[00:00:01] Speaker 03:
Good morning, Your Honors.

[00:00:01] Speaker 03:
Paul Derby for the plaintiffs.

[00:00:03] Speaker 03:
There's a phrase in the investment community, picking up pennies in front of a steamroller.

[00:00:09] Speaker 03:
And that's kind of what the investment strategy of these defendants was in this case.

[00:00:15] Speaker 03:
To try to simplify what's fairly complex, the investment strategy of the structured alpha funds run by Allianz, and this was all transparent, this was all

[00:00:25] Speaker 03:
readily accessible at the outset and through monitoring during the course of the investment.

[00:00:31] Speaker 03:
Where the investments were, the alpha versus the beta part of the investments, the 20 percent at issue here.

[00:00:38] Speaker 03:
Those investments were a combination of highly leveraged derivatives, derivatives based upon a volatility index, just like that sounds.

[00:00:47] Speaker 03:
High risk, high fluctuations that require both steady monitoring.

[00:00:52] Speaker 02:
I just want to be clear about something.

[00:00:53] Speaker 02:
You're not asking for actual loss that you've received, but it was almost a relative loss, correct?

[00:01:03] Speaker 03:
It is a relative loss.

[00:01:05] Speaker 03:
If you were to give someone your money and invest it, you'd expect 30 years later you'd come back to more money.

[00:01:12] Speaker 03:
And in fact, you'd expect that that growth, if someone were capably investing it, would exceed inflation and, in fact, produce some form of retirement.

[00:01:22] Speaker 03:
Here, while it's stated as an unannualized 15% return, that's 3% over a period of time where the market did extremely well prior to COVID.

[00:01:32] Speaker 03:
And so under a normal, an appropriate investment strategy, a prudent investment strategy for a retirement fund, that money would have been invested somewhere that wasn't subject to effectively an overnight loss.

[00:01:47] Speaker 02:
I think the district court said that if you followed that analysis, wouldn't you be engaging in sort of some speculative guessing at that point, aren't you?

[00:01:57] Speaker 03:
Well, you have to make an assumption as to what the appropriate investment or the prudent investment would have looked like.

[00:02:03] Speaker 03:
That's a legal determination.

[00:02:06] Speaker 03:
At the point that you have what a prudent investment would have looked like, you can calculate it to the penny.

[00:02:10] Speaker 03:
And so the math on what a prudent investment generates versus the losses, the relative losses here, that's readily calculable.

[00:02:20] Speaker 03:
The only question is the legal decision that's made on the front end of that, which is what's required by the law, is that that's the call versus Sumitomo decision, is determine what a prudent investment looks like, and then we just do the math.

[00:02:34] Speaker 01:
And here- So can I ask, it seems like you eventually did the math, but there's the original complaint and the amended complaint without the to the penny calculation.

[00:02:41] Speaker 01:
Can you explain why and whether we should consider what you did originally to be enough?

[00:02:46] Speaker 03:
Well, I don't think that in the complaint itself that we have to allege, I don't believe anything more than tens of millions of dollars.

[00:02:53] Speaker 03:
There's obviously some expert analysis that will go into that.

[00:02:57] Speaker 03:
There may be alternatives in terms of what a prudent investment looks like that may generate different calculations.

[00:03:03] Speaker 03:
And so I don't know, and I'm also just bad at math, but I don't know that at this early stage saying something other than it's a whole lot of money, tens of millions of dollars that would have been generated in the event of a prudent investment is required.

[00:03:21] Speaker 03:
But certainly if we were to be required to make an initial calculation to the penny,

[00:03:27] Speaker 03:
which may change over the course of the lawsuit depending upon inputs, that would just be leave to amend.

[00:03:33] Speaker 03:
I mean, if the absence of a to the penny as opposed to tens of millions of dollars calculation is the bugaboo, we could simply change the complaint to correct that very quickly.

[00:03:46] Speaker 03:
The point of picking up pennies with a steamroller is that in understanding why this is such a particularly bad investment, the 20% that is the alpha, the high risk portion of the investment, it doesn't really get hedged by the 80% because the 20%

[00:04:03] Speaker 03:
isn't your normal 20% loss.

[00:04:06] Speaker 03:
You think of that as if you lost 100% of that, well, you still got 80% of the funds.

[00:04:11] Speaker 03:
But that's not true here, because the uncovered call options require the funds to go back to the market and acquire the stock that's not already in their ownership.

[00:04:23] Speaker 03:
And so instead, you have this small, the pennies, commissions that are being paid as to generate the profit in the alpha section of the funds.

[00:04:32] Speaker 03:
But if the market declines significantly, the funds have to go get that stock.

[00:04:39] Speaker 03:
And so they have to buy that stock.

[00:04:41] Speaker 03:
If it's $100 security, they have to spend that $100 on, say, $5 of commission.

[00:04:48] Speaker 03:
And so that 20% can gobble up the remaining 80%.

[00:04:52] Speaker 03:
It's a unique set of circumstances that exposes the funds to the risk of total loss.

[00:04:59] Speaker 03:
The exact opposite of what would be a prudent investment for not just on the cusp of retiring, but some of these people are actually in their retirement.

[00:05:08] Speaker 03:
They are living off of these defined contribution plans, and they don't have the fat in their monthly income to be able to lose 20, 30, 40%.

[00:05:18] Speaker 01:
So this argument you're making seems more like a merits argument than a standing argument.

[00:05:22] Speaker 01:
At this stage, do we just have to decide if you have standing to make this argument later?

[00:05:26] Speaker 03:
It is a merits-based argument, and we viewed the Court's opinion as somewhat merits-based, significantly merits-based, and so I think the whole process is maybe a little ahead of its skis.

[00:05:37] Speaker 03:
But I do agree, obviously, standing is the initial issue.

[00:05:41] Speaker 03:
In terms of injury in fact, I mean, even the respondents at page 28 and 31 of their brief are walking back the actual basis of the District Court's order, which is that relative loss can't be injury in fact.

[00:05:55] Speaker 03:
Here, we've alleged there's no contrary evidence.

[00:05:58] Speaker 03:
The only evidence on the Allen Declaration is the math that we agree with in terms of a $38.6 million net gain over somewhere between four to six years, depending upon where the investment was initially made.

[00:06:11] Speaker 03:
So along with wind and answer, Your Honor, yes, I think there has to be a standing determination, but I think on injury in fact,

[00:06:18] Speaker 03:
The respondents themselves have backpedaled that into a pleading issue.

[00:06:23] Speaker 02:
So should we stop at standing and send back if we followed your position?

[00:06:30] Speaker 03:
Well, if there is standing, I think the court can also resolve the 12b6 issue.

[00:06:34] Speaker 03:
It's de novo.

[00:06:35] Speaker 03:
And I think that this court can say that the 62 pages and 224 paragraphs of the first amended complaint are fulsome and that we should get on with discovery, I believe.

[00:06:48] Speaker 03:
I'd certainly prefer that to a loss.

[00:06:51] Speaker 01:
But if we thought that you needed to have the per by the penny calculation, then you're also saying you could just amend to add that and then get on with it.

[00:07:00] Speaker 03:
Yes, if that's the only hurdle, I mean, we could attempt that in full disclosure.

[00:07:05] Speaker 03:
I think that's a little premature.

[00:07:06] Speaker 03:
I think that's a process driven by the experts.

[00:07:09] Speaker 03:
I think that.

[00:07:10] Speaker 01:
Well, don't you already have the Pomerance Declaration?

[00:07:12] Speaker 03:
We do.

[00:07:13] Speaker 03:
We do.

[00:07:13] Speaker 03:
That number could easily be inserted.

[00:07:15] Speaker 03:
And in fact, one of the things we argue

[00:07:17] Speaker 03:
is that even if the court, and it's a very short to the point opinion.

[00:07:21] Speaker 03:
It felt sort of like, let's get done with this.

[00:07:24] Speaker 03:
But the Pomerance Declaration, even if you don't consider it as evidence, and there's no need, there's no evidentiary dispute, absolutely.

[00:07:31] Speaker 03:
It's a roadmap for the amendment.

[00:07:34] Speaker 03:
And so if the dollar amount simply needs to be cut and pasted into the complaint, that's an easy fix.

[00:07:41] Speaker 03:
If I may reserve, if I may have any time.

[00:07:44] Speaker 03:
Thank you.

[00:08:06] Speaker 04:
I believe there are a lot of summer associates from various law firms in the courtroom this morning.

[00:08:11] Speaker 01:
We're happy to have them here.

[00:08:12] Speaker 01:
It's great.

[00:08:13] Speaker 04:
That's the reason why it's so crowded.

[00:08:15] Speaker 04:
Thank you and may it please the court, John Hamill, on behalf of the defendants.

[00:08:19] Speaker 04:
Let me start by saying that it is quite clear, as the district court found,

[00:08:24] Speaker 04:
that the plaintiffs gained and their pleadings did not establish that.

[00:08:30] Speaker 04:
They gained, they did not lose.

[00:08:33] Speaker 01:
They're trying to... Why is that the relevant question though?

[00:08:36] Speaker 01:
I mean, if you invest money for 100 years and you gain 0.01%, you clearly have lost in the stock market if that's all you've gained.

[00:08:45] Speaker 01:
So I don't understand how that could be an answer to this.

[00:08:47] Speaker 04:
Sure.

[00:08:48] Speaker 04:
It's a relevant question because under this court's precedent, once it's been established that they gained,

[00:08:53] Speaker 04:
And once proof has been put on that they gained and they came before the district court with an emphatic position.

[00:08:58] Speaker 04:
in their pleadings that they lost.

[00:09:01] Speaker 04:
It was then our role, as we did, our proper procedure, which we invoked to put evidence before the district court that they gained, thereby refuting the allegations in the complaint.

[00:09:11] Speaker 02:
But why do you believe that they didn't allege relative loss in this case?

[00:09:16] Speaker 02:
I guess that's, I'm not sure if I'm capturing that argument.

[00:09:20] Speaker 04:
Because under your precedent, once we have established that the pleadings were incorrect,

[00:09:28] Speaker 04:
Travel travel with me for a minute on this.

[00:09:30] Speaker 04:
Once we establish with evidence that the pleadings are incorrect, the pleadings pleaded a loss.

[00:09:38] Speaker 04:
That loss was not true.

[00:09:40] Speaker 04:
We established that they gained the district court no longer has to accept the allegations in the complaint as true.

[00:09:47] Speaker 04:
That's your law in this circuit.

[00:09:49] Speaker 04:
So now the plaintiffs, it's incumbent upon them to come forward with evidence

[00:09:54] Speaker 04:
that they have lost.

[00:09:55] Speaker 04:
All they came forward with was speculation, even as to this relative loss concept, which is barely in the complaint.

[00:10:03] Speaker 02:
Even as to this relative... So you admit that it is in the complaint?

[00:10:05] Speaker 04:
They have allusions to the concept of a relative loss.

[00:10:08] Speaker 04:
In a couple of paragraphs of the complaint, they allude to the concept.

[00:10:11] Speaker 02:
At 47 and 51, I thought.

[00:10:13] Speaker 04:
I'll go with you on the paragraphs.

[00:10:15] Speaker 04:
I'll trust your citations.

[00:10:17] Speaker 04:
There are allusions to the concept.

[00:10:18] Speaker 04:
But even if we play that out, it's just speculation because what they don't do is plead a benchmark.

[00:10:24] Speaker 02:
When we look at the benchmark, why can't we just send it back to the district court to allow for amendment?

[00:10:30] Speaker 04:
Well, for two reasons.

[00:10:31] Speaker 04:
First of all, because once

[00:10:33] Speaker 04:
Once they have failed to plead the benchmark, you certainly can look at all reasons that are set forth in the record.

[00:10:39] Speaker 04:
This court has to know of a review.

[00:10:41] Speaker 04:
If you wanted to look at it as a 12b6 ground, you could do that.

[00:10:44] Speaker 04:
All grounds that are apparent in the record, you could rule upon.

[00:10:46] Speaker 04:
So you could rule on that.

[00:10:48] Speaker 04:
But even as a matter of standing, the benchmark requirement has to be there to show injury and causation.

[00:10:54] Speaker 00:
Whether we look at that as a 12b1 concept- Do they need to do the math to have standing?

[00:10:58] Speaker 00:
Do they need to

[00:10:59] Speaker 00:
set forth the exact calculation.

[00:11:01] Speaker 00:
I think we were having a conversation with your friend on the other side about what actually needs to be pledged.

[00:11:06] Speaker 00:
Do they need to plead the math?

[00:11:09] Speaker 04:
Well, certainly they have to do a lot more than what they've done here, right?

[00:11:12] Speaker 04:
So let's play this out.

[00:11:14] Speaker 04:
When we look at this court's precedent, for starters, they can't just point to an index fund.

[00:11:19] Speaker 04:
They can't just say, well.

[00:11:20] Speaker 01:
Well, why not?

[00:11:20] Speaker 01:
Why not?

[00:11:21] Speaker 01:
I mean, they've pointed to the Russell 1000.

[00:11:23] Speaker 01:
Why can't they just point to that as what would have been the investment?

[00:11:27] Speaker 04:
Because you've said they can't.

[00:11:29] Speaker 04:
You said they can't in the Miners case.

[00:11:31] Speaker 04:
You said they can't in the Davis and Salesforce case.

[00:11:34] Speaker 04:
All the other circuits have said they can't.

[00:11:35] Speaker 04:
Misuzik said that in the Fourth Circuit.

[00:11:38] Speaker 04:
The Seventh Circuit said that they can't do that in the Albert case.

[00:11:41] Speaker 04:
The courts have been very clear from 2019, from 2022, and even going back farther, that they can't just point to an index fund.

[00:11:49] Speaker 04:
They can't just point to passive investments.

[00:11:51] Speaker 04:
All that this Pomerance Declaration did, all that it did was say, well, you know what, there are index funds out there.

[00:11:57] Speaker 04:
He points to a treasury-based index fund, and he points to an equity-based index fund, and he says, gee, gosh, there's something else out there that may have done better.

[00:12:07] Speaker 04:
The law, as it is involved, says that's not enough.

[00:12:10] Speaker 00:
Okay, so can you answer my question, which is, what is enough?

[00:12:12] Speaker 00:
Do they have to set forth the calculation, the math, to establish standing, or the 12b6 issue?

[00:12:20] Speaker 04:
Yes, they certainly have to do a lot more than what they've done.

[00:12:22] Speaker 00:
Here's what's enough.

[00:12:24] Speaker 04:
Here's what's enough.

[00:12:25] Speaker 04:
First thing they have to do is they have to look at some other set of investments that are a proper benchmark to compare to.

[00:12:31] Speaker 04:
They didn't do that.

[00:12:32] Speaker 04:
It's not an index fund.

[00:12:34] Speaker 04:
That much is certain.

[00:12:35] Speaker 04:
It is certainly not an index fund.

[00:12:37] Speaker 04:
Your law and the law of the other circuit says that it has to be a totality of the circumstances.

[00:12:42] Speaker 04:
So whatever it is, it's not an index fund.

[00:12:45] Speaker 04:
Second thing, they have to look at the real world.

[00:12:49] Speaker 04:
We all know what really happened here.

[00:12:51] Speaker 04:
We don't have to don blinders.

[00:12:53] Speaker 04:
What really happened here?

[00:12:55] Speaker 04:
We have to look at events that occurred.

[00:12:58] Speaker 04:
What happened in the real world?

[00:13:00] Speaker 04:
There were guilty pleas and there were a consent decree.

[00:13:03] Speaker 04:
We know what happened.

[00:13:05] Speaker 04:
What the law says is we can't look at hindsight.

[00:13:08] Speaker 04:
This entire complaint is built on hindsight.

[00:13:12] Speaker 04:
So what has to happen?

[00:13:14] Speaker 04:
We have to go back to 2014 and 2016.

[00:13:18] Speaker 04:
That's when these investment decisions were made.

[00:13:20] Speaker 04:
And we have to say what was done at that time.

[00:13:24] Speaker 04:
At that time, let's look what happened at that time.

[00:13:28] Speaker 04:
The board, in its fiduciary capacity, selected an investment advisor in Callan.

[00:13:34] Speaker 04:
That's in the complaint.

[00:13:35] Speaker 04:
Reputable investment advisor.

[00:13:37] Speaker 04:
No hindsight.

[00:13:38] Speaker 04:
Remember, your law says no hindsight.

[00:13:41] Speaker 04:
Callan, reputable.

[00:13:43] Speaker 04:
Perfectly lawful.

[00:13:44] Speaker 00:
Isn't what happened in the real world is that the board read the private placement memorandum for

[00:13:51] Speaker 00:
the Alpha Fund, which clearly stated that it was speculative and entailed substantial risks.

[00:13:56] Speaker 00:
Isn't that what happened in the real world?

[00:13:58] Speaker 00:
They were aware of that.

[00:14:00] Speaker 00:
They disclaimed the fact that they relied on these statements made by the fraudulent actor.

[00:14:06] Speaker 00:
In fact, they said, we didn't consider that when we made these investments.

[00:14:10] Speaker 04:
No, I think what happened in the real world is that those disclaimers are the same disclaimers that are put in any investment, right?

[00:14:17] Speaker 04:
Every investment that's out there says there's risk inherent in investments.

[00:14:21] Speaker 04:
There's nothing new about that.

[00:14:22] Speaker 04:
If we look in, if I may, Your Honor, using this phrase, the real world, I know we're having an exchange on it.

[00:14:27] Speaker 04:
If we look at what's in the... No word, not mine.

[00:14:29] Speaker 04:
Yeah, fair enough.

[00:14:29] Speaker 04:
It is my word, but it's because it's the word that matters, right?

[00:14:32] Speaker 04:
And that's what Judge Kuhnauer certainly looked at.

[00:14:35] Speaker 04:
If we look at the judicially noticeable materials at what was going on,

[00:14:38] Speaker 04:
and we look at what happened in the SEC consent decree and in the guilty pleas, we see that the fraud that was going on was that the risks inherent in these investment vehicles were not disclosed, not to the board, not to the investment community at large.

[00:14:54] Speaker 00:
All the board would see- Sure, they just need to plead at the motion to dismiss stage that the board did not, that there wasn't a break in the causal link, that in fact the board knew information

[00:15:06] Speaker 00:
Upon information and belief, they are alleging that the board had the documents that very clearly indicated the speculative nature of this fund.

[00:15:15] Speaker 04:
No, Your Honor, I disagree.

[00:15:16] Speaker 04:
I think what you would have to do to issue a ruling that went along those lines is you would have to change the hindsight rule into a foresight rule.

[00:15:23] Speaker 04:
Because there is no rule, and the law is very clear on this, there's no rule that there's a per se imprudent investment.

[00:15:31] Speaker 04:
None.

[00:15:32] Speaker 04:
Period and hard stop.

[00:15:33] Speaker 04:
The law is very clear on that.

[00:15:35] Speaker 04:
So what you would have to do is you would have to change the rule that says we don't use hindsight, and you would have to say now a board has to have foresight.

[00:15:43] Speaker 04:
A board, a fiduciary would have to have foresight to advance in their minds to have telepathic foresight to see.

[00:15:51] Speaker 00:
So wouldn't that be per se immunity for boards?

[00:15:53] Speaker 00:
I mean, they would always, they could disclaim any decision making with respect to the investments that they're placing, you know, investments and retirement funds of its employees, if it were to just say, look, we can't possibly know what is going to happen.

[00:16:09] Speaker 00:
with respect to a fund that we're investing in.

[00:16:10] Speaker 04:
No, I don't think it's per se immunity at all.

[00:16:12] Speaker 04:
I think if you had a board that had knowledge that they were hiring an investment fund full of crooks as managers.

[00:16:18] Speaker 00:
But that's what's been alleged in this case.

[00:16:19] Speaker 04:
No, it's not been alleged, Your Honor.

[00:16:21] Speaker 04:
There's no allegation that the board knew that these investments, the managers at Allianz were crooks.

[00:16:26] Speaker 04:
Look what it took to uncover this fraud.

[00:16:28] Speaker 04:
We had the most significant federal prosecutor's office in the southern district of New York, and we had the SEC.

[00:16:34] Speaker 04:
uncover this fraud.

[00:16:35] Speaker 04:
Look at the look at the guilty pleas and look at the consent decrees.

[00:16:38] Speaker 04:
That was in no way known to the board.

[00:16:40] Speaker 01:
So you might win.

[00:16:41] Speaker 01:
I mean you might be able to argue that and win this case eventually but they have pled as I understand it that if the board had been paying attention to how the funds were doing compared to the market they would have known that what the disclosure what the

[00:16:54] Speaker 01:
statements had said about what this investment was supposed to be doing wasn't actually doing it.

[00:16:59] Speaker 01:
They've pled a lot of things about this was a riskier investment that was appropriate for a retirement fund.

[00:17:04] Speaker 01:
If you were watching the market compared to the fund, you would have been able to tell that there were lies.

[00:17:08] Speaker 01:
Maybe they're wrong and maybe you need an investigator and the regular person wouldn't have figured this out, but I don't understand how they haven't pled enough.

[00:17:17] Speaker 04:
Your Honor, that's all hindsight.

[00:17:19] Speaker 04:
If I may respectfully suggest, everything that you just described, according to this court's precedent, that's all hindsight.

[00:17:24] Speaker 01:
I don't think it's hindsight to say, if you were watching the market and comparing it to the fund, you would have been able to figure this out in real time.

[00:17:30] Speaker 01:
That's not hindsight.

[00:17:31] Speaker 04:
It is hindsight because nothing was nothing at all.

[00:17:35] Speaker 04:
According to their pleadings, nothing came to light until 2020 until the coronavirus.

[00:17:40] Speaker 01:
Well, they're saying that's because the board was asleep at the wheel.

[00:17:45] Speaker 01:
I mean, maybe you can show that's wrong, but I understand them to be pleading in part.

[00:17:51] Speaker 01:
This board was not paying attention all the way through, not just in hindsight, but all the way through.

[00:17:55] Speaker 04:
No, Your Honor, there were 112 other, 112 other institutional investors.

[00:18:01] Speaker 04:
This is clear from the judicially noticeable materials.

[00:18:04] Speaker 04:
112 others, 112 other institutional investors that had been investing in these funds as well.

[00:18:10] Speaker 04:
Not just, not just what we're dealing with in this case.

[00:18:13] Speaker 04:
All of them, all of them were victims of this fraud.

[00:18:16] Speaker 04:
not just these defendants, not just these parties.

[00:18:19] Speaker 04:
That's what's out there.

[00:18:20] Speaker 04:
So you would have to issue a rule of law.

[00:18:22] Speaker 01:
And where is that on the face of the complaint?

[00:18:25] Speaker 01:
I mean, the face of the complaint, you may win again.

[00:18:28] Speaker 01:
You may have great arguments.

[00:18:29] Speaker 01:
But I don't understand how they haven't pled enough.

[00:18:33] Speaker 01:
And I know you're saying this thing about you can't compare to index funds.

[00:18:36] Speaker 01:
But I'd like to get back to that, because it seems like that might be true on a certain kind of theory, where the theory is just you could have done better.

[00:18:42] Speaker 01:
But I think they have a more

[00:18:44] Speaker 01:
detailed theory than that.

[00:18:45] Speaker 01:
And I'm not sure what case tells us that where your theory is the board is asleep at the switch.

[00:18:51] Speaker 01:
They could have stayed with this other investment.

[00:18:53] Speaker 01:
They also have the allegations that this is a retirement fund.

[00:18:58] Speaker 01:
The level of risk is not okay.

[00:19:00] Speaker 01:
Look at all this very complicated hedging and all these things that are going on in this fund.

[00:19:04] Speaker 01:
I mean, it's not just there's something that would have done better.

[00:19:08] Speaker 04:
I think that's exactly what they've done.

[00:19:10] Speaker 04:
I think that's the Matusik case.

[00:19:12] Speaker 04:
I think that's what your footnote in Davis and Salesforce is.

[00:19:15] Speaker 04:
I think that's the Oshkosh case.

[00:19:16] Speaker 04:
I think that's all those 2022 cases from all the courts that say, you can't, as a plaintiff, just point to a passive fund.

[00:19:23] Speaker 04:
You can't just do that.

[00:19:24] Speaker 04:
You've got to get the pleading stage.

[00:19:26] Speaker 04:
That's at the pleading stage, which is what you're asking me about.

[00:19:29] Speaker 04:
Otherwise, you are, in fact, putting a standard on boards to have the foresight to see advanced complex criminal behavior that takes two federal regulatory agencies

[00:19:41] Speaker 04:
uncover and that's why the district court said hang on hang on I don't have to don blinders if you're going to come to me this is a very experienced district judge if you're going to come to me and twice on two complaints this was your question to the plaintiffs on two complaints and pretend to me

[00:20:01] Speaker 04:
that there wasn't something else going on in the world.

[00:20:03] Speaker 04:
I'm not having it.

[00:20:05] Speaker 04:
And you're going to come to me and you're not going to tell me that these things happen.

[00:20:10] Speaker 04:
And you're not going to tell me that you gained $38 million.

[00:20:13] Speaker 04:
You're going to tell me that you lost $250 million.

[00:20:17] Speaker 04:
You can't do that in my courtroom, he says.

[00:20:19] Speaker 04:
And that's why he threw it out.

[00:20:21] Speaker 04:
And that was proper.

[00:20:22] Speaker 04:
And that's why he also said, as an alternative.

[00:20:24] Speaker 04:
Now, he found he had no jurisdiction.

[00:20:26] Speaker 04:
He found he had no jurisdiction.

[00:20:27] Speaker 04:
That was the proper ruling.

[00:20:29] Speaker 04:
But that's why he also said, look, I don't have jurisdiction.

[00:20:31] Speaker 04:
But if I did, this doesn't pass because there's no benchmark.

[00:20:35] Speaker 04:
And all you're doing is tossing out an index fund.

[00:20:38] Speaker 01:
And so do you think that there's actually no way to amend to fix this?

[00:20:41] Speaker 01:
Or do you think it's some sort of penalty for wasting the court's time?

[00:20:46] Speaker 01:
What is the basis for not giving leave to amend here?

[00:20:49] Speaker 04:
I think there's no way to fix it.

[00:20:51] Speaker 04:
Let's imagine the Pomerance Declaration, let's just accept for the sake of discussion, let's imagine that it had been pleaded.

[00:20:58] Speaker 04:
The Pomerance Declaration is amounting to saying, look at an index fund.

[00:21:03] Speaker 04:
That does nothing for us.

[00:21:05] Speaker 04:
Your case law says that the comparator has to be a totality of the circumstances comparison.

[00:21:12] Speaker 04:
It cannot be just point to an index fund on a pleading stage.

[00:21:17] Speaker 00:
Can you tell me what case you think is the best case for the proposition that you just articulated?

[00:21:22] Speaker 00:
Because I'd like to go back and you've cited several different cases and there are two issues that you've really focused on and I'd like to know what cases you think I ought to look at for the statement that they can't just cite to a passive fund that it has to be a comparator and then also the sort of hindsight versus foresight issue, which I think they're kind of, they're

[00:21:43] Speaker 00:
I mean, they're related issues, but are there two different cases you would point me to?

[00:21:47] Speaker 04:
I think you're 100% right that they're related.

[00:21:49] Speaker 04:
Here, I'm going to give you a list, if I may.

[00:21:51] Speaker 00:
Sure.

[00:21:51] Speaker 04:
I know that I'm creeping up here on the time.

[00:21:55] Speaker 04:
Matusik, which is an eighth circuit case.

[00:21:58] Speaker 04:
Davis and Salesforce, which is your case, and it's in a footnote.

[00:22:02] Speaker 04:
I take your footnotes seriously.

[00:22:04] Speaker 04:
It's footnote one.

[00:22:05] Speaker 04:
The Albert case is a seventh circuit case.

[00:22:08] Speaker 04:
The Smith case is a sixth circuit case.

[00:22:12] Speaker 04:
Uh, then the minor's case is your case from 2022.

[00:22:15] Speaker 04:
And let's see if there's any others that come to mind.

[00:22:19] Speaker 04:
Uh, I think that will give you a, you know, a pretty good head start for diving into this.

[00:22:23] Speaker 04:
And of course the question about hindsight in general, uh, is the St.

[00:22:28] Speaker 04:
Vincent, the pension case, the St.

[00:22:29] Speaker 04:
Vincent case, which you all adopted, I would submit that you all adopted in your summary affirmance in the white and Chevron case.

[00:22:38] Speaker 02:
And just a clarification, and you think those cases or some of those cases also stand for the proposition that we couldn't just send back to amend the complaint?

[00:22:46] Speaker 04:
Yes, I think the Sisseton case is your authority, which says that the district court has authority here where he's already given, where they've already amended.

[00:22:56] Speaker 04:
They had already amended.

[00:22:58] Speaker 04:
I think they've amended once, is that right?

[00:22:59] Speaker 04:
They did amend once, that's correct.

[00:23:01] Speaker 04:
And then they took five months after that before on kind of a last-ditch effort they threw in the public.

[00:23:07] Speaker 02:
Counsel, I was a district court judge for several years.

[00:23:10] Speaker 02:
I'm aware.

[00:23:10] Speaker 02:
I often allowed folks to amend many, many times when necessary.

[00:23:16] Speaker 02:
Why couldn't we just send back in this case and say, maybe you should take another look at this and allow amendments?

[00:23:23] Speaker 04:
Because I think the Pomerance Declaration, which is what's being proposed as the amendment here, is the judicial equivalent of saying it's good to have a nice breakfast.

[00:23:31] Speaker 04:
It doesn't amount to anything.

[00:23:33] Speaker 04:
And if I may say that the cases that I just offered to the court here are going to show that all that's being done here, all that's being proposed here, is not a legal fix.

[00:23:44] Speaker 04:
It doesn't save the complaint.

[00:23:46] Speaker 04:
This complaint has nothing to it.

[00:23:47] Speaker 04:
It doesn't go forward.

[00:23:48] Speaker 01:
I'm looking at the cases that you told us to look at.

[00:23:51] Speaker 01:
It looks like if we're looking at the ones from our court,

[00:23:54] Speaker 04:
Yes.

[00:23:54] Speaker 01:
Davis is unpublished?

[00:23:57] Speaker 04:
I think Davis is unpublished.

[00:24:00] Speaker 04:
OK, so we have a rule that we can't- But I've got rule 32.1, right?

[00:24:02] Speaker 01:
Well, but we're not going to rely on Davis as precedent.

[00:24:05] Speaker 01:
So which other case from our court?

[00:24:06] Speaker 04:
Miners.

[00:24:09] Speaker 04:
And then- Is that a published case or an unpublished case?

[00:24:13] Speaker 04:
Miners is published.

[00:24:15] Speaker 01:
And then the other one- So Miners, M-E-I-N-E-R, that's the- M-E-I-N-E-R-S.

[00:24:20] Speaker 01:
It says 8th Circuit in your brief.

[00:24:23] Speaker 04:
Perhaps I'm perhaps I'm perhaps I'm misremembering minors then but Davis Davis certainly and then white v. Chevron White v. Chevron is a summary affirmance of a district court case that's adopting the pension benefits st.

[00:24:37] Speaker 01:
Vincent case Okay, the only white v. Chevron cases in your briefs are district court cases.

[00:24:43] Speaker 04:
That's correct your honor But it's actually there's a citation in which it's affirmed

[00:24:47] Speaker 04:
It's a federal appendix case.

[00:24:50] Speaker 04:
So you affirm it.

[00:24:51] Speaker 01:
So you don't have any published cases from our court that support the proposition you want us to treat as gospel?

[00:24:58] Speaker 04:
No, I don't think that's correct.

[00:25:00] Speaker 04:
I mean, I think we go all the way back to the general.

[00:25:02] Speaker 02:
I'm sorry, counsel.

[00:25:03] Speaker 02:
Then cite it.

[00:25:04] Speaker 02:
Cite the case.

[00:25:06] Speaker 02:
that you say stands for the proposition you've argued.

[00:25:09] Speaker 02:
For the fact that you can't look at hindsight?

[00:25:11] Speaker 02:
Yeah, from our precedent.

[00:25:14] Speaker 01:
Or for your idea that you can't look at an index fund.

[00:25:19] Speaker 04:
that you can't look at index funds.

[00:25:21] Speaker 04:
Well, I think all those cases I'm citing, Ron, but you're telling me that because the cases are unpublished that we're not going to rely upon them or not consider them as persuasive authority.

[00:25:31] Speaker 04:
My understanding of the rule is they're not binding precedent.

[00:25:34] Speaker 04:
But just because they're not binding precedent doesn't mean that they're not cases out there that the court

[00:25:38] Speaker 04:
has looked at and considered the issues.

[00:25:41] Speaker 04:
If you ask me whether they're binding precedent, in that sense, I would agree with you.

[00:25:44] Speaker 04:
But they're certainly persuasive and they're reflective of your other judges from the court considering these issues and grappling with them.

[00:25:52] Speaker 04:
And I think if we also look at the trend in the courts, these 2022 decisions, the ones that I've mentioned are all from 2022.

[00:25:58] Speaker 04:
And they're reflecting this trend in the courts that are grappling with this question of whether we should just look to these passive funds.

[00:26:05] Speaker 04:
Should we just look to passive funds as the benchmarks

[00:26:08] Speaker 04:
as the comparators, and we shouldn't do it.

[00:26:11] Speaker 04:
And that's what the trend is.

[00:26:12] Speaker 04:
And I think that's the one that we're introducing.

[00:26:13] Speaker 01:
We've taken you way over your time.

[00:26:14] Speaker 01:
I think I need to cut you off at this point.

[00:26:16] Speaker 04:
I appreciate it.

[00:26:16] Speaker 01:
Thank you, Ron.

[00:26:17] Speaker 01:
So we've given your opponent a bunch of extra time.

[00:26:19] Speaker 01:
Why don't we give you four minutes for rebuttal?

[00:26:21] Speaker 03:
Thank you, Your Honor.

[00:26:22] Speaker 03:
That's in addition to, or?

[00:26:24] Speaker 01:
Total.

[00:26:24] Speaker 01:
OK.

[00:26:25] Speaker 01:
Thank you.

[00:26:26] Speaker 01:
If you're still asking questions, you can keep going.

[00:26:28] Speaker 01:
I had to ask, Your Honor.

[00:26:31] Speaker 03:
Sort of in bullet points, Your Honor.

[00:26:33] Speaker 03:
First of all, of all the cases that were just cited, none addressed specifically the issue of leave to amend other than Matusek.

[00:26:42] Speaker 00:
I think what he's saying is that it would be futile, that we don't need to grant leave to amend if you can't meet the standard.

[00:26:49] Speaker 00:
Now, I think there's a question about whether these cases

[00:26:52] Speaker 00:
require us either cases from our own circuit or if we should be looking at cases outside our circuit for the propositions that you have to have a comparator benchmark fund and whether or not there's this sort of reliance on hindsight versus foresight.

[00:27:08] Speaker 00:
So maybe you can talk to us about why these cases don't make it futile for you to amend the complaint.

[00:27:18] Speaker 03:
Well, if I may, Your Honor, I'd like to also discuss why the complaint on its face is sufficient in the context of those cases, but I'll also note what might be amended.

[00:27:27] Speaker 03:
The cases on hindsight, that's just a mantra that every defendant gives, is that we're just looking backwards.

[00:27:32] Speaker 03:
Well, it looks bad backwards, but it looked bad at the time, too, and that's paragraph 78 to 106 of the complaint.

[00:27:38] Speaker 03:
is that everything about this was contrary to what a prudent advisor of a retirement fund would have done at the time.

[00:27:48] Speaker 03:
Everything about the alpha side, in terms of the risk of the investment, the uncovered nature of the call options, the ability to lose a significant multiple of what was invested so the alpha overwhelms the beta,

[00:28:01] Speaker 03:
That's all known at the time and in fact we're quoting Callan in their white papers at one point as to how this should be.

[00:28:07] Speaker 03:
This should be something that is known and imprudent.

[00:28:11] Speaker 03:
But the other issue that meaningful benchmark meaningful benchmark actually in a lot of these cases This this is a line of 401k cases that have developed in this circuit to say you can't just say there's a fund that did better That's what those cases hold and so in one of the cases they cite There's a Vanguard fund that performed better and the court says that's not enough

[00:28:32] Speaker 03:
And that's the looking backwards cases.

[00:28:36] Speaker 03:
But these cases are nothing like us.

[00:28:38] Speaker 03:
In fact, the Anderson case that they cite at 1154 makes the distinction.

[00:28:44] Speaker 03:
It says in a case where it is about strategy,

[00:28:47] Speaker 03:
where the very vehicle was inappropriate, you don't look to a meaningful benchmark.

[00:28:52] Speaker 03:
A meaningful benchmark has to be same investors, same product.

[00:28:57] Speaker 03:
Well, we don't want other highly leveraged derivatives and uncovered call options tied to the VIX.

[00:29:03] Speaker 03:
We're saying that's insane.

[00:29:05] Speaker 03:
We're not saying that there should be something that looks like that.

[00:29:08] Speaker 03:
We're saying it should look nothing like that.

[00:29:11] Speaker 03:
And so the idea of a meaningful benchmark is when you have quibbling, when you do have this

[00:29:16] Speaker 03:
Well, that fund performed better.

[00:29:18] Speaker 03:
Then you have to say, why is that something that the market would expect is the benchmark for that type of an investment?

[00:29:27] Speaker 03:
We don't want anything like this type of investment.

[00:29:29] Speaker 03:
It was per se imprudent.

[00:29:31] Speaker 03:
Not per se across the board.

[00:29:33] Speaker 03:
I understand this court's rulings that you can't have a per se imprudent investment.

[00:29:37] Speaker 02:
If we allowed it to go back and amend, what would you add?

[00:29:41] Speaker 02:
What would we add?

[00:29:42] Speaker 03:
Well, respectfully, Your Honor, on its face, I think that the... Let's assume that that's not enough.

[00:29:47] Speaker 02:
That is not enough.

[00:29:47] Speaker 03:
What would you add?

[00:29:48] Speaker 03:
Well, it would depend upon the question that Your Honor thought was not sufficiently pleaded.

[00:29:53] Speaker 03:
If the issue was that there wasn't enough pleaded about the comparator, we could give more detail.

[00:29:59] Speaker 03:
Although I think that the investments that were made by these very funds, both prior to and after the imprudent investment, is a pretty good guide.

[00:30:08] Speaker 03:
In fact,

[00:30:09] Speaker 03:
This circuit's a benchmark of the Cal Ironworkers case that you can have a benchmark measure where you look at what the prudent investments in that fund would have done as opposed to the imprudent investments.

[00:30:23] Speaker 03:
That alone, I think, gets us over the hump, but we could plead something to that effect.

[00:30:29] Speaker 03:
If the issue is that somehow, if it's Allianz, well, I think we've got it, but there's a thousand different things we could plead.

[00:30:36] Speaker 03:
much of what opposing counsel set up here isn't even in the record about that prosecution.

[00:30:42] Speaker 03:
And so I think it depends upon, Your Honor, what the issue would be that would cause you to hopefully not think that the 200 and some paragraphs in the complaint are insufficient.

[00:30:53] Speaker 03:
But if there is an issue, then it's really just a 12b6 issue.

[00:30:59] Speaker 03:
It's really just the standing issue when injury in fact can be

[00:31:05] Speaker 03:
a relative loss, which is effectively conceded at pages 28 and 31 of respondent's brief.

[00:31:11] Speaker 03:
It's also the law.

[00:31:12] Speaker 03:
Cases that are published in the Ninth Circuit would be things like Call versus Sumitomo, California ironworkers.

[00:31:19] Speaker 03:
These are published precedents in this circuit.

[00:31:22] Speaker 03:
But I mean, really you're just talking about, I'm struggling.

[00:31:26] Speaker 01:
Sorry, if I'm remembering correctly, the specific fund comparisons to the

[00:31:32] Speaker 01:
The Vanguard Total Bond Market Index Fund and the Vanguard Russell 1000 Index, those didn't appear until the Pomerance Declaration, right?

[00:31:41] Speaker 01:
They're not in your amended complaint?

[00:31:43] Speaker 03:
I thought they were, but I do not know.

[00:31:46] Speaker 00:
I think that they're at excerpts 520, paragraph 132 and 133.

[00:31:51] Speaker 00:
So I think that's the amended complaint.

[00:31:53] Speaker 03:
I did think, but I didn't want to misrepresent that, Your Honor.

[00:31:55] Speaker 03:
I did think they were in the complaint.

[00:31:56] Speaker 01:
But so you're saying there could be more explanation along the lines of the Pomerance Declaration.

[00:32:01] Speaker 01:
Is that what you were saying in response to Judge Mendoza?

[00:32:04] Speaker 03:
The problem I'm having with the question is I'm struggling to understand how the complaint is insufficient.

[00:32:07] Speaker 01:
So you're basically saying the complaint already gave the comparators and already gave a ballpark amount of

[00:32:13] Speaker 01:
comparative loss.

[00:32:14] Speaker 03:
And also that the the meaningful benchmark test that has been adopted as a motion to dismiss test in this circuit, that's a test for in the context of another like investment and cases like the it is an eight circuit case, but the miners case, that's a 2018 eight circuit case, the common spirit case, the Salesforce case.

[00:32:36] Speaker 03:
Put note, these are cases where you're saying somebody else doing the same thing did better.

[00:32:41] Speaker 03:
And then the courts establish an extra hurdle in those sorts of cases.

[00:32:45] Speaker 03:
Well, why is the better the benchmark?

[00:32:48] Speaker 03:
Sure, you can always point to something that's better.

[00:32:51] Speaker 03:
There's always someone faster, better looking than we are.

[00:32:54] Speaker 00:
But why?

[00:32:54] Speaker 00:
Are you saying that then the allegation in these paragraphs in the amended complaint, the difference, the plus factor that you've alleged that you think is sufficient, is the statement that had defendants instead stayed the course by investing in its broad-based bond index fund, the plans would have?

[00:33:11] Speaker 00:
Tens of millions of dollars more in assets.

[00:33:13] Speaker 00:
It's it's one your honor It's it's one of a number of things that I think if you had just stated those funds are out there They did better you would agree that that would not be enough or may not be enough But the fact that you are also alleging that the board Chose to go to these other more speculative funds knowingly that that that's the plus and

[00:33:36] Speaker 03:
We're not arguing that the funds could have done better.

[00:33:39] Speaker 03:
We're arguing that the funds were poisoned from the outset because they were in vehicles that exposed retirees to way too much risk.

[00:33:49] Speaker 03:
And sure enough, it could have been COVID, it could have been subprime mortgages, it could have been anything.

[00:33:54] Speaker 03:
This is a cycle that happens with some regularity, severe recessions.

[00:33:59] Speaker 03:
And even if it's not, if it's tied to the VIX, it's still going to result in significant losses.

[00:34:04] Speaker 03:
What we're saying is that from the get-go, the important thing is, Your Honor, if you're invested in stocks and bonds, those stocks and bonds may collapse, they may go down 50%, but they're going to come back.

[00:34:16] Speaker 03:
Apple still has value.

[00:34:17] Speaker 03:
A company generally still has value.

[00:34:19] Speaker 03:
If you have uncovered call options, you lose.

[00:34:23] Speaker 03:
There's no coming back from that.

[00:34:24] Speaker 03:
At the point that the option is called and the loss is imposed upon the fund, that loss is effectively permanent.

[00:34:32] Speaker 03:
And the only way to make it back is through other good bets.

[00:34:35] Speaker 03:
It's like coming back from a loss in Vegas, effectively.

[00:34:38] Speaker 03:
And so that's our argument, is that these are toxic from the outset.

[00:34:42] Speaker 03:
And they themselves or any reasonable advisor someone like challenge should certainly know that highly leveraged derivatives and uncovered call options have an opportunity to just bust these funds.

[00:34:55] Speaker 03:
And so, yes, it is true that one way to assess the damages.

[00:35:00] Speaker 03:
is to compare it to what this very same fund was doing either before or after the toxic investment.

[00:35:06] Speaker 03:
But our argument more fundamentally as well is that the idea of a benchmark, the idea of a meaningful benchmark has no application in a case where we are not talking about that guy ran faster, that one's prettier.

[00:35:21] Speaker 03:
That's not what this argument is.

[00:35:23] Speaker 03:
It is not pointing to a Vanguard

[00:35:26] Speaker 03:
or a fidelity fund that significantly outpaced the fund in which these plans invested.

[00:35:32] Speaker 03:
It's that the plans invested, transparently invested.

[00:35:36] Speaker 01:
I think I need to cut you off.

[00:35:37] Speaker 01:
We're way over your time now.

[00:35:38] Speaker 01:
I figured that was coming.

[00:35:39] Speaker 03:
Thank you, Your Honor.

[00:35:40] Speaker 01:
Thank you both sides for the helpful arguments.

[00:35:42] Speaker 01:
This case is submitted.