The U.S. District Court for the Eastern District of Michigan used the presumption of prudence precedent adopted by most courts and found participants did not allege facts sufficient to overcome this presumption. The participants argued there were various dates on which State Street should have acted to divest the retirement plan’s holdings in GM stock prior to the time it actually did, but in each instance, the court found State Street had presented evidence in support of its stance.
According to the court opinion, on August 1, 2008, GM announced a third quarter 2008 net loss of $15.5 billion. Analysts projected that GM was on track to run out of cash by the first quarter of 2009. In its November 10, 2008, Form 10-Q filing for the third quarter of 2008, GM acknowledged that its auditors had “substantial doubt” regarding GM’s “ability to continue as a going concern.” In a November 2, 2008, notice to participants and beneficiaries, State Street temporarily suspended the purchases of the GM Common Stock Fund until further notice, noting that “it is not appropriate at this time to allow additional investments by participants.” It was not until March 31, 2009, that State Street decided to divest the GM stock held in the fund, with the process completed by April 24, 2009.
U.S. District Judge Denise Page Hood previously dismissed the lawsuit, finding that since participants could allocate their investments among a range of investment options, and since they knew GM was in financial trouble but continued to invest in GM stock, State Street cannot be held liable for the participants’ investment choices (see “State Street Stock Drop Suit Gets Tossed”). However, on appeal, the 6th U.S. Circuit Court of Appeals, held that the participants pleaded sufficient facts to make plausible their claim of a causal link between State Street’s conduct and the losses to the plan and that State Street cannot escape its duty simply by asserting at the pleadings stage that the plaintiffs (i.e., participants) themselves caused the losses to the plans by choosing to invest in the GM stock fund.
The plaintiffs in the case assert it was imprudent for State Street to continue to hold GM stock in the plans as of July 15, 2008, when GM’s then-CEO announced GM intended to implement a comprehensive restructuring plan in response to second quarter 2008 losses which he described as “significant,” and to stem “an impending liquidity crisis at GM.” The 6th Circuit noted that the plaintiffs need not ultimately prove that July 15, 2008, was the actual date on which it was no longer reasonable to continue holding GM stock, only that the “imprudent date” for investment in GM stock occurred prior to March 15, 2009.
Hood noted in her latest opinion, a fiduciary may breach its duties to plan beneficiaries by failing to investigate and evaluate the merits of its investment decisions. The presumption of prudence is not rebutted if the defendant shows evidence that the stock fluctuated during a certain period and that several investment advisers recommended holding the stock. A fiduciary breaches its duty if it fails to impartially investigate the options by obtaining the impartial guidance of a disinterested outside adviser to the plan, apart from fiduciaries who also double as directors of the corporation.
For each date the participants argued would have been a more prudent time to divest the GM stock, Hood found State Street provided evidence it investigated, considered the guidance of disinterested advisers and/or showed several advisers recommended holding the stock.
In its defense, State Street argued that the notion that the Employee Retirement Income Security Act (ERISA) requires an employee stock ownership plan (ESOP) fiduciary to liquidate company stock holdings based on a company’s financial difficulties has been soundly rejected in comparable stock drop cases, citing DiFelice v. U.S. Airways, Inc.
In addition, State Street said it discharged its fiduciary responsibilities through a three-tier decision making process, and noted that courts who have reviewed its process have concluded it satisfies ERISA’s requirements, and that State Street fulfilled all of its obligations and understood its fiduciary duties, citing In re Delphi Corp. (see “Delphi Fiduciary Breach Suits Dismissed Against State Street”).
“Although Plaintiffs make light of State Street’s ‘procedural process’ in reviewing the status of GM stock, the evidence submitted, including the number of meetings the Independent Fiduciary Committee held during the Class Period shows that State Street was prudent and deliberate in its decisionmaking,” Hood concluded.
In December 2012, the U.S. Supreme Court declined to review the State Street case regarding GM stock (see “GM Participants Can Move Forward with State Street Suit”). However, the high court has since taken on another case concerning the presumption of prudence, and many of the same points made in Hood’s recent decision were discussed in the arguments before the Supreme Court (see “High Court Ponders ‘Conflicts’ for ESOP Fiduciaries”).
The recent decision in Pfeil v. State Street Bank and Trust Company is here.