When a federal judge in California recently dismissed a claim against fiduciaries of Chevron Corp.’s $19 billion 401(k) plan, investment managers who double as plan record-keepers no doubt breathed a sigh of relief.

Judge Phyllis Hamilton granted Chevron’s motion to dismiss for a second time. The plaintiffs in White, et al., v. Chevron Corp amended their original complaint, which was first dismissed in August of 2016.

As she did in her first ruling last year, Hamilton found that the plaintiffs failed to provide sufficient facts to back six allegations brought against the plan, which included claims that plan fiduciaries breached their duties of loyalty and prudence under the Employee Retirement Income Security Act.

Similar to the first complaint dismissed last year, the plaintiffs’ amended complaint claimed Chevron included expensive and poorly performing investment options in the plan, which included 13 Vanguard mutual funds and 12 Vanguard collective target-date funds. Vanguard was not named in the suit.

But it was Vanguard’s role as record-keeper to the plan that provided the most novel of the claims in the case, which was first filed in February of 2016.

The plaintiffs argued that Vanguard funds are the largest institutional investor in Chevron stock, holding about $13 billion worth of company shares across the universe of Vanguard mutual funds and target-date products.

That relationship incentivized Chevron to pay Vanguard excessive record-keeping fees, allegedly in exchange for Vanguard casting block shareholder proxy votes favorable to Chevron and against shareholder originated proposals on executive compensation, corporate governance, and environmental policies.

In short, the plaintiffs alleged that Chevron was engaging in a quid-pro-quo with Vanguard by channeling high record-keeping fees in exchange for a massive block of supportive shareholder proxy votes.

But Judge Hamilton ruled that alleged conflict of interest was “entirely speculative,” according to court documents.

“Plaintiffs have alleged no facts showing that the plan fiduciaries were aware of Vanguard’s allegedly ‘pro-management’ voting position,” wrote Hamilton in her decision.

Chevron’s attorneys argued that Vanguard is a significant shareholder in most publicly owned companies, given the investment management firm’s role as the leading provider of indexed mutual funds, and that Vanguard’s proxy votes across the S&P 500 were all pro-management, regardless of whether it provided investment services to companies within that index.

Judge Hamilton clearly found defense’s argument persuasive.

“The court finds that the allegations that Chevron had illicit motives to drive higher record keeping fees to Vanguard — that the administration of the Plan was infected by ‘conflict of interests’ resulting from Chevron's relationship with Vanguard — are insufficient to state a claim. In particular, plaintiffs allege no facts showing any benefit to Chevron resulting from the plan's arrangement with Vanguard that Chevron would not have received even absent any such relationship,” wrote Hamilton.

Hamilton dismissed the amended complaint with prejudice, concluding that it failed to correct the “deficiencies” in the first complaint. Allowing the plaintiffs to again amend the complaint “would be futile,” ruled Hamilton.

Instant Insights /

California judge says no quid pro quo between Chevron plan and Vanguard

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