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

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

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

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Similar to the first complaint dismissed last year, theplaintiffs’ amended complaint claimed Chevron included expensiveand poorly performing investment options in the plan, whichincluded 13 Vanguard mutual funds and 12 Vanguard collectivetarget-date funds. Vanguard was not named in the suit.

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

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The plaintiffs argued that Vanguard funds are the largestinstitutional investor in Chevron stock, holding about $13 billionworth of company shares across the universe of Vanguard mutualfunds and target-date products.

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That relationship incentivized Chevron to pay Vanguard excessiverecord-keeping fees, allegedly in exchange for Vanguard castingblock shareholder proxy votes favorable to Chevron and againstshareholder originated proposals on executive compensation,corporate governance, and environmental policies.

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

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

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

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Chevron’s attorneys argued that Vanguard is a significantshareholder in most publicly owned companies, given the investmentmanagement firm’s role as the leading provider of indexed mutualfunds, and that Vanguard’s proxy votes across the S&P 500 wereall pro-management, regardless of whether it provided investmentservices to companies within that index.

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Judge Hamilton clearly found defense’s argument persuasive.

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“The court finds that the allegations that Chevron had illicitmotives to drive higher record keeping fees to Vanguard — that theadministration of the Plan was infected by ‘conflict of interests’resulting from Chevron's relationship with Vanguard — areinsufficient to state a claim. In particular, plaintiffs allege nofacts showing any benefit to Chevron resulting from the plan'sarrangement with Vanguard that Chevron would not have received evenabsent any such relationship,” wrote Hamilton.

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

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.