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        Alan Raywid, John D. Seiver, Margaret E. Haering, Susan P. Baxter, Cole, Raywid & Braverman, Washington, D.C., for plaintiffs in Charles S. Foltz, et al.

        Joseph M. Butler, George A. Bangs, Bangs, McCullen, Butler, Foye & Simmons, Rapid City, S.D., E. Roger Frisch, Walsh & Frisch, New York City, Raoul L. Carroll, Hart, Carroll & Chavers, Washington, D.C., for plaintiffs in David B. Richardson, et al.

        Leslie A. Nicholson, Jr., Hannah E.M. Lieberman, Thomas J. Catliota, Shaw, Pittman, Potts & Trowbridge, Washington, D.C., for defendants U.S. News and Madana Realty.

        Richard J. Wertheimer, Hadrian Katz, Edward Wolf, Arnold & Porter, Washington, D.C., for defendants Directors.

        Lawrence Latto, William Galeota, Patrick M. Hanlon, Julie M. Edmond, Shea & Gardner, Washington, D.C., for defendant Profit-Sharing Plan.

        Willis B. Snell, Willard K. Tom, Steuart H. Tomsen, Sutherland, Asbill & Brennan, Washington, D.C., for defendant American Appraisal Associates, Inc.

        Avis Black, Buchanan Ingersoll, Washington, D.C., for defendant-intervenor Save the Fund.

        BARRINGTON D. PARKER, Senior District Judge:

        This memorandum opinion sets forth the Court's final ruling on the claims of former employee shareholders of U.S. News and World Report, Inc. ("U.S. News" or "Company") to proceeds from the sale of the corporation. The Company was purchased in 1984 by Mortimer Zuckerman, a Boston real estate developer, for a price of $176 million. Plaintiffs contend that during the period prior to the sale, when they were entitled to and did receive their share of the value of the Company's stock, the true worth of the stock was wrongfully concealed, that its appraised value was otherwise manipulated and miscalculated by defendants, and that they were deprived of the stock benefits and profit-sharing interests to which they were entitled. The litigation has been hotly contested. Serious and unsettled questions arising under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 et seq., are involved in this proceeding. While other legal issues are also presented under federal securities law, and the common law of fraud, breach of fiduciary duty, unjust enrichment and negligence, the questions arising under ERISA clearly predominate.

        Throughout the course of the proceeding, counsel have ably briefed and argued in both their written memoranda and oral presentations the factual and legal issues involved. The questions presented for resolution have been fully considered. For the reasons set forth below in its factual findings and conclusions of law, entered pursuant to Fed.R.Civ.P. 52(a), the Court determines that plaintiffs have failed to support their claims, that judgment should be granted defendants on all counts, and the consolidated complaints dismissed.

        Course of the Litigation

        The Complaints and Pretrial Motions

        This litigation involves two consolidated complaints brought against U.S. News and several other defendants. Charles S. Foltz and others are plaintiffs in the first; David B. Richardson and others are plaintiffs in the second. At all relevant times, the Company produced and published the weekly news magazine, U.S. News and World Report. The Company also operated book and newsletter divisions; they were not particularly profitable and are of no great consequence to these proceedings.

        Foltz, conditionally certified as a class action, presents the claims of some 230 former U.S. News employees. See Foltz v. U.S. News & World Report, Inc., 106 F.R.D. 338 (D.D.C.1984). The class includes all persons who retired or were otherwise separated from employment with

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the Company during the eight-year period from 1974 through 1981, other than several former directors who have been specifically excluded upon a finding that their interests were not typical of the class. Mr. Foltz and seven other named plaintiffs are the designated representatives for the class period. The Richardson action is brought by former employees who retired or separated from U.S. News in 1982.¹ During their employment, the plaintiffs in both actions participated in the U.S. News Profit-Sharing Plan ("Plan"). They were also beneficial owners of stock in the Company under its stock bonus plan. Upon retirement or separation, they liquidated their Plan accounts and redeemed their stock interests. In both actions, plaintiffs seek recovery of benefits they claim are owed them by virtue of an alleged undervaluation of the Company's stock during the class period.

        Defendant U.S. News, organized at all relevant times under the corporate laws of the State of Delaware,² is headquartered in the District of Columbia. Other named defendants are certain former directors of U.S. News;³ the Madana Realty Company ("Madana"), a wholly-owned U.S. News subsidiary; the U.S. News Profit-Sharing Plan, an employee benefit plan as defined by ERISA § 3(34), 29 U.S.C. § 1002(34); and American Appraisal Associates, Inc. ("American Appraisal"), an appraisal firm transacting business in the District and organized under the laws of the State of Delaware. American Appraisal performed the year-end appraisals of the U.S. News stock that are at issue here. A group designated as Save the Fund was allowed to intervene as defendants. The group includes currently employed or recently separated or retired U.S. News employees interested in preserving and eventually receiving that portion of the sale proceeds held back from distribution from the Plan by order of this Court.⁴

        Over the three-year period during which these consolidated proceedings have been pending, discovery efforts have been thorough and extensive. Even so, many of the factual and legal issues originally presented were significantly narrowed by pretrial proceedings and motions for summary judgment.⁵ By agreement and consent of all counsel, issues of liability and damages were bifurcated for separate trial.

        The claims remaining after entry of partial summary judgment in each case were considered in an extended bench trial. The matters remaining in Foltz included: (1) claims for benefits due and owing from the Plan, under ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B);⁶ (2) claims for

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breach of fiduciary duty against U.S. News, the director-defendants and American Appraisal, under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3);⁷ (3) claims against U.S. News, the director-defendants, and American Appraisal for violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5;⁸ (4) claims for common-law fraud against U.S. News, the director-defendants, and American Appraisal; and (5) claims for common-law breach of fiduciary duty, unjust enrichment, negligence and negligent misrepresentation against U.S. News and the director-defendants.

        The matters remaining in Richardson included: (1) claims for benefits due against the Plan under ERISA § 502(a)(1)(B); and (2) claims against U.S. News and the director-defendants for negligence and negligent misrepresentation.

        At the conclusion of plaintiffs' case-in-chief on the issue of liability, defendants filed motions for dismissal and judgment, pursuant to Fed.R.Civ.P. 41(b). In addition to opposing those motions, plaintiffs in the two actions filed motions to amend their complaints, under Fed.R.Civ.P. 15(b), on the theory that the facts actually litigated tended to support additional causes of action. The motion to amend the Foltz complaint was denied. The Richardson plaintiffs were granted leave to add section 502(a)(3) ERISA claims against the U.S. News defendants for their alleged failure to have the Plan's holdings of U.S. News Class A stock properly appraised.⁹ In an oral bench ruling, the Court granted in part defendants' motions, thus limiting the claims in both proceedings to those against the Plan for benefits due under ERISA § 502(a)(1)(B) and against U.S. News and the director-defendants for breach of fiduciary duty under section 502(a)(3) and for negligence. See Transcript of Proceedings, vol. 54 at 10,316-36.¹⁰ All claims against American Appraisal were dismissed. An extended discussion of the ruling is presented infra pp. 25 ff.

        As discussed above, plaintiffs in the consolidated actions seek to recover retirement benefits allegedly owed them under the Company's profit-sharing and stock bonus plans. Because ERISA affords an aggrieved plaintiff a right of action against a covered plan, plaintiffs brought an action for unpaid benefits directly against the Plan. With respect to their bonus stock interests, however, they must and they do seek recovery of monies allegedly owed them from U.S. News itself.

        In addition, plaintiffs charge that the director-defendants, in concert with American Appraisal, acted both deliberately and negligently to cause their retirement benefits to be undervalued. Accordingly, plaintiffs seek recovery in the alternative from those defendants.

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        In the discussion that follows, the Court presents, pursuant to Rule 52(a), Fed.R. Civ.P., the basic and controlling facts developed during the liability phase of the trial, including the relevant history and operation of U.S. News. It then turns to a legal analysis of the claims and contentions advanced by the parties.

        History of U.S. News and World Report, Inc.

        A. Events Occurring Before the Class Period

        U.S. News & World Report, Inc. was formed on June 1, 1962 from the reorganization of the U.S. News Publishing Corporation ("U.S. News Publishing"), a Company established in 1933 by David Lawrence. Prior to the 1962 reorganization, all voting stock of U.S. News Publishing was held by Lawrence's three adult children, subject, however, to a voting trust, controlled by Mr. Lawrence as sole voting trustee. The non-voting stock was held in part by two trusts established for the benefit of Lawrence family members, and in part by certain employees who had been afforded an opportunity to buy stock. By 1962, 28 employees or members of their families owned 34 percent of the outstanding shares of the 1933 corporation.

        The 1962 reorganization was undertaken with the intent and purpose that U.S. News would be owned entirely by its employees. Mr. Lawrence and the Company's Washington, D.C. counsel, the firm of Covington & Burling,¹¹ took the necessary steps to achieve that end, including an independent appraisal of the fair market value of the corporate shares and the submission of a request to the Internal Revenue Service that the proposed reorganization would not result in the loss of the tax-qualified status of the Plan, which Mr. Lawrence had established prior to 1962. The U.S. News Certificate and Articles of Incorporation ("Articles of Incorporation") also assured that the Company would remain employee-owned. Article Fifth, PX 2 at 7-12. Under the reorganization plan, U.S. News purchased the shares of U.S. News Publishing held by members of the Lawrence family at a price of $50 per share, determined by an appraisal performed by American Appraisal as of May 31, 1962. Consideration was paid partly in cash and partly in notes. Employees who individually held stock in U.S. News Publishing exchanged their stock for shares in U.S. News equivalent in value to what they had previously owned. The value of the U.S. News shares received by the employee stockholders was also determined to be $50 per share by the May 31 appraisal. U.S. News then sold to the Plan 30,000 shares of stock, again at a price of $50 per share.

        After the reorganization, U.S. News had two classes of stock, "Class A" and "common." Each class had the same voting and liquidation rights. All Class A stock was owned by the Profit-Sharing Plan, and the stock would automatically be converted to common stock if it passed into the hands of anyone other than the Plan.

        Immediately following the reorganization, 130,800 shares of U.S. News stock were outstanding: 30,000 shares of Class A stock were held by the Profit-Sharing Plan, and 100,800 shares were held directly by the employees who had previously owned stock in U.S. News Publishing. The 30,000 shares purchased by the Plan constituted approximately a 23 percent interest in U.S. News. It was contemplated, however, that the Plan would own a larger percentage with the passage of time and that it would eventually own nearly all the outstanding stock. This was so because shares owned by the 28 key employees would be redeemed as they reached the retirement age of 65, with each redemption increasing the Plan's percentage of the reduced amount outstanding, until ultimately the Plan

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would own all but the relatively small number of common shares.

        In 1966, the Plan purchased an additional 20,000 shares of Class A stock at a value of $80.00 per share, again determined by American Appraisal. This gave the Plan approximately 45 percent of the 110,574 shares then outstanding. During 1971, the 50,000 shares came to constitute a majority of the outstanding stock of the company, due to the repurchase by the company of outstanding common stock from employees who retired, died, or otherwise terminated their employment.

        The reorganization plan did not contemplate any change in the actual control and management of the company, since all the common stock was placed in a voting trust with Lawrence as sole voting trustee. Thus, as sole voting trustee, he had the legal authority to elect the directors, both before and after reorganization. Mr. Lawrence served in that position until his death in 1973, at which time substitute trustees were named, in accordance with the voting trust instrument. In 1967, the Plan's Class A holdings were placed in the voting trust as well.

        The persons responsible for the reorganization anticipated that employee ownership of U.S. News would take several forms: (1) the 28 employees who had been stockholders of U.S. News Publishing would hold shares of U.S. News & World Report ("key employee stock"); (2) since more widespread ownership by employees was desired, the Plan, in which most of the employees participated, would hold all the Class A stock; (3) the Company would institute a "stock bonus" program, issuing shares to employees every fifth year.

        The U.S. News Profit-Sharing Plan provided income to employees upon their retirement, death, or separation from U.S. News.¹² Each employee who had attained the age of 25 and who had served for at least one year was entitled to participate. An employee became fully vested in the Plan after 10 years' service. The Plan was the primary means through which each employee secured an ownership interest in the Company. The employees could not, without the financial resources of the Plan, purchase all of the stock of U.S. News Publishing previously held by members of the Lawrence family. Thus the Plan's purchase of U.S. News stock permitted all employees to participate in the beneficial or economic ownership of the Company even though they did not have legal title to any shares individually. The Plan was always regarded as a conduit through which employees generally could participate in the growth of the Company. Benefits statements instructed Plan participants how to calculate the number of shares equivalent to their undivided interests in the Plan. See, e.g., DX 94, 95. In addition to the Class A stock, the assets of the Plan also included other investments made with funds received in the form of cash contributions from U.S. News. The value of those investments is not at issue here.

        Under the stock bonus program, common stock was issued to employees at five-year intervals beginning after the fifth anniversary of employment, and in amounts based on salary and length of service and on the appraised value of the Company's stock. The stock bonus program was thought to have psychological advantages over indirect ownership through the Plan, although each employee's bonus stock holdings were of a much lesser value than his Plan account.

        In 1968, Mr. Lawrence instituted a deferred compensation program under which a specified number of shares of "phantom stock" were awarded to certain senior Company executives. The program was designed to give senior managers a greater incentive for superior performance. That program is discussed further, infra pp. 1508-09.

        Because the stock of U.S. News was not publicly traded, it was necessary to determine the value of the stockfor the purpose of awarding and redeeming the bonus

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sharesby appraisal. In addition, because the Plan's major asset was a 50,000 share block of Class A stock, such appraisals were necessary to determine the value of the Plan's assets each year, in which value separating employees shared ratably when they settled their account balances.¹³ The bonus and Class A shares were always valued equally.

        B. Events Occurring During the Class Period

        1. Real Estate Acquisitions

        At the time of the 1962 reorganization, Madana had acquired three to four acres of partially developed real estate in the West End of Washington. Madana owned the land until late 1981, and approximately 75-80 percent of the holdings were used for U.S. News business operations, including a headquarters building, an employee cafeteria, and employee parking facilities. 26 Tr. 5089 (Sweet); 31 Tr. 6272-73 (Naimoli). The remaining portion was subject to commercial leases to third parties.

        Before 1973, development of the real estate was not feasible because of zoning uncertainties, the character of the neighborhood, and the pendency of various proposals that would have required public use of portions of the land. See, e.g., DX 118 at 2; PX 371 at 2. During the early 1970s, U.S. News and other West End property owners actively participated in proposing to local government officials a coherent development plan. In December 1974, the District of Columbia Zoning Commission promulgated zoning law revisions, changing a substantial portion of the Company's holdings from commercial to commercial-residential, while increasing the permissible "floor area ratio ("FAR").¹⁴ The remainder of its property continued to be zoned residential. U.S. News was not wholly satisfied with some aspects of the Commission's decision, for example, height restrictions on certain residential real estate adjacent to Rock Creek Park. Challenges to the rezoning decisions generally, including the height restriction, and lawsuits by other dissatisfied landowners continued for years after the decision was rendered, through late 1977.

        In any event, during 1974 and immediately thereafter, the Company had no definite development plans for the real estate. While its directors and management were aware of the potential value of the real estate, they had no intention of selling those assets at that point in time. The appraiser who performed the year-end valuation for 1974, Mr. C.E.O. Walker, called as a witness by the Foltz plaintiffs, offered convincing testimony and cautioned, as an experienced professional, that any realizable value should be attributed to the real estate only "if it was evident that the controlling interest had a firm and clear intent to dispose of the real estate within a very short or reasonable period of time[, that is,] absolute evidence....not mere development plans." 23 Tr. 4524. See also 23 Tr. 4505-12. Mr. Walker was highly qualified to give this opinion. He had previously served as international president of the American Society of Appraisers and was also a member of the College of Fellows of that organization. 23 Tr. 4493-95.

        In February 1976, the Oliver T. Carr Company, a reputable real estate development firm, responded to a request to provide advice on the development potential of the U.S. News' real estate and the construction of a new headquarters facility. The Carr report and study noted that there were many possibilities for development of the property, but at the same time commented that the ultimate choice as to the character and timing of any project would depend on such unpredictable factors as market conditions and the Company's corporate objectives. The Carr Company completed

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construction documents for a proposed headquarters building, following which U.S. News consulted with architectural planning and space design firms in anticipation of building. Nevertheless, no firm construction commitments materialized under the project development agreement with Carr.

        In 1977, U.S. News management further explored with officers in the mortgage and trusts department of Riggs National Bank the financial feasibility of developing its real estate. Riggs advised that the Company's financial condition was not sufficiently strong and cautioned against undertaking any significant real estate developments at the time. On the strength of that advice, the Company deferred further consideration of building a new corporate headquarters and of pursuing any other development plans. Management discussed its hesitancy about immediate development with the employees, explaining further that if such developments were undertaken, they wanted to be certain that they would protect the Company from uncertain swings in its publishing-related business and assure a source of profits from which contributions could be made to the Plan. See, e.g., PX 11 at 23, Question and Answer Session ("Q & A") at 2.¹⁵

        In early 1978, U.S. News again discussed real estate development plans with Carr Company representatives. Several alternatives were considered including development of part of the land, a partnership arrangement with a developer, and relocation of U.S. News headquarters elsewhere. These alternatives did not materialize into binding development plans.

        During the class period the U.S. News directors kept American Appraisal fully informed of all real estate acquisitions and their considerations regarding development of the property. American Appraisal representatives were familiar with the location, size and use of the property; knew that the property had great potential and unrealized value; and discussed in their annual interviews with U.S. News officers the plans and considerations regarding possible development.

        The working papers of the appraisers referenced contemplated developments of the property as presented in the 1976 Carr report. Their subsequent work papers and annual reports leading up to the 1981 joint partnership agreement with Boston Properties, Inc. likewise reflected full knowledge and awareness of those important events.

        However, until the development plans matured into a firm and clear intent to build within a reasonably certain time frame, the realizable value of the real estate was not reflected in American Appraisal's annual reports or the Company's financial statements. This approach was supported by credible testimony of representatives from American Appraisal. See, e.g., 23 Tr. 4505-12, 4524 (testimony of C.E.O. Walker). When more precise decisions were reached and it became certain that plans and discussions had ripened and definite goals and timetables were set, these facts were reflected in the annual valuations performed by American Appraisal in the last several years of the class period. In interviews with the appraisers who performed the 1979 valuation, U.S. News announced that it expected to make a decision on developing its real estate within the next year. PX 77. Indeed, the appraisers were told that there was a strong likelihood that the Company would participate in some type of venture and that real estate prospects were very promising. Id. The 1979 American Appraisal report reflected these discussions, noting that

        management has recently begun studying various alternatives in the development of the company-owned real estate. There is a good possibility that after development, U.S. News will have a significant income producing property(s). While the development of the real estate, and income therefrom, may be several years away, some weight must be given

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to this potential income source in valuing the common stock shares of U.S. News.

        PX 19 at 10.

        In preparing the 1979 report, American Appraisal understood that U.S. News might decide to develop its real estate, and it considered the realizable value of the real estate not currently needed in U.S. News' publishing business to be a reasonable "proxy" for estimating the effect that possible future development might have on an investor's assessment of the value of U.S. News stock. Id. at 15-16.

        Throughout this litigation, plaintiffs have challenged the uses to which the West End real estate was put. They charge that the U.S. News defendants should have regarded the property as an excess assetbeyond the Company's reasonable needsand that instead they purposely decided and otherwise failed to utilize the land at its highest and best economic use. All of this, plaintiffs assert, was accomplished to their detriment and financial loss. Defendants have responded that the original real estate purchases were made "to protect [the Company's] right to grow." See, e.g., PX 38, Q & A at 4. Several of plaintiffs' experts offered testimony as to what they regarded as excess real estate, which in their view the Company could have developed without interfering with its publishing business. Their testimony and analysis, however, was incomplete and flawed; they failed to consider fully the problems and uncertainties encountered by U.S. News before 1973 and continuing in lesser degree until the mid-70's, as discussed supra, pp. 1502-03. Those problems precluded any type of realistic development plans. Much more important and significant was the fact that their testimony presupposed that the interests of the plaintiffs and other shareholders similarly situated should have been valued on a control basis. See infra pp. 1514 -30.

        One of plaintiffs' several contentions is that the defendant-directors, as fiduciaries, were derelict in failing to discharge their duties in determining and deciding U.S. News policy and keeping abreast of and knowledgeable about corporate affairs. This, they assert, was particularly true with respect to the annual appraisals performed by American Appraisal. The Court finds that such a claim is not supported by the record. The directors as a whole possessed varied abilities, training, and experience. Accordingly, they appropriately relied upon each other and, where necessary, on each other's particular expertise. This was true in many areas of the Company's business affairs.

        Other than John Sweet, two other members of the board of directors were particularly knowledgeable, important and active participants in the day-to-day operating and long-range development of corporate affairs. Bert Padrutt and his successor, Raymond Naimoli, played central roles during the class period in their position as treasurer and chief financial officer. Their fellow board members recognized the training, experience, intelligence and expertise that they brought to their office. The other directors who testified at trial all asserted that they relied upon Padrutt's, and then Naimoli's, judgment and advice in matters relating to the requirements of the assignments undertaken by American Appraisal, major decisions relating to use of the real estate, corporate finances, and other matters involving business decisions as they related to and impacted on the employee shareholders and Plan beneficiaries.

        Padrutt was a certified public accountant with more than 15 years experience when he entered on duty as controller and later treasurer. Before joining U.S. News, he had worked with the Ernst & Ernst accounting firm (now Ernst & Whinney) and had been involved in their annual audits of U.S. News. During his tenure as chief financial officer, he regularly conferred with representatives of American Appraisal when they undertook their assignments, and he made the department heads and other directors available for conferences with the appraisers. He also reviewed and discussed with the appraisers their final reports to ensure that he understood their basic assumptions, that they were appropriate and well documented and that the final report could be supported and defended.

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        The Court was left with the impression that Mr. Padrutt was a methodical, thorough and knowledgeable executive who knew what was required as chief financial officer under the circumstances. He understood the methodology employed by the appraisers and believed that their approach was appropriate. When it was required and dictated by the circumstances, he consulted with outside counsel, Don Harris of Covington & Burling, on matters relating to the Profit-Sharing Plan and employees' stock interests.

        Naimoli was hired as chief financial officer in mid-1980. Like Mr. Padrutt, he possessed academic credentials and prior professional experience which equipped him for the position. As an accredited public accountant he had a previous and widening work experience with a major accounting firm, the Arthur Young Company. He also served for approximately 10 years as corporate controller for Scholastic Magazine, a reputable publication. Because U.S. News was experiencing unusual changes when he entered on duty and because of his recent introduction to U.S. News and to the appraisal of its closely held stock, he proceeded cautiously but with a recognition of immediacy. As did his predecessor, Naimoli consulted with Don Harris about the facts surrounding the 1962 reorganization, particularly the methodology to be employed in valuing U.S. News' stock.¹⁶

        As a first assignment he reviewed prior efforts of the Company to develop its real estate with the hope of placing such efforts on a firmer track. See 30 Tr. 5982-84. In this connection U.S. News retained the law firm of Arnold & Porter in late 1980 to study development possibilities. In turn, Arnold & Porter hired the Julien Studley Company, a marketing consultant group, to assist in planning and to estimate current and projected values from development of the real estate. In January 1981, Arnold & Porter submitted an analysis of possible avenues for development, together with an optimistic report from Studley. Two alternatives were advanced for consideration: an immediate all-cash sale or a joint venture. On April 9, 1981, U.S. News distributed a prospectus developed by Arnold & Porter and Studley, soliciting a joint venture partner to develop its real estate. The Carr Company did not consider the proposal particularly attractive and did not submit a bid. Even so, on August 11, 1981, U.S. News signed a letter agreement with Boston Properties, Inc., providing for a series of limited partnerships to develop all of U.S. News' real estate parcels in the West End.

        In December of 1983, an unsolicited offer was made to purchase the Company for $1,000 per share. The highest value at which the U.S. News stock had been appraised up to that point was only $470 per share. The employee-shareholders were advised and made aware of these developments. Accordingly, with the consent of a majority of the beneficial owners of its stock, U.S. News solicited bids for sale of the corporation during the following spring. The winning bid was that of Mr. Zuckerman, a principal of Boston Properties. The magazine was subsequently sold in October of 1984 for $176 million, or roughly $2,800 per share.

        2. Acquisition of Other Assets

        In addition to its real estate holdings, U.S. News acquired in 1975 and 1976 a minority stock interest in Atex, a supplier of photocomposition equipment to the magazine industry. While that stock was carried on the books at cost throughout the class period, when it was exchanged in 1981 at a significant profit for stock in the Eastman Kodak Company, the transaction was in part reflected in the 1981 annual appraisal. In 1978, U.S. News acquired a minority block of stock in Publishers Phototype, Inc., another photocomposition company. In 1981, U.S. News made other investments and acquisitions, primarily in the

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phototypesetting field. American Appraisal's treatment of these assets is considered infra, pp. 1530-33.

        The Foltz complaint was filed in February 1984, when previously retired employees learned from newspaper accounts that the December 1983 offer of $1,000 per share had been made. See 2 Tr. 216-18, 274-75 (Foltz). The Richardson suit followed and was filed in July of 1985. It was consolidated with Foltz in March of 1986 for pretrial proceedings and trial.¹⁷

        While sometimes lost sight of, the central issue requiring resolution in this litigation has always been the propriety of the methodology employed in appraising the U.S. News stock. Plaintiffs maintain that the annual stock valuations, performed for U.S. News by American Appraisal, were not only grossly inaccurate throughout the class period, but were the result of collusion between those two defendants. Their basic quarrel with the appraisals is that they did not value the Plan's stock holdings, which constituted a majority of the Company's outstanding stock, on a control basis. This alleged failure, in turn, resulted in the minimization or exclusion from the appraisals of the value of the Company's non-operating assets, primarily the real estate.

        As analyzed by the Court in its summary judgment opinion entered in Richardson, plaintiffs' claims in both actions fall more or less neatly into two categories. See 639 F.Supp. at 599. The first comprises claims premised upon intentional or fraudulent conduct and includes claims for breach of the fiduciary duty of loyalty under ERISA § 502(a)(3), securities and common-law fraud, common-law breach of fiduciary duty, and unjust enrichment. The second encompasses claims based upon negligent, imprudent, arbitrary or capricious conduct and includes claims for benefits due under ERISA § 502(a)(1)(B), for breach of the fiduciary duty of care under ERISA § 502(a)(3), and for negligence and negligent misrepresentation. The effect of the Court's summary judgment decision in Richardson and of its ruling on defendants' Rule 41(b) motions in Foltz was to dismiss all those claims premised upon intentional or fraudulent conduct, on the grounds that there was no evidence in the record that any of the defendants engaged in any course of conduct designed deliberately to undervalue the Company's stock. See 639 F.Supp. at 603-10; 54 Tr. 10,326-27, 10,328-33.

        What remains are plaintiffs' allegations that U.S. News, the director-defendants, and the Plan acted negligently or unreasonably in accepting American Appraisal's valuations for each of the class years. The second portion of the trial as to liability, commencing with the beginning of defendants' case-in-chief, dealt extensively and exclusively with whether the appraised values were reasonable in light of the circumstances. In this connection, plaintiffs and defendants presented several expert witnesses each. Their testimony addressed the issue of whether what was done during the class period conformed to acceptable and recognized procedures and standards

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and was otherwise appropriate and, if not, what should have been done. Defendants also presented an additional expert, Mr. Chester Gougis, who had undertaken an independent, "blind" appraisal of the Company's stock during each of the class years. His testimony was proffered to corroborate American Appraisal's valuations.

        After consideration of the expert testimony presented, the Court is not persuaded that the appraisal methodology was improper or flawed, or that the per-share price arrived at each year by American Appraisal did not fall within a reasonable range of acceptable values. Having decided that the appraised values were reasonable, the Court must and does conclude that their acceptance and use by U.S. News was reasonable and thus cannot form the subject of any cause of action. Accordingly, the Court determines that plaintiffs have simply suffered no redressable injury, initial appearances aside. The Court also concludes that, because the Plan stock was reasonably valued on a minority-interest basis, the common or bonus stock was necessarily properly so valued.

        The Court now presents its findings of fact and conclusions of law with respect to defendants' motions under Fed.R.Civ.P. 41(b), which dealt solely with the issue of intentional or fraudulent conduct. It then addresses the controversial and central issue dealing with the appropriate appraisal methodology.

        A. Defendants' Motions to Dismiss and for Judgment Under Rule 41(b), Fed.R.Civ.P.

        The Court's bench ruling on defendants' Rule 41(b) motions served to narrow further the issues remaining to be considered following plaintiffs' case-in-chief. The initial findings announced from the bench were not detailed. It is thus necessary to flesh out the findings of fact and conclusions of law in greater depth as contemplated under Fed.R.Civ.P. 52(a). In expanding upon its previous oral ruling, the Court again notes that, "[i]n a case tried without a jury, the trial court is not required to consider the evidence in the light most favorable to the plaintiff in determining whether to grant a motion to dismiss under Rule 41 made at the completion of the plaintiff's case." Woods v. North American Rockwell Corp., 480 F.2d 644, 645-46 (10th Cir.1973). "Rather, the court is required to weigh all the evidence, resolve any conflicts and ... decide itself where the preponderance lies." Albright v. United States, 558 F.Supp. 260, 264 (D.D.C.1982), aff'd, 732 F.2d 181 (D.C.Cir. 1984).

        The bench ruling eliminated from Foltz all claims premised upon intentional or fraudulent conductthat is, claims for securities and common-law fraud, common-law breach of fiduciary duty and unjust enrichment, as well as claims for breach of the fiduciary duty of loyalty under ERISA § 502(a)(3). All such claims had previously been considered and eliminated from Richardson on summary judgment, so that the bench ruling in Foltz placed both cases on equal footing.

        As originally pleaded, plaintiffs' claims of intentional or fraudulent conduct on the part of the several defendants appeared at first blush to be superficially plausible. Their seeming vitality and strength sprang from an initial perception that the class plaintiffs had been treated unfairly compared with those U.S. News employees who had benefited from the 1984 multimillion dollar sale of the Company. As the trial unfolded,¹⁸ however, it became increasingly apparent that the claims were not supported by reliable and credible evidence. Indeed, with the benefit of a considerable record of discovery and trial testimony, it is clear that the various claims to some degree are mutually contradictory. Plaintiffs charge both that U.S. News conspired with American Appraisal to undervalue the

Page 1508

Company's stock and withheld information from the appraisers. In this way, plaintiffs portray the appraisers both as active wrongdoers and as unwitting dupes. While such a contradiction might have been tolerable at the pleading and discovery stage, its continued existence at trial indicates that plaintiffs simply failed to develop a reasonable and plausible theory of their case in this respect. Accordingly, those defendants accused of intentional or fraudulent conductthat is, U.S. News, the director-defendants, and American Appraisal moved to dismiss all claims against them premised on such conduct.

        Plaintiffs have failed to carry their burden of demonstrating that U.S. News conspired with American Appraisal in any way to manipulate the appraisal process and to undervalue the Company's stock. The same is true of their claim that the U.S. News defendants withheld information from American Appraisal concerning the Company's real estate development plans, or that the Company and its directors withheld information from the employees concerning those plans and concerning the appraisal methodology employed generally. None of these claims finds support in the testimony presented by plaintiffs.

        To demonstrate a conspiracy between U.S. News and American Appraisal, plaintiffs succeeded in pointing to only two instances of alleged wrongdoing, arising from the year-end 1978 and 1980 appraisals, from which they urge the Court to draw an inference of fraudulent conduct. Such an inference would be completely unwarranted, as is discussed in connection with the claims against American Appraisal, infra.

        In addition to the absence of any conspiratorial conduct on the part of the U.S. News directors, defendants have pointed to the absence of any motive on their part for undervaluing the Company's stock. They argue instead that, like any managers, they had every reason to maximize the value of the Company's stock in each year. Plaintiffs insist, however, that the operation of the deferred compensation structure set up for the benefit of the directors supplied a motive for undervaluing the stock.

        Subsequent to the 1962 reorganization, U.S. News directors and officers were no longer able to purchase shares in the Company.¹⁹ Instead, a deferred compensation plan was instituted, briefly noted supra, whereby directors and other key employees were awarded blocks of "phantom stock," redeemable upon retirement at the appraised price of the Company's Class A and common shares. The phantom stock shares could not be voted and were subject to forfeiture if the awardee left the Company before normal retirement.

        While such shares were awarded at periodic intervals until each holder received a maximum of 2,400 shares, in 1982, for various reasons that have been fully explored and dealt with elsewhere, see 639 F.Supp. at 604-05, and which with benefit of later trial testimony need not be further discussed, awards to several eligible persons were accelerated by the Board. When the Company was sold in 1984, the phantom stockholders received payment for their shares from Mr. Zuckerman, but at a price considerably less than that paid for the Class A and common stock.

        Throughout this litigation, plaintiffs have maintained that there was something wrongful about the phantom stock awards. Unfortunately, they have failed to articulate exactly what it is that the Court should be concerned with. See 627 F.Supp. at 1174. Presently, they argue that the awards created in the director-defendants some perverse incentive for undervaluing the Company's stock during the class period. Specifically, they have attempted to show that the directors were concerned that a rapid rise in the amount of benefits to be paid separating employees, triggered by a "full" valuation of the Company's

Page 1509

stock, would have forced the Company to be prematurely liquidated before they could "cash in" their phantom stock interests. If anything, however, the natural incentive on the part of the directors would have been to ensure that the Company's stock be fully valued on whatever date their phantom stock obligations were to be redeemed. Defendant Keker, for instance, was concerned that, upon his reaching retirement age in 1982, his key employee shares²⁰ should not be redeemed until sometime later. 4 Tr. 793-800. If it were only a question of manipulating the appraisal process, he would have been interested in "manipulating" the 1981 valuation upward, knowing that he faced his normal retirement date in 1982. Similarly, other directors redeemed stock during the class period and thus would have made unlikely participants in a conspiracy to undervalue the Company's stock during that time. See Estate of Grant v. U.S. News & World Report, Inc., 639 F.Supp. 342, 345-46 (D.D. C.1986) (Ben Grant); 25 Tr. 4996 (Howard Flieger); PX 1 (Robert Osmond, John Adams).²¹ Not only does plaintiffs' theory appear fanciful and illogical, but more importantly it is contradicted by the only credible testimony and documentation in the record.

        Accordingly, the Court lays to rest, and with finality, any concern that the deferred compensation rights awarded to individuals at U.S. News were somehow wrongful.

        It is undisputable that U.S. News gave American Appraisal all relevant information regarding the 1981 joint venture agreements. Richardson, 639 F.Supp. at 603-04. While plaintiffs might quarrel with the manner in which American Appraisal treated this information in the 1981 valuation, certainly nothing that was done or not done is in any way reflective of fraud or intentional misconduct. It is true, however, that American Appraisal's treatment of the U.S. News real estate in 1981 was more involved than usual. But if the appraisers gave less attention to the real estate in prior appraisals, it was not because U.S. News had withheld information from them.

        In 1981, when the year-end 1980 appraisal was conducted, U.S. News had received the Julien Studley report, analyzing the development potential of the Company's real estate. When chief financial officer Ray Naimoli offered the report to the appraiser, David Marshall, Mr. Marshall indicated that, in the absence of a firm commitment by a developer, such a study would not be relevant to an appraisal of the Company's stock. 31 Tr. 6245, 6247-48 (Naimoli). Nevertheless, Naimoli told Marshall that Studley had arrived at a FAR value of $53.²²

        The only other real estate plans of note were contained in the 1976 proposal of the Oliver T. Carr Company to construct a new headquarters building. The notes of the appraisers who performed the 1975, 1976 and 1977 appraisals knew of the Carr plans. PX 782 at 10,875; PX 294. Mr. Marshall, who did the appraisals for 1978 through 1981, contacted the Carr Company himself with regard to the 1978 report and was directed to the Carr Company by U.S. News with respect to the 1979 report. PX 67, 77, 85.

        Not only did U.S. News not withhold information relevant to its real estate development plans, but by the admission of plaintiffs' own real estate expert, Mr. William Harps, such proposals in the absence of a finalized plan for development would not even be relevant to a real estate appraisal, much less to a stock appraisal. See 33 Tr. 6599; 34 Tr. 6766-69. For that

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same reason, Marshall's lack of interest in the 1980 real estate analysis offered him by Naimoli was not unjustified.

        Plaintiffs contend that the U.S. News defendants wrongfully concealed information about the Company and its appraised value that would have been relevant to them. In its summary judgment ruling, the Court recognized that, if plaintiffs could show that they would have altered their retirement plans upon receipt of information that had been withheld, information indicating that the Company was undervalued, they could make out a claim for securities fraud and, by extension, common-law fraud. See 627 F.Supp. at 1159-61. On the present record, however, it is clear not only that there was nothing to concealthe Company's stock had not been undervaluedbut that U.S. News did disclose information relevant to the areas of concern here.

        First, U.S. News made no attempt to conceal the fact that American Appraisal valued the Company every year on a minority-interest basis. At the annual spring shareholder luncheons beginning in 1974, and at more informal gatherings, Chairman John Sweet and other members of the Board freely disclosed that the Company could be sold for several times the value that one would obtain if one were to multiply the appraised price per share by the number of outstanding shares. Even if this information, spelled out specifically at the 1978 annual shareholder luncheon, see PX 11, Q & A at 11, did not make the matter plain enough, certainly such a revelation would be inconsistent with an attempt to keep the information secret. See Richardson, 639 F.Supp. at 603 n. 16.

        As a general matter, the annual shareholder luncheons afforded employees an opportunity to obtain a fair amount of information about the financial circumstances of the Company. While Mr. Lawrence met with his employees on a regular basis, he tended to be relatively tight-lipped about Company affairs, fearing the leak of information that might prove helpful to competitors. Mr. Sweet, on the other hand, was more forthcoming in answering employees' queries about their Company. See 2 Tr. 333-35 (Foltz). Beginning with those for year-end 1976, Sweet distributed written summaries of the Company's financial statements, in advance of the annual luncheons. PX 144-48. At the meetings Sweet would cover the Company's financial developments during the previous year in some detail. Employees were invited to ask questions at the conclusion of his remarks. There were no limits on the questions that could be asked,²³ and no one was made to feel inhibited. See 2 Tr. 251 (Foltz). Transcripts were made available for all those who could not attend the meetings, including those persons assigned to stations outside the Washington area.

        With respect to the treatment of the real estate in the annual appraisals, the absence of any attempt to conceal relevant information is even more striking. At the 1974 shareholder luncheon, for instance, Mr. Sweet, recently elected Chairman of the Board, told those present that the Company's real estate was carried on the books at only one-third of its full value. PX 37, Q & A at 12. While in ruling on the Foltz motions for summary judgment, the Court declined to find that that revelation removed any material issue of fact as to notice on the part of plaintiffs, 627 F.Supp. at 1151, the situation is somewhat different in the present posture of this case. First, whether or not Chairman Sweet's remarks were sufficient to impute notice to the class is a question that must be answered only upon a finding that defendants engaged in a course of conduct designed to conceal some alleged wrongdoing. On the present record, however, it is clear that no such concealment was attempted. Rather, Sweet's remarks at the 1974 luncheon are merely illustrative of management's lack of interest in keeping things secret. Second, at the summary judgment stage, the Court was concerned that plaintiffs' knowledge of

Page 1511

how the real estate was treated on the books might shed too little light on their understanding of how it was treated in the appraisals. See 627 F.Supp. at 1151. However, after the conclusion of plaintiffs' case-in-chief, it became evident that plaintiffs were under no misapprehension as to whether the Company's potential real estate bonanza was fully reflected in the appraised value of its stock. In fact, several of the class plaintiffs testified freely at trial that, during the class period, they believed that the real estate was undervalued and not adequately accounted for in the annual appraisals. See 2 Tr. 406-08 (Foltz); 24 Tr. 4850 (Edward Castens). In view of such sentiments among its employees, the Company's disclosure that its real estate was carried at only one-third of value is certainly inconsistent with any plan of concealment.

        Neither did management attempt to conceal the status of the Company's plans for the development of its land. See, e.g., 2 Tr. 354-59 (Mr. Foltz was generally aware of the Company's development plans). Employees were told when plans toward the construction of a new headquarters building were suspended; they were notified when prospective joint venture partners were solicited in 1981 and, again, when the joint venture agreements were signed with Boston Properties later that year. At the same time that they were told of the joint venture solicitations, plaintiffs were pointedly advised that they might want to consider leaving their account balances in the Plan so that they might share in and secure the benefits of the anticipated increase in the value of the Company's stock. PX 50.

        Plaintiffs point to two instances, however, where management was in their view less than forthright in keeping them advised of relevant information. First, they adduce a December 1980 memorandum to Company department heads from Mr. Sweet, PX 319, which enclosed a second memorandum to be circulated to employees, notifying them of potential development plans. In the cover memorandum, Sweet instructs the department managers not to go beyond the contents of the enclosed memorandum in their discussions with employees. When the Foltz summary judgment motions were considered, it seemed at least plausible that the cover memorandum suggested a secretive attitude on the part of management, consistent with a pattern of concealment. 627 F.Supp. at 1153. After considering the relevant trial testimony, however, the Court has little doubt that Mr. Sweet's real concern was that employees not be provided with overly optimistic assessments of future developments, which might have led them to act hastily in making their retirement plans. See 25 Tr. 4941 (Sweet).

        Plaintiffs similarly point to an October 21, 1980 letter from Treasurer Bert Padrutt to outside counsel Don Harris, PX 317, in which Padrutt questions Harris about potential liability to employees who might retire between the announcement of development plans and the next appraisal. Padrutt was concerned that such employees, who would receive benefits based on the value of the Company's stock as of the close of the last calendar year, would feel deprived in not benefiting from any increase in the value of the Company's stock during the current year. In fact, to avoid precisely this contingency, the directors voted subsequent to the signing of the joint venture agreements in 1981 to award benefits to employees retiring between that date and December 31, 1981 based upon the value of the stock as of the latter date. See 42 Tr. 8255-57 (Padrutt).

        Upon entry of partial summary judgment for defendants in Foltz,²⁴ the claims against American Appraisal for intentional wrongdoing were reduced to claims for securities and common-law fraud arising out of the conduct of the year-end 1978 and 1980 appraisals and for participation with the U.S. News defendants in a breach of fiduciary duty under ERISA § 502(a)(3)

Page 1512

with respect to the appraisals for 1977 through 1980. On closer inspection, however, the record reveals no such conduct either on the part of U.S. News and the director-defendants or American Appraisal.

        With respect to the 1978 and 1980 appraisals, plaintiffs point to certain apparent irregularities that they claim indicate a deliberate undervaluation of the Company's stock. In ruling upon defendants' motions for summary judgment, the Court believed that further inquiry into these matters was merited and, consequently, declined to grant defendants summary judgment as to claims arising out of these instances of apparent misconduct. See 627 F.Supp. at 1152-53, 1156, 1163, 1179-81. With benefit of relevant testimony and a full trial record now before the Court, it is clear that these challenges are lacking in merit.

        Pointing to the 1978 appraisal, plaintiffs complain that the final value of $105 per share was arrived at after a senior appraiser, not otherwise involved with the valuation for that year but who had done appraisals in prior years, provided U.S. News with that figure in advance of the completion of the final report. The two appraisers assigned to the valuation for that year had arrived at a somewhat higher preliminary figure of $117-118, but acquiesced in the $105 value. The more senior of the two appraisers testified that he was actually more comfortable with the second approach and that, in any event, any figure within the range of $105 to $118 would have been reasonable. 28 Tr. 5571-87; 29 Tr. 5913-16, 5950-51 (John Russell). It is undisputed that U.S. News knew only of the $105 number and was not privy to any discussions among the appraisers of any other figures. Hence, the final value of $105 could not have been the product of any collusion between U.S. News and American Appraisal and was not the result of a venal desire to keep the value per share as low as possible. Moreover, because the testimony demonstrates, and the Court finds, that the appraised price of $105 per share was within a range of reasonable values, the publication of that value by American Appraisal cannot be seen as the result of any deliberate misconduct, nor its acceptance by U.S. News as unreasonable.

        With respect to the 1980 appraisal, plaintiffs charge that the appraiser might have been improperly influenced by a remark, made by Mr. Naimoli during a standard interview, that a certain range of values had been given to the Company's auditors for use in performing some unrelated calculations. See 627 F.Supp. at 1153 & n. 12. The uncontroverted testimony is that there was no such influence and that the remark was perfectly innocent. Hence, no possible liability could attach to its utterance.

        Plaintiffs' ERISA claims against American Appraisal fare no better. In ruling on that defendant's motion for summary judgment in Foltz, the Court held that, with respect to claims falling within the statute of limitations period (i.e., those arising out of the 1977 through 1980 appraisals), American Appraisal might be liable for participating in or furthering a fiduciary breach on the part of U.S. News and the director-defendants. See 627 F.Supp. at 1156, 1168. Yet, as is now apparent, there was no breach of fiduciary duty on the party of U.S. News or its directors. Such a breach would have occurred, under plaintiffs' theory of the case, if those defendants had sought intentionally to undervalue the Company's stock to the detriment of the employee participants in the Plan. However, the Court finds that there is no evidence in the record to support a finding that defendants engaged in any sort of deliberate misconduct. Moreover, as discussed infra, the Court further finds that the Company's stock was not undervalued at all.

        In sum, plaintiffs have failed to support their claims by a preponderance of the evidence. After months of testimony, the record clearly shows that neither U.S. News, its directors, nor American Appraisal engaged in any scheme of deliberate misconduct designed to defraud or otherwise injure plaintiffs in any way.

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        B. The Nature of the Court's Inquiry Valuation Issues

        This litigation is concerned not with fraud, but with the proper apportionment of the proceeds or benefits from the sale of an employee-owned business. As the law stands now, such proceeds will not be distributed to former employees who left the business prior to the sale, unless it can be shown that they would have been entitled to a greater portion of benefits at the time they separated. In other words, the approach to be used is not retrospective, but prospective. One must look at the situation as of the time that each employee separated from the Company. Therefore, the appropriate inquiry is whether the Company was properly valued during the class period, not whether former employees become eligible for a greater share of benefits upon the contingency of a subsequent sale.

        Employee benefits plans, like the one at issue here, are governed by two spheres of regulation, the private and the public.²⁵ Such plans are established by private parties either by the employer acting alone, or by agreement between the employer and employeesand generally operate according to the terms established by the controlling documents. If, however, one or more of such terms conflicts with any provision of federal regulation, in this case ERISA, then those terms are rendered invalid. Hence, in examining whether plaintiffs are owed additional benefits, one must answer two questions. First, under the terms of the documents governing the Profit-Sharing Plan, are plaintiffs owed greater benefits than they received? Second, if not, are there supervening provisions of federal law that render the relevant Plan provisions invalid and that entitle plaintiffs to greater benefits? Finally, if neither the Plan provisions nor the requirements of ERISA speak directly to the issue here raisedthe proper amount of plaintiffs' benefitsthen the Court must satisfy itself that what was done falls within a range of conduct permitted by both spheres of governance.

        In the Foltz summary judgment decision, it was unnecessary to define exactly the appropriate standard against which the conduct of plan fiduciaries should be judged, since it was found that plaintiffs were not entitled to summary judgment on their ERISA claims under even the least deferential standard. 627 F.Supp. at 1169-70. The Court did note that a determination of pension eligibility or of the appropriate level of benefits to be paid appeared to be governed by the "arbitrary and capricious" standard of review, id. at 1169 & n. 55, even though that standard might be applied with a "stern hand and flinty eye," id. at 1170 (quoting Maggard v. O'Connell, 671 F.2d 568, 572 (D.C.Cir.1982)).

        Plaintiffs continue to urge the Court to adopt a stricter "prudent man" standard, found in section 404(a)(1)(B) of ERISA, 29 U.S.C. § 1104(a)(1)(B). That section requires a fiduciary to discharge his duties "with the care, skill, prudence, and diligence under the circumstances ... that a prudent man ... would use...." While that provision does appear, at least superficially, to demand application of a "prudent man" standard, the relevant case law makes it fairly clear that it has no application to the present situation.

        A useful gloss is placed on the requirements of section 404(a) by Struble v. New Jersey Brewery Employees' Welfare Trust Fund, 732 F.2d 325 (3d Cir.1984). Struble acknowledged that courts have generally adopted an "arbitrary and capricious" standard in assessing the denial of personal claims for benefits. Id. at 333. The court then contrasted such a situation with those presented Donovan v. Cunningham, 716 F.2d 1455 (5th Cir.1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533, 82 L.Ed.2d 839 (1984) and Donovan v. Bierwirth, 680 F.2d 263 (2d Cir.), cert. denied, 459 U.S. 1069, 103 S.Ct. 488, 74 L.Ed.2d 631 (1982).

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In both Cunningham and Bierwirth, the fiduciary charged with improper conduct could be said to have either subordinated the interests of the plan beneficiaries to those of a third party, or to have wasted plan assets. The Struble court concluded that in such situations the appropriate standard of review was that contained in section 404(a) and not the "arbitrary and capricious" standard. 732 F.2d at 333-34; Fink v. National Savings and Trust Company, 772 F.2d 951, 955-56 (D.C.Cir. 1985). The "arbitrary and capricious" standard does apply, however, where the issue is whether the plan fiduciaries have properly balanced the interests of different classes of beneficiaries. Fiduciaries thus have broad discretion to resolve the often competing concerns of present and future claimants in order to preserve the financial stability of funds while allocating assets to the advantage of all beneficiaries. Id.

        A number of courts have followed Struble in its analysis of the proper scope of review, or have otherwise found that the "arbitrary and capricious" standard is appropriate in assessing a fiduciary's interpretation or implementation of plan terms, when no outside interests press on the balance. See, e.g., Holland v. Burlington Industries, Inc., 772 F.2d 1140, 1148-49 (4th Cir.1985), cert. denied, ___ U.S. ___, 106 S.Ct. 3271, 91 L.Ed.2d 562 (1986); Edwards v. Wilkes-Barre Pub. Co. Pension Trust, 757 F.2d 52, 55-57 (3d Cir.1985), cert. denied, 474 U.S. 843, 106 S.Ct. 130, 88 L.Ed.2d 107 (1986); Ganze v. Dart Industries, Inc., 741 F.2d 790, 792-93 (5th Cir.1984).

        Without discussing the dichotomy posited in Struble, our Circuit Court has nevertheless recently held that, where trustees face a choice between reasonable alternatives in interpreting or implementing the terms of a plan "[c]ourts will substitute their judgment for that of trustees only if the trustees' actions are not grounded on any reasonable basis. Choices between reasonable alternatives, it follows, are for the trustees, not the courts." Stewart v. National Shopmen Pension Fund, 795 F.2d 1079, 1083 (D.C.Cir.1986). In Stewart a change in pension calculation, inter alia, reduced monthly pension benefits to a 74-year-old retiree from $80 to $9. Even so, the trustees' action was reviewed under the arbitrary and capricious standard.

        In determining whether a fiduciary's interpretation of the terms of a plan document is arbitrary or capricious, four factors should be considered: (1) whether the interpretation is contrary to the language of the plan; (2) whether it is consistent with the purposes of the plan; (3) whether it is consistent with the purposes of the particular provision itself; and (4) whether it is consistent with prior interpretations and whether beneficiaries were on notice of the interpretation. Donovan v. Carlough, 576 F.Supp. 245, 249 (D.D.C. 1983), aff'd mem., 753 F.2d 166 (D.C.Cir. 1985). With these factors in mind, the Court now turns to a consideration of the controlling documents under which the Plan was operated: the U.S. News Profit-Sharing Plan Document, PX 6, ("Plan Document") and the Articles of Incorporation, PX 2.

        The U.S. News Profit-Sharing Plan was established as "a defined contribution plan," into which the Company paid contributions on behalf of its employees, based upon their compensation, up to a maximum limit. While each member of the Plan had his own account, Plan Document 6.2,²⁶ the accounts together constituted "a [single] fund [to] be invested and administered as a unit." Id. 6.3. Those investments included a modest portfolio of marketable securities and, most importantly, the 50,000 shares of U.S. News Class A stock. The net value of a member's account was stated to be his "undivided share of the cash, securities and other property in the Fund," including the Class A stock. Id. 6.4. No

Page 1515

member was deemed to have title to any specific assets of the Plan. Id. 6.11.

        The Plan Document in paragraph 6.3 further provided that the value of the Class A stock was to be determined each year in accordance with Article Fifth (e) of the Articles of Incorporation. Article Fifth established the mechanism by which the beneficial ownership of the Company was to vest in its employees, "directly or through the corporation's profit-sharing trust." Its provisions thus governed both the Class A and common stock. Under Article Fifth (b), a holder of stock could not sell, transfer or otherwise encumber his shares; if he attempted to do so, the Company at its option could call the shares under Article Fifth (c). That latter provision also gave the Company an option to call the stock in the event that an employee retired, died, or otherwise ceased employment with U.S. News. The value of the stockboth Class A and commonfor purposes of Article Fifth was to be its "fair market value" "agreed upon by the parties," or as determined by an appraiser to be selected annually by the Board of Directors. Id. (e).²⁷ The appraiser was to render his annual valuations "without regard to the restrictions on transfer of stock contained in [the] Article[,]" using the "methods and standards recognized by the regulations of the United States Internal Revenue Service as appropriate for determining fair market value of corporate stock." Id. Article Fifth (g) further provided that the option price was payable in cash or in notes of up to 15 years' maturity, bearing 5 percent simple interest, and subordinated to other debts of the corporation.

        As is readily apparent, the two controlling documents are not particularly illuminating on the question of whether the Company's stockeither Class A or common was to be valued on a majority- or minority-interest basis. All that one learns upon reading the relevant provisions of the documents is that it was assumed that the Class A and common stock would be valued equally. If that fact had any significance in 1962, at the time the Company was reorganized, it was that the drafters of the documents contemplated that both classes of stock would be valued on a minority-interest basis. This appears to be so in view of the fact that, as of 1962, no shareholder, including the Plan, held more than a minority interest in the Company. Hence, had the Plan sold its holdings back to the Company at any time before 1971, when it became the majority shareholder, it would have been appropriate for it to have done so for a minority price.²⁸

        Finally, the fact that the fiduciaries charged with administering the Plan interpreted paragraph 6.3 of the Plan Document and Article Fifth (e) to require that the Class A stock be accorded the same minority value as the common stock was certainly not unknown to the Company's employees. Account statements and other documents given periodically to the employees made it reasonably clear that the annual appraisals ordered each year yielded a single pershare value, which was then used with respect to both the bonus and Class A stock. Indeed, no plaintiff testified that he was led to believe that there were in fact two such values. In short, the fiduciaries' interpretation of the relevant documents was not only consistent with the language of the Plan and its purposes,²⁹ but was consistently used and was understood by the Plan beneficiaries. Carlough, 576 F.Supp. at 249.

        Recognizing that the Plan Document and Articles of Incorporation were drawn up

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long before the enactment of ERISA, and noting too that, by the beginning of the Class period the Plan attained a majority position in the Company, it is necessary then to examine whether the continued valuation of the Plan's stock on a minority-interest basis violated ERISA as a matter of law.

        ERISA, enacted in 1974, became effective as of January 1, 1975. The statute was designed to establish uniform, comprehensive and consistently applied protections for the beneficiaries of employee benefit plans. See ERISA § 2, 29 U.S.C. § 1001 (Congressional findings); 120 Cong. Rec. 29933-35 (1974) (remarks of Sen. Javits); id. at 29928, 29933 (remarks of Sen. Williams) (preemption of state law), reprinted in 1974 U.S. Code Cong. & Ad. News 4639, 5177, 5188-89. Congress' primary concern was with the financial soundness of the plans covered, the conduct of those administering them, and the fair treatment of their beneficiaries. Accordingly, the statute as enacted requires plan administrators to report on fund resources and activities to the Secretary of Labor and to employee beneficiaries, 29 U.S.C. §§ 1021-31; regulates participation and vesting requirements, id. §§ 1051-61, as well as plan funding, id. §§ 1081-86; outlines the responsibilities and establishes a standard of care for plan fiduciaries, id. §§ 1101-1114; and provides for the administrative, civil and criminal enforcement of its provisions, id. §§ 1131-1145.³⁰

        Despite the comprehensiveness of the provisions cited above, nothing in ERISA speaks to the amount or method of calculating benefits due plan beneficiaries. Rather, those determinations are left in the hands of the "private parties creating the plan." Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 511, 101 S.Ct. 1895, 1900, 68 L.Ed.2d 402 (1981). Nevertheless, plaintiffs claim to have found in the body of the statute a firm directive that, in a case such as presented here, where a plan holds a majority block of employer stock, that stock must be valued on a control basis. For reasons that shall become apparent and for ease of referencethat argument shall be called plaintiffs' "current value" theory.

        It is noted at the outset that plaintiffs' "current value" theory is entirely a construction of counsel. It draws no support from any judicial or administrative interpretations of the provisions in question. The legislative history is sparse, and what little is found tends to undermine rather than to bolster plaintiffs' position. Indeed, as a simple matter of statutory construction, the theory is not in harmony with the legislative scheme as a whole, relying as it does upon the grafting together of various provisions and terms taken out of context. It is worth noting, too, that none of plaintiffs' several experts saw fit to refer to or rely upon the theory.

        Plaintiffs begin by noting that ERISA § 103(a)(1)(A), 29 U.S.C. § 1023(a)(1)(A), requires every covered plan to file an annual report with the Secretary of Labor and to furnish that report to plan participants. Subsection (B) provides that the report shall include a financial statement detailing, among other things, what assets the plan holds. Subsections 103(b)(3)(A) and (C) require that the plan assets be listed at "current value." "Current value" is defined as "fair market value where available and otherwise the fair value as determined in good faith by a trustee or a named fiduciary ... pursuant to the terms of the plan ..., assuming an orderly liquidation at the time of such determination." Id. § 3(26), 29 U.S.C. § 1002(26). Believing that the phrase "orderly liquidation" somehow speaks to the issue of control valuation, plaintiffs seize upon a supposed difference in meaning between "fair market value" and "fair value," the latter implicating an "orderly liquidation."

        Apparently, in plaintiffs' view, the "fair market value" of the Plan's stock would not involve the concept of "orderly liquidation," so that if it were acceptable under ERISA to value plan assets at fair market value, as the terms of the U.S. News plan

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required, then the notion of an "orderly liquidation" would never enter into the calculus. Of course, plaintiffs cannot argue that ERISA proscribes valuations at "fair market value"; instead, they maintain that "fair market value" was not "available" within the meaning of the statute because the Company's stock was not publicly traded and that, hence, "fair value" must be used. As just noted, however, the documents under which the Plan was operated did prescribe a means of determining "fair market value"either the parties would agree upon such a value or it would be arrived at by appraisal. The latter method, which was consistently used, is certainly endorsed by the Internal Revenue Service ("IRS") as appropriate for valuing and allocating trust earnings to a participant's account. See Rev.Rul. 80-155, 1980-1 C.B. 84, 85; Rev.Rul. 59-60, 1959-1 C.B. 237 ("fair market value" of closely held stock to be determined by appraisal); Sommers Drug Stores Co. Employee Profit-Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456 (5th Cir.1986). ("fair market value" determined by appraisal for ERISA purposes), reh. en banc denied, 797 F.2d 977 (5th Cir.1986).

        Other ERISA provisions cast further doubt upon the proposition that there is some qualitative difference between "fair market value" and "fair value." When a plan purchases or sells certain plan assets, it must do so for no more and no less than "adequate consideration." Id. § 408(e)(1), 29 U.S.C. § 1108(e)(1). "Adequate consideration" for this purpose means, where there is no "generally recognized market," the "fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan...." Id. § 3(18)(B), 29 U.S.C. § 1002(18)(B) (emphasis added). Clearly, the statute contemplates that "fair market value" may in some instances be determined by appraisal, as was done in the instant case. The most that can be said for the distinction that plaintiffs attempt to draw between "fair market value" and "fair value" is that, if "fair value" means anything other than "fair market value," it is "fair market value by appraisal." And since a determination of "fair market value by appraisal" is precisely what was called for under the documents controlling the Plan, the concept of "current value" adds absolutely nothing to an analysis of how the Plan assets should have been valued.

        Even if "fair market value" were not available or appropriate and if "fair value ... assuming an orderly liquidation" had to be determined, plaintiffs would gain nothing by it. The term "orderly liquidation" could mean either an "orderly liquidation" of a plan's assetsthat is, the immediate sale of all of its assets in some "orderly" fashionor it could mean an "orderly liquidation" of a plan's assetsthat is, the sale of a plan's assets in whatever way is most appropriate, whether all at once or over a period of time. Hence, in no way can it be said that the phrase "orderly liquidation" requires that the Plan's stock have been valued on a control basis. If anything, it should counsel otherwise, for the "fair value" language upon which plaintiffs rely itself states that the value of a plan's assets should be arrived at considering the terms of the plan. All other relevant provisions of ERISA also make reference to and, in a sense, incorporate the provisions under which a plan is operated.³¹ And since the terms of the U.S. News plan did not contemplate anything other than a series of minority-interest transactions, see infra pp. 1521-22, 1524 -30, the valuation of its stock on a minority

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basis does not offend ERISA even under plaintiffs' "current value" theory.³²

        Finally, it should be noted that plaintiffs' "current value" theory is not consistent with ERISA's statutory scheme taken as a whole. First, it is not the purpose of ERISA to require that plan fiduciaries maximize the benefits paid to departing employees. See, e.g., Edwards v. Wilkes-Barre Pub. Co. Pension Trust, 757 F.2d at 56-57. If this were not the case, one would not expect to find, as one does, a requirement that an Employee Stock Ownership Plan ("ESOP")³³ that holds a controlling block of employer stock nevertheless value that holding on a minority-interest basis, if the employer's stock is actively traded. See Dep't of Labor P/Opinion 76-52 (1976) (applying ERISA § 3(18)(A)(ii), 29 U.S.C. § 1002(18)(A)(ii)). Nor would one expect to find an endorsement of a plan under whose terms "book value" was to be utilized in determining benefits. See Dep't of Labor P/Opinion 77-35 (1977). Second, the purpose that section 103 was meant to serve quite clearly has nothing to do with the calculation of benefits. Section 103 appears in the portion of the statute dealing exclusively with reporting and disclosure requirements. Those provisions, in turn, were designed to provide a means of overseeing plan administration. See 120 Cong. Rec. 29931-32 (1974) (remarks of Sen. Williams), reprinted in 1974 U.S.Code Cong. & Ad.News at 5185. The concern was with plans that, through mismanagement or outright criminal activity, become unable to pay the benefits to which their participants are entitled. See 120 Cong. Rec. 29934-35 (1974) (remarks of Sen. Javits); Fink v. National Savings and Trust Co., 772 F.2d at 956-57. To this end, it is necessary that a plan not overstate the value of its assets when it files its annual reports. It is certainly consistent with that purpose that a plan which pays out benefits based upon a minority valuation of its holdings of employer stock should report the value of those holdings on that same basis. To report a greater value for them in its annual report would seem more repugnant to the statute. This would have been especially true for the U.S. News plan towards the end of the class period, when a large increase in the value of the Company's stock caused the Plan to experience some cash-flow difficulties.

        To sum up, plaintiffs' "current value" theory not only lacks support in the text of the statute or in judicial or administrative glosses thereon, but it also is manifestly at odds with the entire scheme that Congress had in mind. The theory must be, and is, rejected outright.

        Neither ERISA nor the documents under which the Plan operated provide any affirmative directive as to how the Class A stock should have been valued. It therefore becomes necessary to determine whether, within the relatively loose constraints imposed by the statute and the operative documents, the assumptions relied upon and the procedures utilized by the appraisers were reasonable under the circumstances. Plaintiffs of course bear the burden of proof on the valuation.

        Plaintiffs of course bear the burden of proof on the valuation issue; nevertheless, it is useful first to canvass the situation briefly from defendants' perspective. Such an overview demonstrates the prima facie reasonableness of defendants' approach.

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        Defendants' valuation methodology produced a result that was consistent with the provisions of the operative documents. The appraisals arrived at a single, minority value that was reasonable as applied to the minority transactions featured by both the profit-sharing and stock bonus plans. The redemption of the bonus stock each year clearly involved the exchange of small amounts of stock, whose owners had no direct effect on or say in the day-to-day operations of the Company, either in theory or in practice. Participation in the Plan afforded its beneficiaries an even more remote interest in the affairs of the corporation, to the extent that the Plan served as a holding device for shares of stock that the employees themselves did not directly own. As will be seen, there is no reason to look beyond the practical realities of how the Plan functioned and to assume that it could exercise theoretical powers that would have served to enhance the value of plaintiffs' minority interests. See infra pp. 1524-30.

        Even if a cogent argument could be made to support a control valuation of the Class A stock, it is impossible to say that what defendants did was unreasonable. Clearly, in the absence of any statutory, administrative, or judicial authority for the proposition that a control value might have been indicated, defendants cannot be faulted for employing a minority valuation. As noted, ERISA does not require plan fiduciaries to maximize the benefits of departing employees, Edwards v. Wilkes-Barre Pub. Co. Pension Trust, 757 F.2d at 56-57; it only requires them to make a reasonable choice from among possible alternatives. Stewart v. National Shopmen Pension Fund, 795 F.2d at 1083. Again, as stated at the outset, no principle of law governing this litigation demands that monies received from the 1984 sale be distributed to former employees without regard to fault on defendants' part in valuing the Company's stock during the class period. And defendants cannot be faulted for choosing one from at most two reasonable alternatives.

        In addition to "current value," plaintiffs advance three theories as to why the Class A stock should have been valued on a control basis. They first argue that, because the Class A stockas well as the common stockwas placed in the voting trust, they acquired the equivalent of a controlling interest by operation of law. They then argue that, becauseas they allegethe Plan originally paid a control price for its stock, principles of consistency require that Plan beneficiaries be awarded benefits on a control basis as well. Finally, they maintain that the very fact that the Plan held a majority of the outstanding stock by itself dictates that a majority-interest approach should have been used. The three theories will be discussed in that order.

        Plaintiffs believe that, although they were not entitled to vote their shares of stock, those shares should have been valued on a control basis. The fact that such "control" resided in individuals over whom they in turn had no control, they say, afforded them the benefits of control by operation of law. Moreover, that theory, if accepted, would require that plaintiffs' minority holdings of common stock, as well as the Plan's Class A stock, be valued on a majority-interest basis.

        As defendants have been quick to point out, the theory has no basis in theory or in practice. First, the voting trust did not, and was not meant to, afford U.S. News employees a controlling voice in the Company. Indeed, the voting trust instrument states on its face that it was designed only to provide employees with "beneficial ownership" of shares of U.S. News stockthat is, with something less than the full incidents of stock ownership. Moreover, plaintiffs were under no misapprehension as to what Mr. Lawrence intended and had accomplished. As he made clear both when the Company was reorganized in 1962 and subsequently, he still held the reins of control. Plaintiff Charles Foltz recognized this when he testified that Lawrence "took

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part in virtually everything from top to bottom." 1 Tr. 161. As Chairman of the Board, Chief Executive Officer, and "owner,"³⁴ Lawrence "had the final say on virtually everything that took place in the publication." Id. It is undisputed that he alone voted the stock, just as he had done prior to the reorganization.

        After Lawrence's death, when the voting trust agreement came up for renewal, his successor, John Sweet, sent a memorandum to the employees, recommending that they vote to renew the trust. Sweet made it clear in his memorandum that the purpose of the trust was to "concentrat[e] responsibility, authority, and accountability." DX 141 at 4, 7. This was what Lawrence had in mind when he effected the reorganization of the Company, and it is certainly the way that business was conducted during the class period.

        Despite the realities of how the voting trust actually worked and of how corporate control was concentrated, first in Lawrence and then in his successor trustees, plaintiffs continue to argue that, because the trustees owed them fiduciary duties to run the Company in their best interests, the voting trust provided a mechanism whereby employees enjoyed effective control of U.S. News. Such an argument, however, simply proves too much. It is always the case that the directors and officers of a corporation manage the company for the benefit of its shareholders and that they owe those shareholders fiduciary duties to manage the company in an acceptable manner. See 8 Del.Code Ann.: Gen.Corp.Law § 141(a) (Michie 1983); Smith v. Van Gorkom, 488 A.2d 858, 872 (Del.1985); Pogostin v. Rice, 480 A.2d 619, 624 (Del.1984); Gottlieb v. McKee, 34 Del.Ch. 537, 107 A.2d 240, 243 (1954); Harden v. Eastern States Pub. Serv. Co., 14 Del.Ch. 156, 122 A. 705, 706 (1923); see also Matter of Reading Co., 711 F.2d 509, 517 (3d Cir.1983).³⁵ A voting trust adds nothing to a shareholder's rights in this regard, but rather takes away from him the right to vote his stock on certain issues. As to certain other issues, such as mergers and other major corporate changes, the vote of a majority of the beneficial owners of the Company's stock was required. In that situation, then, the voting trust was inoperative. In short, as to day-to-day matters of corporate management, the voting trust added nothing to a shareholder's