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On Remand From Sixth Circuit, State Street Beats Stock-Drop Claim; Presumption Applies

Tuesday, April 15, 2014

By Jacklyn Wille  

April 14 --State Street Bank & Trust Co. is entitled to summary judgment on stock-drop claims by participants in General Motors Corp.'s Section 401(k) plans, because plan participants failed to present evidence sufficient to overcome the presumption of prudence shielding fiduciaries of employer stock plans, the U.S. District Court for the Eastern District of Michigan ruled.

Judge Denise Page Hood's April 11 ruling follows a remand from the U.S. Court of Appeals for the Sixth Circuit, which previously reversed Hood's 2010 ruling granting State Street's motion to dismiss.

Hood's most recent decision marks one of the few times a stock-drop case has progressed past the motion-to-dismiss stage of litigation. Many courts outside of the Sixth Circuit dismiss stock-drop claims by applying the pro-fiduciary presumption of prudence first articulated by the U.S. Court of Appeals for the Third Circuit in Moench v. Robertson, 62 F.3d 553, 19 EBC 1713 (3d Cir. 1995). The Moench presumption requires plan participants to point to a plan sponsor's impending collapse or other dire circumstances to show that a reasonable plan fiduciary would have divested the plan of employer stock.

The Sixth Circuit used its 2012 ruling in the instant case to become the only circuit court to hold that the Moench presumption doesn't apply at the pleadings stage. It also used its Pfeil decision and its follow-up decision in Dudenhoeffer v. Fifth Third Bancorp, 692 F.3d 410, 53 EBC 2842 (6th Cir. 2012) (172 PBD, 9/6/12; 39 BPR 1720, 9/11/12), to articulate a weaker presumption than has been used in other circuits.

The U.S. Supreme Court heard oral arguments in Dudenhoeffer in April 2014. That case asks the high court to determine whether the presumption applies, and if so, at what stage of litigation.

Applying Presumption

Scott Macey, president and chief executive of the ERISA Industry Committee in Washington, said that Judge Hood's ruling in favor of State Street was well reasoned, given the extensive process State Street used in evaluating the GM stock.

“It's hard to fault what State Street did or say that because the participants might have lost some money, there's automatically a breach of fiduciary responsibility,” Macey told Bloomberg BNA April 14. “Sometimes everybody does what they're supposed to do and still the situation doesn't come out right.”

Macey, who isn't involved in the litigation, also noted that courts considering stock-drop claims in recent months--including claims involving JPMorgan Chase & Co. and Hewlett-Packard Co.--have been willing to apply the presumption of prudence, despite knowing that the Supreme Court will soon weigh in on the issue (In re JPMorgan Chase& Co. ERISA Litig., 2014 BL 89969, S.D.N.Y., No. 1:12-cv-04027-GBD, 3/31/14 (63 PBD, 4/2/14; 41 BPR 797, 4/8/14); In re HP ERISA Litig., 2014 BL 92891, N.D. Cal., No. 3:12-cv-06199-CRB, 4/2/14 (66 PBD, 4/7/14; 41 BPR 798, 4/8/14)).

“I think that's how the judges are going,” Macey said. “They're looking at it knowing that the Supreme Court just held oral arguments and is evaluating the issue, and they're still coming out with these decisions saying the presumption applies, which I believe is a reasonable way to evaluate these claims.”

Public Versus Inside Information

Shannon Barrett, a partner with O'Melveny & Myers LLP in Washington, said that Hood's ruling underscored the difficulty that stock-drop participants have when their claims are based on public, rather than inside, information.

“It's becoming very difficult for plaintiffs to prevail in these cases, where, as here, there are allegations that the defendants should have gotten out of the stock based on public information rather than some type of inside information,” Barrett said.

Further, Barrett said that this distinction between public and inside information appeared important to the Supreme Court justices when they heard oral arguments in the Dudenhoeffer case.

“The argument (in Dudenhoeffer) quickly pivoted to what to do about inside information,” Barrett said. “That seems to reflect the recognition by the courts that it's very difficult and that defendants can't be expected to outsmart the market.”

Barrett also said that the instant case against State Street involved another issue that received attention during the Dudenhoeffer oral arguments--namely, the effect of an independent, outside fiduciary on participants' claims of fiduciary breach.

“One way in which plans have reacted to stock-drop cases is to go to independent fiduciaries, and it was interesting at the Dudenhoeffer argument that the concept of independent fiduciaries came up multiple times,” Barrett said. “This decision, which involved an independent fiduciary, somewhat underscores the difficulty that plaintiffs have in establishing a case against that type of fiduciary--precisely because you're having to rely in most instances on public information.”

Barrett wasn't involved in the litigation.

'Substantial Evidence.'

Richard Siegel, a senior associate with Alston & Bird LLP in Washington, said that Hood's decision recognizes the “significant burden” that a stock-drop plaintiff must satisfy to overcome the presumption of prudence.

“As the court acknowledged, where a plan mandates that company stock be offered, requiring fiduciaries to not follow those instructions based upon the ups and downs of the market effectively turns them into speculators on company stock, a role they are certainly not supposed to play,” Siegel told Bloomberg BNA April 14.

“In this case, the plan required State Street to allow the plan to invest in GM stock unless there was a serious question regarding GM's ongoing short-term viability,” Siegel said. “State Street produced substantial evidence supporting its decision, including that analysts had mixed reviews of GM stock, with most analysts recommending that the stock be held rather than sold, as well as showing that large institutional investors maintained or increased their holdings of GM stock. Based upon this, the court's conclusion that it was not an abuse of discretion for State Street to maintain the plan's holdings of GM stock was prudent under the circumstances certainly appears correct.”

Further, Siegel said that it “defies logic” that a fiduciary could be found imprudent for following analyst recommendations and taking a course of action similar to other institutional investors.

“To require otherwise would be to require fiduciaries to outsmart the market, something (the Employee Retirement Income Security Act) does not require,” Siegel said.

Siegel wasn't involved in the litigation.

Stock Fluctuations

On remand from the Sixth Circuit, the parties agreed to certify the class and filed cross-motions for summary judgment.

The district court first explained that, in the Sixth Circuit, a plaintiff attempting to rebut the presumption of prudence must show that “a prudent fiduciary acting under similar circumstances would have made a different investment decision” (quoting Kuper v. Iovenko, 66 F.3d 1447, 19 EBC 1969 (6th Cir. 1995)).

According to the district court, this standard “is not concerned with results.” Rather, it requires a court to evaluate the fiduciary's actions at the time of the transaction and without the benefit of hindsight.

“Stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence” to rebut the presumption, the district court said.

Presumption Not Overcome

The participants alleged that State Street breached its duties by continuing to hold GM stock during the class period, which ran from July 15, 2008, until March 31, 2009, when State Street began divesting the plan of GM stock. They identified four dates on which they contended State Street acted imprudently by continuing to hold GM stock.

First, the participants alleged that it was imprudent to continue holding GM stock as of July 15, 2008, when GM's then-chief executive officer announced a “comprehensive restructuring plan” to address “significant” corporate losses.

However, the court agreed with State Street that nothing in ERISA requires an employer stock plan fiduciary to sell employer stock “based on a company's financial difficulties.”

Further, the court said that the publicly known facts about GM at that time “were at worst mixed and certainly did not compel a singular conclusion about GM's stock's future prospects.” The court also noted that “at least one named plaintiff purchased GM stock after the plan was announced,” casting doubt on the participant's claims of imprudence.

Second, the participants argued that holding GM stock became imprudent by Sept. 22, 2008, when GM announced that it had drawn down its remaining $3.9 billion of secured credit. State Street countered that “analyst outlook on GM remained neutral” throughout this period, with some market participants continuing to express confidence in GM.

The court again agreed with State Street, noting that impartial investment advisers continued to hold GM stock during this period. This evidence failed to show that there was a “singular conclusion that holding GM stock was imprudent,” the court determined.

No Fiduciary Breach

Next, the participants challenged State Street's holding of GM stock as of Nov. 21, 2008, when sales figures dropped to levels not seen since the early 1980s and when GM announced $4.2 billion in quarterly losses. At this time, State Street voted to restrict new investment in GM stock, a decision the participants said “meant that by definition, GM stock was not a prudent investment.”

This argument failed to persuade the court, which said that large investors continued to increase their holdings in GM stock during this time.

“Although GM's future without government intervention appeared bleak in November 2008 based on the submissions by Plaintiffs, it cannot be said that a reasonable prudent fiduciary should have liquidated the ESOP on November 21, 2008,” the court concluded.

Finally, the participants argued that GM stock was an imprudent investment by Dec. 12, 2008, when State Street reversed its decision to liquidate GM stock and received a business analysis indicating that GM had a “significant solvency risk” and was likely to face significant dilution of stock.

The court again found that State Street didn't act imprudently, explaining that its decision was based on its reasonable analysis of statements from the White House regarding the potential for government intervention to keep the automaker afloat.

In awarding summary judgment to State Street, the court also rejected the participant's attacks on State Street's process for evaluating the GM stock, finding that the company “was prudent and deliberate in its decision making.”

Litigation History

In 2009, two GM employees filed a proposed class action alleging that State Street breached its fiduciary duties by waiting too long to divest GM's Section 401(k) plans of their holdings in GM stock (111 PBD, 6/12/09; 36 BPR 1440, 6/16/09).

The district court dismissed the complaint in 2010. It found that, although the participants were likely to overcome the presumption of prudence that attaches to fiduciaries of employer stock plans, they wouldn't be able to show that State Street caused their investment losses, because the employees retained ultimately control over their investment selections (191 PBD, 10/5/10; 37 BPR 2237, 10/12/10; 50 EBC 1004).

On appeal, the Sixth Circuit reversed, finding that the district court erred in applying the presumption of prudence at the motion-to-dismiss stage of litigation (35 PBD, 2/23/12; 39 BPR 411, 2/28/12; 52 EBC 1641).

The Sixth Circuit is the only federal appellate court to hold that the presumption doesn't apply at the pleadings stage of litigation. Although the Supreme Court declined to review the Sixth Circuit's 2012 ruling in Pfeil, it heard arguments earlier in April in the Sixth Circuit's follow-up decision in Dudenhoeffer (64 PBD, 4/3/14; 41 BPR 790, 4/8/14).

The participants were represented by David R. Scott, Deborah Clark-Weintraub, Geoffrey M. Johnson and Thomas L. Laughlin IV of Scott & Scott LLP, Colchester, Conn., New York, and Cleveland Heights, Ohio; and Elwood S. Simon and John P. Zuccarini, Bloomfield Hills, Mich. State Street was represented by James D. VandeWyngearde of Pepper Hamilton LLP, Southfield, Mich., and Wilber H. Boies of McDermott Will & Emery, Chicago.

 

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com


Text of the opinion is at http://www.bloomberglaw.com/public/document/Pfeil_et_al_v_State_Street_Bank_and_Trust_Company_2014_BL_102500_.

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