State Street Validated by Company Stock Suit Ruling

A federal appellate court has cleared State Street Bank&Trust Co. of wrongdoing for selling W.R. Grace Company stock from the company’s 401(k) plan.

The 1st U.S. Circuit Court of Appeals, upholding a lower court decision, ruled that State Street did not breach its Employee Retirement Income Security Act (ERISA) fiduciary duties when it sold the Grace stock while acting as an independent fiduciary.

“Under ERISA, a fiduciary is required to act with “the care, skill, prudence, and diligence … that a prudent man acting in a like capacity and familiar with such matters would use,’ ” wrote Circuit Judge Juan R. Torruella. The appellate court said State Street had “unquestionably met” ERISA’s prudent man standard, and that W.R. Grace acted properly by bringing in State Street as an independent fiduciary for its company stock fund.

According to the opinion, W.R. Grace’s 401(k) plan offered 28 investment options, including the Grace Stock Fund, which made up 4% of the plan’s assets, but participants owned 12% of W.R. Grace’s outstanding shares.

Expert Opinions

In the course of its work as an independent fiduciary, the court said State Street obtained the opinion of Duff and Phelps LLC (D&P) as to the financial prospects of W.R. Grace and consulted with the law firm Goodwin Procter LLP for legal advice. After considering all information, in February 2004 State Street began selling the plan’s W.R. Grace stock on the open market for just under $3 per share.

Two months later, State Street sold a substantial block of the plan’s W.R. Grace stock to a third party at the price of $3.50 per share, though the stock’s market value at the time was $2.96 per share, according to the court.

A group of plan participants filed a lawsuit against State Street, contending it had breached its ERISA fiduciary duties by divesting the plan of the W.R. Grace stock. The participants also argued that W.R. Grace breached its fiduciary duties by failing or refusing to insert itself in State Street’s decisionmaking process.

In January 2008, the U.S. District Court for the District of Massachusetts ruled in favor of State Street and W.R. Grace after rejecting the arguments made by the participants (see “Company Stock Price Not Only Factor in ERISA Prudence).

“There can be little doubt on this record that the state of Grace’s corporate health was thoroughly studied by experts who debated and considered ad nauseam the pros and cons of retaining or selling the stock held in the Plan’s portfolio,“ the appellate judges said. “The unanimous conclusion of those charged with making the decision was that divestment of this stock was the only action consistent with the prudence required of a responsible fiduciary under ERISA.”

The case is Bunch v. W.R. Grace & Co., 1st Cir., No. 08-1406.