Securities Expert Witness’ Opinion on Defendant’s Breach of Fiduciary Duties Admitted

Plaintiffs are former Salesforce employees who participated in the Salesforce 401(k) Plan. They alleged Defendants breached their fiduciary duties to the Plan and Plan participants in violation of the Employee Retirement Income Security Act of 1974 (“ERISA”).

Plaintiffs alleged the Investment Advisory Committee, Joseph Allanson, Stan Dunlap, and Joachim Wettermark (collectively, “Committee Defendants”) breached their fiduciary duty of prudence by selecting and retaining investment options with high costs relative to other, comparable investments. They relied on Robert E. Conner to support their claims against Defendants—fiduciaries of the Salesforce 401(k) Plan—under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

Robert Conner stated that Defendants’ oversight of the Salesforce 401(k) Plan was not “consistent with the standard of care of a prudent fiduciary,” and that the Plan participants incurred “losses . . . as a result of the Plan fiduciaries’ failure to provide oversight.”

Defendants sought an order excluding Conner’s opinions pursuant to Rule 702 of the Federal Rules of Evidence, arguing he was “not qualified to opine on the standard of care applicable to such fiduciaries under ERISA” and that his opinions were based on “flawed methodology and unreliable information.”

Securities Expert Witness

Robert E. Conner holds an M.B.A. in Finance from Harvard Business School. Conner is currently the President and co-founder of Datura Analytics, LLC and the co-founding officer of Thornapple Associates, Inc; two expert witness firms specializing in litigation support for investment disputes, investment industry standards, and damages. He has 46 years of experience in the securities industry serving clients in areas such as “ERISA pension and profit-sharing plans, registered and nonregistered investment managers and advisors, non-profit organizations and foundations, bankruptcy trustees, trusts and estates.”

Conner’s opinions were partly based on his experience as a fiduciary in, among other things, investment portfolio management, including within the retirement plan industry. Conner has been an expert witness in several analogous ERISA cases.

Discussion by the Court

Conner Lacks the Requisite Experience

Defendant argued that Conner never “served on a 401(k) or other pension plan committee” and has never “served as an expert witness where the ERISA fiduciary standard of care has been at issue.”

However, Conner “managed discretionary accounts” and “provided research and transactional coverage of non-discretionary accounts” including pension plans from 1977 to 1980. From 1983 to 1998, he managed equity portfolios for pension accounts as a portfolio manager, all of which experience included managing ERISA plan assets. Since 1998, Conner has worked at two expert witness firms, supporting litigation in “the securities and commodities industry” and in “investment industry disputes.”

In conclusion, the Court determined that the Defendants’ criticism of Conner’s experience only affected the weight of his opinions, not admissibility.

Conner’s Opinions are based on Flawed Methodology and Unreliable Information

Conner opined the Committee breached its fiduciary duty by choosing “investments and share classes with higher expenses even though identical investments with lower expenses were available” by: (1) as to Target Date Funds (“TDFs”), “failing to choose or switch to the JPMorgan Smart Retirement 2020 R5 share class . . . or the R6 share class when they became available”; and (2) failing to offer the “Fidelity Contra Commingled Pool (CIT)” and “Fidelity Contra Fund K6.”

JPMorgan SmartRetirement Target Date Funds

Defendants first argued Conner based his criticism of the Committee’s failure to substitute the Institutional share class of the JPMorgan TDFs for the R5 share class “on flawed methodology and unreliable information.”

The underlying factual record indisputably showed that the Plan was invested in the Institutional (later renamed R5) class from the beginning of the Class Period through December 2017.”

Plaintiffs did not dispute that the R5 and Institutional share classes were identical. Instead, they argued the “essential part” of Conner’s TDF share class opinion “focused on . . . why the R6 share class should have replaced the more expensive [Institutional/R5] share classes” more promptly, and, as Plaintiffs also pointed out, the supporting data contained in the exhibit submitted in connection with Conner’s report could support a calculation demonstrating the difference between the Institutional/R5 and R6 share classes. In light thereof, the Court found the above-described error concerned the weight, rather than the admissibility, of Conner’s opinions.

Defendants next criticized Conner for ignoring the benefit of revenue sharing to offset Plan administrative expenses, which was provided by the R5 class but not the R6 class. Although Conner conceded that revenue sharing was applied toward expenses with the fund, he stated he did not account for the revenue sharing credit paid by the Institutional/R5 share class in his damages calculations because revenue sharing made recordkeeping and administrative costs interdependent with plan participant returns and reduced the investment returns plan participants received.

The Court found that the above challenge primarily concerned the merits of Plaintiffs’ claims, rather than whether the report was based on sufficient facts and data.

Collective Investment Trusts

Defendants also sought to exclude Conner’s opinion that the Defendants breached their fiduciary duty of prudence by failing to replace the JPMorgan TDFs, the Fidelity Contrafund K, and the Fidelity Diversified International Fund K on the Plan’s investment menu with cheaper CITs sooner than they did. They argued Conner’s methodology was flawed because he inappropriately compared mutual funds with CITs, which were entirely different investment vehicles with different features. Conner did not dispute the above-referenced differences but offered his opinion that such concerns did not permit a prudent fiduciary to “rule out” CITs entirely. The Court again found Defendants’ challenge questioned the merits of Plaintiffs’ claims rather than the admissibility of Conner’s opinions in support thereof.

Damages

Defendants first sought to exclude Conner’s damages calculations because he did not obtain the underlying data himself and failed to properly assure its accuracy. Conner testified that he verified the numbers upon which he relied and based his own opinions upon. Accordingly, the Court declined to exclude Conner’s testimony on the basis of his use of such data.

Flaws:

Defendants additionally argued Conner’s damages calculations suffered from several fundamental flaws specifically:

(1) He treated the R5 and Institutional share classes of the JPMorgan TDFs as distinct share classes;

(2) He failed to account for the difference in expense ratios varying over the 2015 to 2017 period and by vintage; and

(3) He multiplied his calculation of expense ratio differences by Plan assets in the challenged funds as of year-end keeping in mind expenses accrued throughout the year rather than at year end.

As to the first of the above-listed “flaws,” the Court declined to exclude Conner’s damages calculations because, as discussed above, it isolated the mistake from the rest of Conner’s analysis.

As to the second flaw, Conner acknowledged that the share class expense ratios could change at different times causing smaller or larger spreads, but he explained that the difference typically is about 0.10%, which is the figure he opted to use. The Court held that an expert’s arguably improper focus on damages at a particular point in time is a question of fact, rather than grounds for exclusion.

Similarly, as to the third “flaw,”  the Court found the parties’ respective experts’ disagreement as to whether it was preferable to use monthly asset averages, as was done by Defendants’ expert, or instead to use year-end assets, as was done by Plaintiffs’ expert, concerned the weight of each such opinion, not its admissibility.

Opinions as to Excluded Claims

Defendants sought to exclude Conner’s opinions to the extent they pertained to claims brought solely in the Second Amended Complaint, which Plaintiffs were not permitted to file, and to claims whose dismissal from the First Amended Complaint was affirmed by the Ninth Circuit. Plaintiffs agreed that such opinions “could be stricken.”

Held

The Court denied the Defendant’s motion to exclude Securities Expert Witness Robert Conner with the exception of the opinions as to excluded claims.

Key Takeaways:

1. Requisite Qualification: Conner managed discretionary accounts and provided research and transactional coverage of non-discretionary accounts. He also worked at two expert witness firms. The Court held that he was qualified to opine.
2. Methodological Basis: The Court’s decision emphasized that Conner thoroughly checked the numbers used in his damages calculations, ensuring that he based his opinions on a sound methodology.
3. Challenge to Merits: Defendants argued that Conner’s methodology was flawed because he inappropriately compared mutual funds with CITs, which were entirely different investment vehicles with different features. The Court held that the Defendants’ challenge concerned the merit of Plaintiff’s claims.

Case Details:

Case Caption:	Miguel v. Salesforce.Com
Docket Number:	3:20cv1753
Court:	United States District Court, California Northern
Order Date:	March 20, 2024