State Street Cleared of Liability for Not Dumping GM Stock

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By Jo-el J. Meyer

Nov. 10 — State Street Bank and Trust Co. didn't breach its fiduciary duties when it decided, in its role as fiduciary of General Motors Corp.'s employee stock ownership plan, to hold on to the plan's GM stock in the months leading up to the automaker's bankruptcy filing, the U.S. Court of Appeals for the Sixth Circuit ruled.

In a 2-1 decision issued Nov. 10, the appeals court said there was sufficient evidence that State Street satisfied its duty of prudence under the Employee Retirement Income Security Act when it reviewed the ESOP's continued investment in GM stock.

The ruling marks the first time the Sixth Circuit has decided a stock-drop case after the U.S. Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 2014 BL 175777, U.S., No. 12-751, 6/25/2014, struck down a special “presumption of prudence” the Sixth Circuit had been applying to the cases.

Rather than using a presumption of prudence, which has typically favored the plan sponsor, the Sixth Circuit said it interpreted Dudenhoeffer as requiring that plaintiffs show “special circumstances” that would make an ESOP's investment in a publicly traded security imprudent. The appeals court said this type of rule accords with modern portfolio theory.

Presumption of Prudence

The lawsuit against State Street was filed in June 2009 by two GM employees who alleged that as a fiduciary of the ESOP component of GM's 401(k) plans, the banking firm had a duty to rid the plans of the automaker's shares in the months leading up to GM's Chapter 11 bankruptcy filing on June 1, 2009.

The U.S. District Court for the Eastern District of Michigan dismissed the lawsuit in 2010, but it was revived by the Sixth Circuit after the appeals court said the lower court misapplied the presumption of prudence.

The case then went back to the lower court and again the district court—applying the presumption of prudence—ruled in favor of State Street.

The plaintiffs again appealed and while the appeal was pending, the Supreme Court issued Dudenhoeffer.

Modern Portfolio Theory

Applying Dudenhoeffer and evaluating State Street's actions according to a prudent-process standard that it equated with modern portfolio theory, the Sixth Circuit in its most recent decision ruled in favor of State Street.

According to the court, modern portfolio theory “rests on the understanding that organized securities markets are so efficient at discounting securities prices that the current market price of a security is highly likely already to impound the information that is known and knowable about the future prospects of that security.”

The appeals court said its duty wasn't to look at State Street's decision in hindsight, but instead it was to evaluate the banking firm's conduct at the time it occurred. Looking to the time period leading up to State Street's eventual decision to remove the GM stock, the court said the banking firm actively evaluated and discussed the automaker's stock “scores of times” during the class period.

Independent Panel Evaluated Investment

Among other things, State Street had an independent fiduciary committee evaluate the GM stock investment and sought the advice of outside legal and financial advisers. “We hold that State Street's actual processes demonstrated prudence, and the decision of other expert professionals both to invest and not to divest on or near the dates that State Street made those decisions demonstrates the reasonable nature of those decisions,” the court said.

The majority opinion was written by Judge Danny J. Boggs and was joined by Judge Richard F. Suhrheinrich.

Judge Helene N. White dissented, saying the majority's use of modern portfolio theory was wrong. White also faulted the majority for finding that it was prudent for State Street to retain the stock because other pension fund fiduciaries were doing the same thing at that time.

The GM employees were represented by Deborah Clark-Weintraub and Geoffrey M. Johnson of Scott & Scott LLP in New York and Cleveland Heights, Ohio. State Street was represented by Wilber H. Boies, Michael S. Yellin and Jennifer Aronoff of McDermott Will & Emery LLP in Chicago, and James D. VandeWyngearde of Pepper Hamilton LLP in Southfield, Mich.

To contact the reporter on this story: Jo-el J. Meyer in Washington at

To contact the editor responsible for this story: Phil Kushin at

Text of the opinion is at