The U.S. District Court for the District of Massachusetts rejected State Street’s argument that it should follow the lead of the 3rd U.S. Circuit Court of Appeals in Moench v. Robertson and adopt the presumption that State Street company stock was a prudent investment in its employee retirement plan. The court agreed with plaintiffs that the Moench presumption does not apply, and, even if it did, they have provided sufficient allegations of imprudence to rebut the presumption.
The court found that State Street did not face the same pressure as fiduciaries in the Moench case because they were not required to offer a company stock fund, but instead could have removed it from the list of available plan investments. U.S. District Judge Nancy Gertner said it is not appropriate to apply a presumption that may not be necessary in this case to further Congress’ goal of encouraging Employee Stock Ownership Plans (ESOPs).
“Without the Moench presumption shielding defendants, plaintiffs have sufficiently alleged that State Street stock was not a prudent investment for the plan,” the opinion stated. “The allegations support a plausible claim that the objective, prudent person who knew what defendants knew would have ceased to invest in State Street stock before October 2009.”Gertner pointed out that the 1st U.S. Circuit Court of Appeals has yet to adopt the Moench presumption in any case. Gertner found that further record development — and particularly input from those with expertise in the arcane area of law where the Employee Retirement Income Security Act’s (ERISA’s) ESOP provisions intersect with its fiduciary duty requirements — seems essential to a reasonable elaboration of that which constitutes a breach of fiduciary duty in this context.
The case involves two separate but related class actions which have been consolidated: a federal securities action, alleging violations of both the Securities Exchange Act of 1934 and the Securities Act of 1933 and the ERISA Action. Although the plaintiffs in these two cases are different, they have claims stemming from the same conduct by State Street Corporation.
Gertner partially relied on facts in a lawsuit filed October 20, 2009, after an 18-month investigation by California Attorney General Edmund G. Brown, Jr., alleging State Street committed an "unconscionable fraud" against California's two largest pension funds -- California Public Employees' Retirement System (CalPERS) and California State Teachers' Retirement System (CalSTRS) -- by overcharging CalPERS and CalSTRS for the costs of executing FX trades since 2001 (see "CA Charges State Street for ‘Unconscionable Fraud’ against Pension Funds").
Taking into account the heightened pleading standards, Gertner found that plaintiffs' allegations are both stated with particularity and plausible. “It is plausible that State Street impermissibly overcharged clients for indirect FX trades, thereby enabling the bank to fraudulently inflate its foreign exchange revenue by a material amount. At this point – the pleading stage -- I cannot ignore that Plaintiffs' complaint is buttressed by, among other things, allegations made by six confidential sources and the booty from an 18-month investigation by the California AG. To require more from Plaintiffs at this stage would be to improperly declare that a plaintiff must produce a smoking gun in order to survive a motion to dismiss a fraud securities case, a burden too heavy to bear at the pleading stage.”
Gertner also said she couldn’t hold that a reasonable jury would find that State Street allegedly inflated its FX revenue by only an immaterial amount or that the explanations provided to the investing public for the FX revenue growth were immaterial. “The California AG alleged that State Street overcharged CalSTRs and CalPERS alone $56 million over eight years. Averaging $7 million per year, this overcharge for only two clients comprised approximately 0.11% of State Street's annual revenue. But, as Plaintiffs allege, the mark-up was not limited to these two clients, since State Street offered the same FX trading services ‘to a broad range of custody clients in the U.S. and internationally,’" Gertner pointed out.
The consolidated suit claims that between October 17, 2006, and October 19, 2009, State Street allegedly deceived its investors in two separate ways. First, State Street impermissibly charged its clients a different exchange rate than the one the bank actually used to execute Foreign Exchange ("FX") trades requested by its clients. Second, State Street misled the market regarding State Street's exposure when it assured investors in the fall of 2008 that debt securities contained in its investment portfolio and in four specific off-balance-sheet commercial paper conduits -- collateralized in part by risky mortgage-backed securities -- were of high quality.
Lead Plaintiffs in the Securities Action -- two institutional investors, Public Employees' Retirement System of Mississippi (MPERS) and Union Asset Management Holding AG brought federal securities claims on behalf of themselves and all other similarly situated State Street stock holders. In the ERISA Action, lead Plaintiff Casey J. Richard, a participant in the State Street Corporation Salary Savings Plan brought a class action on behalf of himself and all other similarly-situated participants in the plan.The case is Hill v. State Street Corp., D. Mass., No. 1:09-cv-12146-NG.