151,164 shares of
Fremont Stock, approximately 24% of his Fremont holdings, for a profit of more than $2.4
million. As a member of the Fremont Board, Rampino carried the authority to select, monitor,
retain, and remove the members of the Plan Committee by virtue of Board’s power to appoint the
Plan Committee.
c. Defendant Wayne R. Bailey (“Bailey”). Defendant Bailey has served as
the Executive Vice President and Chief Operating Officer of Fremont since 2004. Defendant
Bailey also served as Executive Vice President, Treasurer and Chief Financial Officer of
Fremont from 1995 to 2004. From 1994 to 1995, he served as Senior Vice President and Chief
Operating Officer and as Vice President and Chief Financial Officer from 1990 to 1994.
Defendant Bailey has been a member of the Fremont Board since 1996 and is currently a
member of the FIL Board. During the Class Period, Defendant Bailey sold over 300,000 shares
of Fremont Stock for a profit of approximately $6.8 million. On January 4, 2007, he sold
121,929 shares of Fremont Stock for a profit of more than $1.9 million. As a member of the
Board, Meyers carried the authority to select, monitor, retain, and remove the members of the
Plan Committee by virtue of Board’s power to appoint the Plan Committee.
d. Defendant Thomas W. Hayes (“Hayes”). Defendant Hayes has been a
member of the Fremont Board since 2001. He also currently serves on the FIL Board. As a
member of the Fremont Board, Hayes carried the authority to select, monitor, retain, and remove
the members of the Plan Committee by virtue of Board’s power to appoint the Plan Committee.
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e. Defendant Robert F. Lewis (“Lewis”). Defendant Lewis has been a
member of the Fremont Board since 2002. He is also a member of the FIL Board. As a member
of the Fremont Board, Lewis carried the authority to select, monitor, retain, and remove the
members of the Plan Committee by virtue of Board’s power to appoint the Plan Committee.
f. Defendant Russell K. Mayerfeld (“Mayerfeld”). Defendant Mayerfeld
has been a member of the Fremont Board since 2004. He also serves on the FIL Board. As a
member of the Fremont Board, Mayerfeld carried the authority to select, monitor, retain, and
remove the members of the Plan Committees by virtue of Board’s power to appoint the Plan
Committees.
g. Defendant Dickinson C. Ross (“Ross”). Defendant Ross has been a
member of the Fremont Board since 1987. During the Class Period, he sold 28,000 shares of
Fremont Stock for a profit of approximately $385,000. As a member of the Fremont Board,
Ross carried the authority to select, monitor, retain, and remove the members of the Plan
Committees by virtue of Board’s power to appoint the Plan Committees.
26. Defendant Plan Committees. The Plan Committees appointed by Fremont have
throughout the class period had the power to administer the Plans. Additionally, the Plan
Committees have had overall responsibility for selecting the investment options offered by the
Plans throughout the class period. The Plan Committees and their members are Named
Fiduciaries of the Plans. The following individual Defendants (collectively referred to as “Plan
Committees Members”) have served on the Plan Committees throughout the class period:
(a) Defendant Louis J. Rampino (“Rampino”). Rampino is a member of the
Plan Committees and the Fremont Board. He has served as Fremont’s President since 1995 and
as Fremont's Chief Executive Officer since 2004.
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(b) Defendant Wayne R. Bailey (“Bailey”). Bailey is a member of the Plan
Committees and the Fremont Board. He has served as Fremont’s Executive President and Chief
Operating Officer since 2004. Defendant Bailey also served as Executive Vice President,
Treasurer and Chief Financial Officer of the Company from 1995 to 2004. From 1994 to 1995,
he served as Senior Vice President and from 1990 to 1994 as Chief Financial Officer. He has
been a member of the Fremont Board since 1996 and is currently a member of the FIL Board.
Defendant Bailey sold over 300,000 shares of Fremont Stock during the Class Period for a profit
of $6.8 million. On January 4, 2007, shortly before the market became aware of the true nature
of Fremont’s financial well-being, he sold 121,929 shares of Fremont Stock, approximately 24%
of his Fremont holdings, for a profit of more than $1.9 million. He has served as a member of
the Plan Committees since at least January 1, 2004.
(c) Defendant Patrick E. Lamb (“Lamb”). Lamb is a member of the Plan
Committees. He has served as Fremont’s Senior Vice President, Treasurer, Chief Financial
Officer, since 2005. He has served as Senior Vice President, Controller and Chief Accounting
Officer of the Company from 2002 to 2003 and as Vice President of Finance from 1998 to 2001.
Defendant Lamb has served as a member of the Plan Committees since 2005. During the Class
Period, Defendant Lam sold over 88,000 shares of Fremont Stock for proceeds of approximately
$1.8 million. On January 4, 2007, Defendant Lamb sold 35,249 shares of Fremont Stock,
approximately 19% of his holdings of Common Stock, for a profit of more than $570,000.
(d) Defendant Raymond G. Meyers (“Meyers”). Defendant Meyers has
served as Senior Vice President and Chief Administrative Officer of Fremont since 1989 and has
been a member of the Plan Committees since at least January 1, 2004. During the Class Period,
Defendant Meyers sold over 146,000 shares of Fremont Stock for proceeds of approximately
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$3.2 million. On January 1, 2007, he sold 39,223 shares of Fremont Stock, approximately 29%
of his Fremont holdings, for a profit of more than $635,000.
(e) Defendant James J. McIntyre has served as a member of the Plan
Committees since at least January 1, 2004.
(f) Defendant Louis J. Rampino has served as a member of the Plan Committees
since at least January 1, 2004.
(g) Defendant Dickinson C. Ross served as a member of the Plan Committees
from at least January 1, 2004 until December 31, 2004
27. Defendants DOES 1-20. Plaintiffs do not currently know the identity of these
fiduciaries of the Plans. These fiduciaries’ exact identities will be ascertained through discovery.
V. THE PLANS
28. The Plans sponsored by Fremont are “employee pension benefit plans” within the
meaning of ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A). The Plans are legal entities that can sue
and be sued. ERISA § 502(d)(1), 29 U.S.C. § 1132(d)(1). Pursuant to ERISA§ 409, 29 U.S.C. §
1109, and the law interpreting it, the relief requested in this action is for the benefit of the Plans
and their participants and/or beneficiaries.
29. The Trustee of the 401(k) Plan, Merrill Lynch Trust Company of California
(“Merrill”), holds in trust contributions to the 401(k) Plan by and on behalf of the participants
and beneficiaries, and invests them in the investment options offered by the Plans.
30. Fremont is the sponsor, Plan Administrator, and a Named Fiduciary of the 401(k)
Plan and the ESOP.
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31. As Plan Administrator and a Named Fiduciary for the 401(k) Plan, Fremont had
the ability through the Board and chose to appoint a Plan Committee to carry out any or all of
Fremont’s fiduciary duties to the 401(k) Plan and the ESOP.
32. The Plan Committees have the power to administer the 401(k) Plan and the ESOP
and also have primary responsibility for selecting, monitoring, evaluating, and removing
investments offered by the Plans.
A. The 401(k) Plan
33. The 401(k) Plan was established on February 1, 1986 to provide benefits for all
employees and their beneficiaries and certain temporary employees except in limited
circumstances. Eligibility to participate occurs when it is “administratively feasible following
his or her Employment Commencement Date or the date he becomes an Eligible Employee, if
later.” See 401(k) Plan § 3.1; Fremont General Corporation Investment Incentive Plan, Annual
Report (Form 11-K) at 4 (Dec. 31, 2005).
34. Each participant receives an account that tracks all contributions and individual
investment fund earnings or losses. 401(k) Plan § 5.1(b), (c). Participants’ accounts are credited
in three ways: (a) participant’s contributions; (b) Company contributions; and (c) Plan earnings
or losses. 2005 Form 11-K at 5.
35. A separate account is maintained for: (a) salary deferral contributions; (b)
employer matching contributions; (c) qualified matching contributions; (d) qualified nonelective
contributions; (e) rollover contributions; and (f) other accounts as necessary or appropriate.
401(k) Plan § 5.1(a).
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36. Participants have the opportunity to contribute a portion, up to 15%, of their
eligible pre-tax compensation for the Plan year. 401(k) Plan § 4.1(a); 2005 Form 11-K at 4.
Participant contributions vest immediately. 401(k) Plan § 6.1(a); 2005 Form 11-K at 4.
37. “Employer matching contributions shall be made in such amount and in such
form (i.e., cash or Fremont Stock, or a combination thereof) as prescribed by the Board.” 401(k)
Plan § 4.2(a). Employee contributions are matched by the Company at a rate of 100% of the first
6% of eligible compensation deferred by the employee. 401(k) Plan § 4.2(a); 2005 Form 11-K at
4. Before 2003, the comparable matching contribution was 85%. Fremont General Corporation
Investment Incentive Plan, Annual Report (Form 11-K) at 4 (Dec. 31, 2003).
38. Per the Board’s discretion, during 2004 and 2005, the Company made matching
contributions to the 401(k) Plan in shares of Company common stock. 2005 Form 11-K at 4.
Any participant who is an employee has their matching contributions account immediately 100%
vested. 401(k) Plan § 6.1(a)(iv); 2005 Form 11-K at 4.
39. Employees have some discretion to diversify out of Company common stock after
the Company’s contribution has been allocated into participants’ accounts. 2005 Form 11-K at
4. However, “the Administrator may, in its sole discretion, suspend or limit the right of any
Participant to make such an investment election.” 401(k) Plan § 9.3 (a); see also id. at §9.4 (a)
(“. . .no Participant may divest the Company stock held in his or her Account, if any, in violation
of the policies and guidelines established by the Administration from time to time, in its sole and
absolute discretion.”).
40. During the Class Period, Fremont Stock represented more than 50% of the 401(k)
Plan’s net assets.
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41. The 401(k) Plan incurred the following substantial losses as a result of the Plan’s
investment in Fremont Stock. As of Dec. 31, 2004, the 401(k) Plan held approximately 4.5
million shares of Fremont Stock, trading at approximately $24.80 and valued at the time at over
$108 million. Fremont General Corporation and Affiliated Companies Investment Incentive
Plan Form 5500 (Dec. 31, 2005) at 8. Following revelations that Fremont engaged in predatory
subprime lending practices and other improper practices, Fremont Stock declined approximately
69% since the beginning of the Class Period. The value of Fremont Stock in the 401(k) Plan is
now approximately valued at $31.2 million.
B. The ESOP
42. The ESOP was established effective Dec. 1, 1988 “for the exclusive benefit of
eligible employees of Participating Employees and their beneficiaries, to enable them to acquire
shares of stock in the Employer, to provide retirement funds, and to provide benefits in the event
of disability.” ESOP at 1.
43. Employees who are scheduled to work 25 or more hours per week become
eligible to participate in the ESOP after they have worked 1,000 hours within a consecutive
twelve month period beginning on the date of hire, with some limited exceptions. ESOP § 2.1
and § 1.30. Participants become vested in the Plan incrementally on a seven year schedule with
seven years of service resulting in 100% investment. ESOP §5.1. However, upon death or
permanent and total disability, or after a participant turns 65, he or she becomes 100% vested.
Id. at § 5.1(b) and § 1.16.
44. The amount of the employer contribution was determined at the discretion of the
Board and could be made in cash or in Fremont Stock. ESOP § 3.1; 2006 Proxy Statement at 23.
The Fremont Board has approved contribution levels ranging from 0% to 15% of the eligible
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compensation of each participant since 1989. 2006 Proxy Statement at 23. Company
contributions for 2004 and 2005 were made in shares of Company common stock. Id.; Fremont
General Corp. Proxy Statement (Form 14A) (Apr.14, 2005) at 22.
45. The ESOP invests primarily but not exclusively in employer stock. Id; ESOP
Trust Agreement § 1.1, 5.2(a). The Plan Documents designate the Plan Committees, the named
fiduciaries, with the responsibility for establishing and carrying out the ESOP Plan consistent
with the objectives of the Plan and requirements of ERISA. The Plan Committees also have the
authority to direct the Trustee [Merrill Lynch] to “invest, reinvest and hold the assets of the Trust
Fund in cash or in any forms of investment….” ESOP Trust Agreement § 5.2(b).
46. Pursuant to the ESOP Trust Agreement and the ESOP, assets of the ESOP are
held in a “Trust Fund” for the benefit of eligible Fremont employees. ESOP §§ 1.28, 9; ESOP
Trust Agreement at 3; Fremont General Corp., Proxy Statement (Form 14A) (Apr. 13, 2006) at
23. The Trust is administered according to the ESOP Trust Agreement by the Trustee, Merrill
Lynch, at the direction of the ESOP Committee. ESOP §§ 1.28, 9; ESOP Trust Agreement at 3.
47. The Trust Fund contains accounts held for each participant. ESOP § 4.1.
Participant’s accounts are divided into two parts: (a) employee stock; and (b) other investments.
Id.
48. The ESOP does not limit the types of investments that the fiduciaries can make in
the company in the event that investment in Fremont Stock is not prudent. The ESOP Plan
Document restricts Participants’ ability to sell the Fremont Stock in their ESOP accounts once
allocated there. Participants must turn 55 years old and have completed 10 years of service
before they can diversify up to 25% of the assets in the account. This diversification option can
only occur upon the election of the participant to tell the Plan Committees to invest in one or
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more of the three alternative investments during a 90-day period following the end of the Plan
Year. ESOP, §6.9(a), (c).
49. As a result of Defendants’ breaches of fiduciary duty, Plaintiffs’ losses to the
ESOP were significant. The ESOP held approximately 4.4 million shares of Fremont Stock on
December 31, 2004, trading at approximately $24.80 and worth approximately $108 million at
the time. 2006 Proxy Statement at 23. Once it was revealed that Fremont engaged in predatory
subprime lending practices and other actions, Fremont Stock declined dramatically,
approximately 69%, since the beginning of the Class Period. The value of the Fremont Stock in
the ESOP is now approximately $40.8 million.
VI. DEFENDANTS’ FIDUCIARY STATUS
50. ERISA requires every Plan to provide for one or more “named fiduciaries” who
will have “authority to control and manage the operation and administration of the Plan.”
ERISA §402(a)(1), 29 U.S.C. § 1102(a)(1).
51. The person named as the “administrator” in the plan instrument is automatically a
named fiduciary, and in the absence of such a designation, the sponsor is the administrator.
ERISA §3(l6)(A), 29 U.S.C. § 1002(16)(A). Defendant Fremont is the Administrator of the
Plans and a Named Fiduciary under ERISA §402(a)(2), 29 U.S.C. §1102(a)(2), and the
documents governing the Plans. Fremont exercises broad responsibility for management and
administration of the Plans. Among its responsibilities, Fremont oversees the Plans’
investments, policies, performance, and other actual fiduciaries through actions such as
appointing and monitoring the Plan Committees.
52. Fiduciaries, as defined by ERISA, are persons explicitly named as fiduciaries
under ERISA §402(a)(1), any persons who perform fiduciary functions, and any persons who are
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responsible for fiduciary functions. ERISA §3(21)(A)(i) and (iii), 29 U.S.C. §1002(21)(A)(i)
and (iii). ERISA makes a person (including a juridical person such as Fremont) a fiduciary
to the extent. . . he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management of disposition of its assets. . or. . . has any discretionary authority or discretionary responsibility in the administration of such Plan.
ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A).
53. Each Defendant is a fiduciary to the Plans and owes fiduciary duties to the Plans
and their participants in the manner and to the extent set forth in the documents governing the
Plans, through their conduct, and under ERISA.
54. Fremont exercises certain powers for the Plans as Plan Administrator, including
the power to establish a funding policy, select alternative investment funds, receive and review
reports on the financial condition of the Plans and on the receipts and disbursements from the
Plans, appoint one or more investment managers to manage any or all of the assets of the Plans,
and appoint one or more persons to act as Plan Committees to discharge the duties of the Plan
Administrator.
55. Fremont, acting through its Board, appointed the Plan Committees to discharge
some or all of its duties to the Plans. The members of the Plan Committees are Named
Fiduciaries for the Plans. Appointing and removing fiduciaries is itself a fiduciary function and
persons having this power of appointment and removal are de facto fiduciaries.
56. The Plan Committees have the power to administer the Plans and also have
primary responsibility for selecting the Plans’ offered investments.
57. As fiduciaries, Defendants were required by ERISA § 404(a)(1), 29 U.S.C. §
1104(a)(1), to manage and administer the Plans, and the Plans’ investments solely in the interest
of the Plans’ participants and beneficiaries and with the care, skill, prudence, and diligence under
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the circumstances then prevailing that a prudent person acting in a like capacity and familiar with
such matters would use in the conduct of an enterprise of a similar type and with similar aims.
58. Plaintiffs allege that Defendants were fiduciaries to the extent of the specific
fiduciary discretion and authority assigned to or exercised by them, and, as further set forth
below, the claims against each Defendant are based on such specific discretion and authority.
Defendants chose to maintain control over the decisions concerning the Plans rather than
delegate it to an outside agent. Although the Plans had an institutional trustee unrelated to
Fremont, the Trust Agreements required the trustee to follow the discretion of Fremont.
59. Fremont is a fiduciary under the 401(k) Plan because it is responsible for
administering, interpreting and carrying out Plan provisions. 401(k) Plan § 7.1. Fremont is
granted full and complete discretionary authority to interpret the terms of the 401(k) Plan and the
authority to delegate its duties including: (a) establish a funding and investment policy; (b) select
additional or alternative investment funds or vehicles; (c) receive and review reports on the
financial condition of the trust fund and statements of the receipts and disbursements of the trust
fund from the trustee; (d) appoint or employ one or more investment managers to manage all or
any part of the assets of the Plan. 401(k) Plan § 7.1.
60. Fremont is also responsible for appointing, monitoring and removing the Trustee
and execution of the Trust documents with the Trustee to provide for the investment,
management and control of the assets of the 401(k) Plan. 401(k) Plan § 9.1.
61. The Plan Committees were established to carry out fiduciary duties with respect
to the 401(k) Plan. 401(k) Plan § 7.2(a). Fremont was responsible for appointing, monitoring,
and removing the members of the Plan Committees. Id. Fremont has at all times exercised
control over the activities of its employees that performed fiduciary functions with respect to the
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401(k) Plan and is in turn responsible for the employees’ activities under the principles of agency
law.
62. Under the ESOP, Fremont established a Plan Committee to carry out fiduciary
duties with respect to the ESOP. Fremont was responsible for appointing, monitoring and
removing the members of the Plan Committee, a fiduciary function under ERISA. 29 C.F.R. §
2509.75-8 (D-4).
63. The Plan Committee provides the company with annual reports on the
administration of the ESOP and directs the Trustee regarding the managing, dispensing and
investing of Trust assets. ESOP §§ 8.2, 9.5.
64. Fremont was named fiduciary of both Plans pursuant to ERISA § 402(a)(1), 29
U.S.C. § 1102(a)(1), and a de facto fiduciary of the Plans within the meaning of ERISA §3(21),
29 U.S.C. §1002(21), during the Class Period. Fremont exercised discretionary authority or
discretionary control respecting managing and dispensing of the Plans’ assets, and/or had
discretionary authority or discretionary responsibility in the administration of the Plans.
65. Defendants McIntyre, Rampino, Bailey, Hayes, Lewis, Mayerfeld, and Ross are
Board Members. The Fremont Board and Board Members exercised the authority to select,
monitor, retain, and remove the Plan Committees and, accordingly, exercised authority and
oversight over the Plan Committees, who reported to the Board and Board Members regarding
the Plans.
66. Through the Board Member Defendants, Fremont was required to establish and
did establish the Plan Committees to carry out fiduciary duties with respect to the Plans. 401(k)
Plan § 7.2(a); ESOP § 8.1. Additionally, the members of the Board of Directors individually and
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independently exercised discretionary authority with respect to the Plan-related duties they
undertook.
67. Board Member Defendants assumed Fremont’s responsibility to appoint, monitor
and remove the members of the Plan Committees. ESOP § 8.1; 401(k) Plan § 7.2(a).
Additionally, Board Member Defendants overlapped their fiduciary responsibilities by acting as
members of the Plan Committees. As mentioned above, Board Members McIntyre, Rampino
and Ross all served as members of the Plan Committees.
68. Defendants Rampino, Bailey, Lamb, and Meyers are Plan Committees Members.
The Plan Committees and Plan Committees’ Members exercised the authority to select, monitor,
and remove the Plans investments, specifically including the discretion and authority to liquidate
the Plans’ investments in Fremont Stock and stop new investments by the Plans in Fremont
Stock.
69. The 401(k) Plan provides for Fremont to establish a committee to delegate
Fremont’s duties under the Plan. 401(k) Plan § 7.2. Fremont acted through the Fremont Board
in carrying out this responsibility.
70. The members of the Plan Committee had the authority to administer the 401(k)
Plan. 401(k) Plan §§7.1, 7.2. In addition, the Plan Committee had the authority to delegate
authority to other persons as it deemed necessary. Id.
71. In addition to being named fiduciaries under the Plans, the Plan Committee
Defendants had the following powers and duties that also deemed them fiduciaries: (a) construe
and interpret the ESOP; (b) decide all questions of eligibility and to amount, manner and time of
payment of any benefits; (c) request and receive from the Company any information necessary
for the proper administration of the ESOP; (d) prepare and distribute information explaining the
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ESOP; (e) furnish the Company with annual reports regarding the administration of the ESOP;
(f) review reports on the financial condition of the Trust Fund; (g) direct the Trustee regarding
the management, disposition and investment of Trust assets; and (h) value and manage the
disposition and investment of Fremont Stock. ESOP §§ 8.1, 8.2, 9.5, ESOP Trust Agreement §§
1.1, 5.1.
72. The Plan Committees also had the power to survey participants to determine how
Fremont Stock should be voted and whether Fremont Stock should be sold and must follow the
participants’ instructions in directing the Trustee regarding the voting or sale of Fremont Stock.
ESOP § 9.5(b); ESOP Trust Agreement § 1.1.
73. The Plan Committee Defendants were and are fiduciaries of the Plans within the
meaning of ERISA § 3(21), 29 U.S.C. § 1002(21), during the Class Period in that they exercised
discretionary authority or discretionary control in regard to managing the Plans, exercised
authority or control in managing or disposing of the Plans’ assets, and/or had discretionary
authority or discretionary responsibility in the administration of the Plans.
VII. FACTS REGARDING FIDUCIARY DUTIES OF PRUDENCE AND LOYALTY
74. As set forth in Paragraph 2, Fremont operates its financial services holding
company primarily through its subsidiary, FIL. The financial services FIL provides include
brokering subprime mortgage lending, commercial real estate construction lending, and
residential loan servicing.
75. Some time on or before January 1, 2005, the Defendants developed and
implemented a plan to engage in unsafe and unsound banking practices through Fremont and FIL
in an effort to raise the price of Fremont Stock.
76. Under this plan, Defendants operated FIL inappropriately in the following ways:
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(a) marketing and extending subprime mortgage and commercial construction
loans without adequate consideration of the borrower’s ability to repay and with an unreasonably
high risk of borrower default;
(b) operating with ineffective risk management policies and procedures, including
inadequate underwriting criteria;
(c) operating with inadequate liquidity in relation to the volatility of Fremont’s
business lines and assets;
(d) operating with a large volume of poor quality loans and in such a manner as to
produce low and unsustainable earnings;
(e) using highly subjective “gain on sale” accounting practices in an aggressive
and ill-founded manner resulting in overstatements of earnings that were subsequently reversed;
and
(f) using aggressive securitization practices, all of which constituted a highly risky
business strategy culminating in the collapse of the Company’s financial position and stock
price. In short, during the Class Period, the Company faced dire financial circumstances as a
result of the aforementioned circumstances.
77. Under this plan, Defendants caused FIL to engage in the following risky behavior:
(A) participate in unsatisfactory lending practices;
(B) operate with no adequate strategic plan in relation to the volatility of FIL’s
business and the type and characteristic of FIL’s assets;
(C) operate with capital inadequate in relation to the type and characteristic of
FIL’s assets;
(D) operate in such a manner as to produce unsustainable earnings;
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(E) operate with inadequate provisions for liquidity in relation to the volatility of
FIL’s business lines and the kind and quality of assets held by the FIL;
(F) make mortgage loans without adequately considering the borrower’s ability to
repay the mortgage according to its terms;
(G) operate in violation of section 23B of the Federal Reserve Act, 12 U.S.C.
§371c-l (applicable to state nonmember insured institutions, Section 18(j) (1) of the Act, 12
U.S.C. §1828(j)(1)) in that FIL engaged in transactions with its affiliates on terms and under
circumstances that in good faith would not be offered to, or would not apply to, nonaffiliated
companies;
(H) operate inconsistently with the FDIC's Interagency Advisory on Mortgage
Banking and Interagency Expanded Guidance for Subprime Lending Programs;
(I) market and extend adjustable-rate mortgage (“ARM”) products to subprime
borrowers in an unsafe manner, greatly increasing the risk that borrowers would default on the
loans or otherwise cause losses to FIL. This included ARM products with one or more of the
following risky behaviors;
(i) qualifying borrowers for loans with low initial payments based on a
temporary introductory rate that after an initial period will expire, without
adequate analysis of the borrower’s ability to repay the debt at the fully-
indexed rate;
(ii) approving borrowers without adequate requirements or analysis of
appropriate documentation and/or verification of their income;
(iii) containing product features likely to require frequent refinancing to
maintain an affordable monthly payment and/or to avoid foreclosure;
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(iv) including substantial prepayment penalties and/or prepayment
penalties that extend beyond the initial interest rate adjustment period;
(v) failing to provide borrowers with adequate and/or clear information
relative to product choices, material loan terms and product risks, prepayment
penalties, and the borrower’s obligations for property taxes and insurance;
(vi) approving borrowers for loans with an insufficient debt-to-income
analysis that do not properly consider the borrowers’ ability to meet their
overall level of indebtedness; and/or
(vii) approving loans or “piggyback” loan arrangements with loan-to-value
ratios approaching or exceeding the entire value of the collateral.
78. FIL (and Fremont) was able to generate and report a significant amount of
subprime business that it would not have been able to generate and report had Defendants
operated FIL consistent with sound underwriting, risk management, and lending practices on or
before January 1, 2005 to the present.
79. As a consequence of causing FIL to operate in a manner inconsistent with sound
underwriting, risk management, and lending practices, the price of Fremont Stock increased from
the beginning of 2003 until early 2007 when subprime borrowers began to default on loans in
large numbers and Defendants’ scheme to engage in unsafe and unsound banking practices in an
effort to raise the price of Fremont Stock began to unravel.
80. Fremont Stock declined dramatically as the extent of the consequences of FIL’s
unsound underwriting, risk management, and lending practices became known. Fremont Stock
has lost approximately fifty percent of its value since January 1, 2007.
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81. Because Defendants are all insiders, directors, or senior executives at Fremont as
well as fiduciaries for the Plans, Defendants knew or should have known about FIL’s unsound
underwriting, risk management, and lending practices and the impact of such practices on
Fremont Stock.
82. The Defendants knew, or should have known, that Fremont was in dire financial
condition and facing imminent collapse, and yet they continued to invest the Plans’ assets in
Fremont Stock and continued to encourage the Plans’ participants to do the same
83. Fremont executives, including the Defendants named herein, made the touting of
Company stock to Fremont employees a regular practice. Plaintiffs and their co-workers were
continually told how well Fremont was performing, how valuable the stock was and would
continue to be, and were encouraged to continue to purchase and hold Fremont Stock in their
401(k) accounts.
84. During the Class Period, the 401(k) Plan and ESOP collectively acquired and/or
held, in any given year, between $150 million and $210 million in Fremont Stock.
85. Even though they knew or should have known that Fremont Stock was an
imprudent investment because of FIL’s unsound underwriting, risk management, and lending
practices, Defendants caused or allowed the Plans to purchase and maintain multi-million dollar
investments in Fremont Stock during the Class Period.
86. Despite causing or allowing the Plans to acquire millions of dollars in Fremont
Stock during the Class Period at great loss to the Plans, Defendants were far more protective of
their own personal investments in Fremont Stock. For instance, Defendant McIntyre has sold
over $11 million worth of Fremont Stock since August 2006. And Plan Committee Members
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Defendants Bailey, Lamb, Rampino and Meyers have sold, respectively, $1.9 million, $571
thousand, $2.4 million, and $635 thousand worth of Fremont Stock during 2007.
87. By causing or allowing the Plans to purchase and maintain multi-million dollar
investments in Fremont Stock during the Class Period, Defendants caused the Plans to lose
millions of dollars.
VIII. ERISA'S FIDUCIARY STANDARDS
88. ERISA imposes strict fiduciary duties of loyalty and prudence upon the
Defendants as fiduciaries of the Plan. ERISA §404(a), 29 U.S.C. § 1104(a), states, in relevant
part, that:
[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and – (A) for the exclusive purpose of (i) providing benefits to participants and their beneficiaries;
and (ii) defraying reasonable expenses of administering the plan; (B) with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims;
* * * * *
(D) in accordance with the documents and instruments governing the
plan insofar as such documents and instruments are consistent with the provisions of this [title and Title IV].
89. ERISA also imposes specific co-fiduciary duties on plan fiduciaries. ERISA §405,
29 U.S.C. §1105(c), states, in relevant part, that:
In addition to any liability which he may have under any other provision of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances:
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(1) if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach; or
(2) if, by his failure to comply with section 404(a)(1) in the administration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to commit a breach; or
(3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.
90. ERISA mandates that fiduciaries who exercise discretionary authority or control
over the selection of plan investments and the selection of plan service providers shall act
prudently and solely in the interest of participants in the plan when selecting investments.
91. Under the duty of loyalty and prudence, a fiduciary must disregard plan
documents or directives that it knows or reasonably should know would lead to an imprudent
result, or would otherwise harm plan participants or beneficiaries. ERISA §404(a)(1)(d), 29
U.S.C. § 1104(a)(1)(D). A fiduciary may not continually follow plan documents or directives
that would lead to an imprudent result or that would harm plan participants or beneficiaries, nor
permit others, including those under them or those directed by a plan, to do so.
92. Under ERISA, a supervising fiduciary such as Fremont as the Plan Administrator,
must ensure that the other fiduciaries are performing their fiduciary obligations, including those
with respect to investment of plan assets. This supervising fiduciary must take prompt and
effective action to protect the plan and participants when the other fiduciaries are not. In
addition, a supervising fiduciary must provide the other fiduciaries with, and may not withhold,
accurate information in their possession that they know or reasonably should know the other
fiduciaries must have in order to prudently manage the plan and the plan assets.
IX. NO ENTITLEMENT TO A PRESUMPTION OF PRUDENCE FOR DEFENDANTS’ INVESTMENT IN FREMONT STOCK
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93. To the extent that a presumption of reasonableness applies to the decision to
invest in company stock in the ESOP portion of the Plan, such presumption is overcome by the
facts alleged here, including, among other averments:
$ A precipitous stock price decline from over $23.74 to $7.45 during the
Class Period;
$ Serious and gross mismanagement evidenced by, among other things:
- marketing and extending subprime residential mortgage loans and
commercial construction loans without adequate consideration of
the borrower’s ability to repay and with a high risk of borrower
default;
- operating with ineffective risk management policies and
procedures, including inadequate underwriting criteria;
- operating with inadequate liquidity in relation to the volatility of
Fremont’s business lines and assets; and
- operating with a large volume of poor quality loans and in such a
manner as to produce low and unsustainable earnings;
- use of improper accounting methods.
$ Fremont’s deteriorating and desperate financial condition as a result of the
Company’s risky and inappropriate lending and accounting practices; and
$ Insider self-dealing by Defendants identified above.
94. Based on these circumstances, and the others alleged herein, it was imprudent and
an abuse of discretion for Defendant to continue to make and maintain investment in Fremont
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stock, and, effectively, to do nothing at all to protect the Plans from large losses as a result of
such investment during the Class Period.
CLAIMS FOR RELIEF
COUNT I
Breach of Fiduciary Duty – Failure to Prudently and Loyally Manage the Plans and Assets of the Plans
(Violation of §404 of ERISA, 29 U.S.C. §1104 by Defendants)
95. Plaintiffs incorporate the allegations referenced in paragraphs 1-94 above.
96. Plaintiffs allege this claim against all Defendants.
97. During the Class Period, Defendants acted as fiduciaries pursuant to ERISA §
402(a)(1), 29 U.S.C. § 1102(a)(1), or de facto fiduciaries within the meaning of ERISA
§3(21)(A), 29 U.S.C. §1002(21)(A), or both by exercising authority and control with respect to
the management of the Plans and the Plans’ assets.
98. Defendants breached their duties of prudence and loyalty to the Plans under
ERISA §404(a)(1)(A), (B), 29 U.S.C. §§ 1104(a)(1)(A), (B). Defendants accomplished this by
their actions and omissions in authorizing or causing the Plans to invest in Fremont Stock when
they knew or should have known that Fremont Stock was an imprudent investment.
99. The Defendants were obliged to prudently and loyally manage all of the Plans’
assets. However, their duties of prudence and loyalty were especially significant with respect to
Company stock because: (a) company stock is a particular risky and volatile investment, even in
the absence of company misconduct; and (b) participants tend to underestimate the likely risk
and overestimate the likely return of investment in company stock. In view of this, the
Defendants were obliged to have in place a regular, systematic procedure for evaluating the
prudence of investment in Company stock.
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100. As a direct and proximate result of Defendants’ breaches of duty, the Plans, and
indirectly Plaintiffs and the Plans’ other participants and beneficiaries, lost millions of dollars
when the value of Fremont Stock declined precipitously in 2007.
101. Pursuant to ERISA §502(a)(2), 29 U.S.C. § 1132(a)(2) and 29 U.S.C. § 1109(a),
Defendants are liable to restore all losses to the Plans caused by their breaches of fiduciary duties
alleged in this Count and to provide other equitable relief as appropriate.
COUNT II
Breach of Fiduciary Duty – Failure to Provide Complete and Accurate Information to the
Plans’ Participants and Beneficiaries
102. Plaintiffs incorporate the allegations referenced in paragraphs 1-101 above.
103. Plaintiffs allege this claim against all Defendants.
104. As alleged above, during the Class Period, Defendants acted as fiduciaries
pursuant to ERISA § 402(a)(1), 29 U.S.C. § 1102(a)(1), or de facto fiduciaries within the
meaning of ERISA §3(21)(A), 29 U.S.C. §1002(21)(A), or both by exercising authority and
control with respect to the management of the Plans and the Plans’ assets.
105. The Defendants’ fiduciary responsibility included the communications and
material disclosures to the Plan participants and beneficiaries.
106. ERISA requires of Plan fiduciaries, a duty of loyalty and duty to inform. The
duty of loyalty requires fiduciaries to speak truthfully to participants, not to mislead them in
regard to the Plan or Plan assets, and to disclose information that participants need in order to
exercise their rights and interests under the Plan. The duty to inform requires fiduciaries to
provide participants and beneficiaries of the Plan with complete and accurate information
regarding Plan investment options such that participants can make informed decisions with
regard to the prudence of investing in such options made available under the Plan.
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107. The inherent risk of the undiversified investments the Defendants chose the Plans
to invest (mainly Fremont Stock) made the Defendants’ duty to inform particularly important
with respect to Fremont Stock. The duty to inform was breached by Defendants when they:
failed to provide truthful information regarding a) Fremont’s serious mismanagement and
improper business practices; b) public misrepresentations and material accounting irregularities;
c) the consequential artificial inflation of the value of Fremont Stock; and d) the soundness of
Fremont Stock as an investment. Since a considerable amount of the Plans’ assets were invested
in Fremont Stock during the Class Period, the value of the participants’ assets were significantly
reduced as a result of Defendants’ fiduciary failures.
108. Participants relied on Defendants for information regarding risks of the various
Plans’ investments making Defendants’ omissions unmistakably material to participants’ ability
to exercise informed control over their Plan accounts.
109. As a result of the breaches of fiduciaries of duties described in this Count,
Defendants were unjustly enriched and Plaintiffs and the Plans’ other participants and
beneficiaries lost a significant portion of their investment.
110. Pursuant to ERISA §502(a)(2), 29 U.S.C. § 1132(a)(2) and 29 U.S.C. § 1109(a),
Defendants are liable to restore all losses to the Plans caused by their breaches of fiduciary duties
alleged in this Count and to provide other equitable relief as appropriate.
COUNT III
Failure to Monitor Fiduciaries (Violation of §406 of ERISA, 29 U.S.C. §1106 by Defendants)
111. Plaintiffs incorporate the allegations referenced in paragraphs 1-110 above.
112. Plaintiffs allege this claim against Fremont and the Board Defendants (the
“Monitoring Defendants”).
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113. During the Class Period, Defendants acted as fiduciaries pursuant to ERISA §
402(a)(1), 29 U.S.C. § 1102(a)(1), or de facto fiduciaries within the meaning of ERISA
§3(21)(A), 29 U.S.C. §1002(21)(A), or both by exercising authority and control with respect to
the management of the Plans and the Plans’ assets. Thus, they were bound by the duties of
loyalty, exclusive purpose, and prudence.
114. As alleged above, the scope of the fiduciary responsibilities of Fremont and the
Board Defendants included the responsibility to appoint, and remove, and thus, monitor the
performance of other fiduciaries. 401(k) Plan ¶ 61, 69; ESOP Plan ¶ 64, 69.
115. Under ERISA, a monitoring fiduciary must ensure that the monitored fiduciaries
are performing their fiduciary obligations, including those with respect to the investment and
holding of plan assets, and must take prompt and effective action to protect the plan and
participants when they are not. Monitoring fiduciaries are responsible for putting procedures in
place to review and evaluate whether the directly responsible fiduciaries are adequately
performing their duties. Without such procedures, the appointing fiduciaries would have no
basis for concluding whether direct fiduciaries were effectively performing their obligations to
the plan participants.
116. Fremont and the Board Defendants as monitoring fiduciaries, must also provide
the monitored fiduciaries with complete and accurate information in their possession that they
know or reasonably should know that the monitored fiduciaries must have in order to prudently
manage the plan and the plan assets, or that may have an extreme impact on the plan and the
fiduciaries’ investment decisions regarding the plan.
117. The Plans suffered significant losses as a consequence of the Monitoring
Defendants’ breaches of fiduciary duty. If the Monitoring Defendants’ had fulfilled their duties
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of proper monitoring as described above, the losses suffered by the Plans would have been
minimized or avoided. Therefore, as a direct and proximate result of the breaches of fiduciary
duty alleged herein, the Plans, and indirectly Plaintiffs and other Class members, lost millions of
dollars.
118. Pursuant to ERISA §502(a)(2), 29 U.S.C. § 1132(a)(2) and 29 U.S.C. § 1109(a),
Defendants are liable to restore all losses to the Plans caused by their breaches of fiduciary duties
alleged in this Count and to provide other equitable relief as appropriate.
COUNT IV
Co-Fiduciary Liability
(Violation of §405 of ERISA, 29 U.S.C. §1105 by Defendants)
119. Plaintiffs incorporate the allegations referenced in paragraphs 1-118 above.
120. Plaintiffs bring this claim against all Defendants.
121. As alleged above, during the Class Period the Defendants were named fiduciaries
pursuant to ERISA § 402(a)(1), 29 U.S.C. § 1102(a)(1), or de facto fiduciaries within the
meaning of ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), or both. Thus, they were bound by the
duties of loyalty, exclusive purpose, and prudence.
122. By virtue of the facts and events alleged herein, Defendants to this count, by
failing to comply with their specific fiduciary responsibilities under ERISA 404(a)(1), enabled
their co-fiduciaries to commit violations of ERISA and, with knowledge of these breaches,
participated jointly with the other fiduciaries in their breaches, and failed to make reasonable
efforts to remedy the breaches. Accordingly, the Plans’ fiduciaries are each liable for the others’
violations pursuant to ERISA §405(a)(2) and (3), 29 U.S.C. §1105(a)(2) and (3).
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VIII. PRAYER FOR RELIEF
WHEREFORE, Plaintiffs pray for relief as follows:
1. Declare that each Defendant has violated ERISA’s prohibited transactions
provisions and breached their duties under ERISA;
2. Issue an order certifying a class under Fed. R. Civ. P. 23;
3. Issue an order compelling Defendants to restore all losses suffered by the Plans
resulting from the Plans’ investments in Fremont Stock;
4. Award such other equitable or remedial relief as may be appropriate, including
the permanent removal of the Defendants from any positions of trust with respect to the Plans
and the appointment of independent fiduciaries to administer the Plans;
5. Enjoin Defendants collectively, and each of them individually, from any further
violations of their ERISA fiduciary responsibilities, obligations, and duties;
6. Award Plaintiffs their attorneys’ fees and costs pursuant to ERISA § 502(g), 29
U.S.C. § 1132(g) and/or the Common Fund doctrine;
7. Impose a Constructive Trust on any amounts by which any Defendant was
unjustly enriched at the expense of the Plans as the result of breaches of fiduciary duty;
8. Issue an Order for equitable restitution and other appropriate equitable and
injunctive relief against the Defendants; and
9. Award such other and further relief as the Court deems equitable and just.
Dated: May 29, 2007
By: ___________________________________
Jon A. Tostrud
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CUNEO GILBERT & LaDUCA, L.L.P. 1801 Century Park East, Suite 2400 Los Angeles, California 90067 Telephone: (310) 556-9621 Facsimile: (310) 556-9622 [email protected] Jonathan W. Cuneo Matthew Wiener CUNEO GILBERT & LaDUCA, L.L.P. 507 C Street N.E. Washington, D.C. 20002 Telephone: (202)789-3960 Facsimile: (202)789-1813 [email protected] Eric E. Castelblanco LAW OFFICES OF ERIC E. CASTELBLANCO 8383 Wilshire Blvd., Suite 302 Beverly Hills, California 90211 Telephone: (323) 951-0180 Facsimile: (323) 951-0183 [email protected]
Richard A. Lockridge Karen H. Riebel Elizabeth R. Odette LOCKRIDGE GRINDAL NAUEN P.L.L.P. 100 Washington Avenue South, Suite 2200 Minneapolis, MN 55401 Telephone: (612) 339-6900 Facsimile: (612) 339-0981 [email protected] Seymour J. Mansfield Jean B. Roth MANSFIELD TANICK & COHEN 1700 U.S. Bank Plaza South 220 South Sixth Street Minneapolis, Minnesota 55402-4511 Telephone: (612) 339-4295 Facsimile: (612) 339-3161 [email protected] Counsel for Plaintiffs