Morningstar and Prudential Win RICO Suit Dismissal

The unsuccessful challenge was viewed as somewhat unique amid the glut of retirement industry litigation because it cited the Racketeer Influenced and Corrupt Organizations Law of 1970, known as RICO.

The U.S. District Court for the Northern District of Illinois, Eastern Division, has dismissed a lawsuit filed against Morningstar and Prudential.

Technically speaking, the court has ruled on Morningstar’s motion to dismiss Green vs. Morningstar et al pursuant to Federal Rule of Civil Procedure 12(b)(6) and the Prudential defendants’ motion to dismiss pursuant to Rule 12(b)(6), or in the alternative for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c).

For the reasons set forth below, defendants’ motions were granted and the complaint was dismissed without prejudice. Importantly, the judge has determined the plaintiff “shall have one more time to re-plead the cause of action in conformity with this opinion.”

The lead plaintiff in the failed class action suit is an employee of Rollins Inc. and a participant in the Rollins retirement plan. The Rollins plan is a defined contribution retirement plan with assets of roughly $500 million and more than 10,000 participants and beneficiaries, case documents show. Specifically, the challenge focused on the behavior of various groups that manage the plan participant-level automated investment advice program marketed under the tradename GoalMaker.

The crux of the charges leveled by the lead plaintiff is that “both the Prudential defendants and Morningstar, through concerted racketeering action, including but not limited to consulting meetings and joint GoalMaker-related asset allocation computer modeling work, arranged for GoalMaker to influence plan investors including plaintiff to invest in high-cost retirement funds that kick back unwarranted fees to the Prudential defendants by limiting the investment choices otherwise available to participants in the plans that would be included in the GoalMaker asset allocation program.”

Against these allegations, defendants first challenged whether the plaintiff has standing to bring this action, particularly with regard to the fact of whether the alleged injury was directly and proximately caused by their conduct. In particular, Morningstar argued that its provision of GoalMaker to is too remote from the alleged injury to make it a proper defendant. For their part, the Prudential defendants argued that the lead plaintiff failed to allege both “but-for” and “proximate” causation because he failed to allege that he would have paid lower fees if Prudential had not received revenue-sharing payments and also that the “independent actions of Rollins (as the sponsor) and the plaintiff himself with regard to his investment decisions make his injury too attenuated from Prudential’s actions.”

Considering these matters, the court has ruled that the “complaint does not sufficiently plead that the defendants were engaged in the conduct of an association-in-fact enterprise or that each defendant engaged in a pattern of racketeering activity.” As such, the court “does not reach the issue of causation here, but cautions that the matter is not free from doubt.”

Digging into the Racketeer Influenced and Corrupt Organizations Law (RICO) claims, the court explains that pursuant to Section 1962(c), it is “unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.” In order to establish a violation of 1962(c) a plaintiff must allege and prove: “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.”

The text of the complaint includes detailed argumentation on all of these points, ultimately ruling strongly against the plaintiff.

As the judge lays out, the complaint does not directly address the duration of the enterprise in question; it only conclusively mentions the concept in passing, alleging that the facts indicate “longevity sufficient to permit these associates to pursue the enterprise’s purpose sufficing to make the instant RICO enterprise actionable.”

The decision continues: “Relevant documents submitted in connection with the motions to dismiss indicate that [Prudential] began providing services to the Rollins Plan in 2007 and Morningstar began providing services to [Prudential] in 2012. But even these documents do not indicate when the alleged scheme began, and the further complaint lacks allegations regarding when [plaintiff] himself utilized the GoalMaker software that eventually led to his injuries. Second, the complaint fails to sufficiently allege a common purpose among the RICO defendants. The existence of a common goal or purpose is an essential ingredient of an association-in-fact enterprise. Not only must there be a common purpose or goal, a plaintiff must allege the existence of an organization with a structure and goals separate from the predicate acts themselves.”

According to the complaint, the ultimate goal of the alleged scheme was to procure revenue-sharing payments made directly to the Prudential defendants.

“As is clear, plaintiff has not alleged—even conclusively—that the defendants were organized for any purpose other than procuring revenue-sharing payments. In other words, if the alleged predicate acts are removed, there is nothing left in the complaint to sustain the allegation of an ongoing, structured enterprise among defendants,” the decision explains. “This is not sufficient.”

Following further considerations of ruling precedents, the decision concludes that the “complaint does not present a single factual claim asserting that each RICO defendant had any interest in the outcome of the alleged scheme beyond their own individual interests. For example, there is no indication in the complaint that the RICO defendants shared in the profits of the alleged enterprise as opposed to merely taking their own respective profits from their respective actions related to the scheme.”

The decision continues: “Specifically, Morningstar performed consulting and design work and received consulting and design fees in return. [Prudential] performed general marketing for the GoalMaker program and then received revenue-sharing payments from investment funds later down the line. [Prudential] took the GoalMaker software and actually managed its operation as to the plans and plans’ participants, and [Prudential] is the only defendant specifically alleged to have received revenue-sharing payments from specific investment funds. Still, it is true that all of the defendants are alleged to have received fees and/or payments, but the shared goal of financial profit, by each party conducting its own business, does not qualify as a ‘common purpose’ under RICO.”

For similar reasons, the judge explains, even if the complaint sufficiently alleged the existence of an enterprise, it fails to adequately allege that each member of the alleged enterprise participated in the enterprise’s affairs as opposed to simply pursuing their own affairs.

The full text of the decision is available to download here.