A federal lawsuit claims State Street Bank & Trust Co. failed to sell General Motors Corp. stock before its price collapsed earlier this year, resulting in hundreds of millions of dollars of losses to GM's salaried and hourly employees' 401(k) plans.
The suit, filed by several participants in U.S. District Court in Detroit, seeks class-action status. It contends State Street, Boston, breached its duty as independent fiduciary for the two plans.
If successful, the suit could put greater pressure on independent fiduciaries and could drive up the fees they charge, according to consultants not involved in the case.
On Aug. 19, Judge Denise Page Hood denied State Street's request to move the case to Judge Nancy G. Edmunds in the same court. Ms. Edmunds had presided over a similar 2005 lawsuit on behalf of participants in the plans and had dismissed State Street from that case, said David R. Scott, attorney with the Colchester, Conn.-based law firm of Scott & Scott LLP, representing the plaintiffs.
State Street told Ms. Hood it would file a motion to dismiss the current case, Mr. Scott said. Ms. Hood scheduled a hearing for Dec. 16 on that motion.
If “the motion to dismiss is resolved in the plaintiffs' favor, discovery will proceed on the merits of the case and whether the case merits class-action treatment,” Mr. Scott said.
The $11.7 billion salaried employees' 401(k) plan and $8.6 billion GM hourly employees' 401(k) plan owned a combined $1.4 billion in GM stock as of Dec. 31, 2007, according to the latest available SEC filing.
“As the independent fiduciary and investment manager for the GM stock purchased by and held in the plans, State Street had a fiduciary duty to determine whether GM stock was a prudent investment to offer and hold in the plans,” according to the lawsuit, filed June 8.
“State Street continued to sit on the 50 million-plus shares of GM stock” held by the plans, the suit states.
Geoffrey M. Johnson, the lead plaintiff's attorney in the case in Scott & Scott's Cleveland Heights, Ohio, office, said the plaintiffs don't have all the data yet on the number of shares that were held in the plan.
“By waiting until March 31, 2009, to begin divesting the plans of their holdings in GM stock, and not divesting the plans of their holdings in GM stock at an earlier date, State Street breached its fiduciary duty of prudence and caused the plans to suffer hundreds of millions of dollars in losses” the suit said.
In November, State Street barred GM from allowing plan participants to purchase GM shares because of the automaker's financial difficulty (P&I Daily, Nov 26).
The plaintiffs seek restoration of the losses to the plan, which State Street is obligated to do under the Employee Retirement Income Security Act, the lawsuit states. The suit doesn't specify the losses.
SSgA appointed in '06
GM appointed State Street as independent fiduciary for the company stock in the plan June 30, 2006, the suit states. “By the end of 2006, it should have been obvious to State Street that GM's financial troubles were serious and the company itself was moving closer to an impending financial collapse,” the suit states.
By mid-2008, the lawsuit states, “numerous financial analysts and market participants were predicting that the probability of a GM bankruptcy filing was "high'; several of GM's largest institutional investors were aggressively divesting their shares; GM's crippling health-care and pension costs were continuing to grow at an alarming rate and were severely underfunded.”
State Street spokeswoman Arlene Roberts couldn't be reached for comment. GM spokeswoman Julie M. Gibson said GM isn't involved in the suit and declined to comment.
In January 2008, GM paid $37.5 million to participants' accounts and in attorney fees to settle a class action, stemming from a 2005 lawsuit brought by participants under ERISA against State Street, GM, the GM investment funds committee and General Motors Investment Management Corp., which was renamed this year Promark Global Advisors Inc., according to a GM 10-K report and Mr. Scott, whose law firm also represented participants in the earlier lawsuit.
That earlier suit alleged the “defendants breached their fiduciary duties” to participants in the two GM plans “by, among other things, investing their assets, or offering them the option of investing, in GM stock on the ground that it was not a prudent investment,” according to a GM 10-K filing.
Ms. Edmunds dismissed State Street as a defendant in that suit, on the grounds that, while it was a trustee for the plan, GM at that time made all the investment decisions, Mr. Johnson said. State Street was a directed trustee following GM's instruction and was essentially a record keeper for the plan and “had no rule in the investments,” Mr. Johnson said.
“But on June 30, 2006, GM relinquished its investment responsibility and appointed State Street as independent fiduciary to make investment decisions,” leading to the new case filed in June, he added.
The case will have implications for independent fiduciaries “if the court upholds the complaint," Mr. Scott said.
“Clearly the case implies independent fiduciaries have the obligation to ... make sure they are discharging their independent fiduciary duty to make prudent investment decisions,” he added.
Edward A.H. Siedle, president, Benchmark Financial Services Inc., Ocean Ridge, Fla., a consulting firm specializing in pension fund, securities and money management matters, said, “This case will test the cozy relationship between independent fiduciaries and plan sponsors that hire them.”
“But unfortunately, it won't alter the colossal conflicts of interest,” said Mr. Siedle, who wasn't aware of the suit. “Arguably, when an independent fiduciary is hired, that's when the stock should be sold. Independent fiduciaries are often hired when a company has fallen under dire financial circumstances.”
But Samuel W. 'Skip' Halpern, president of Independent Fiduciary Services Inc., Washington, which offers independent fiduciary services said, “There is no change in the landscape here (with the suit) because being an independent fiduciary always requires great care and attention to a great deal of interrelated factors,” including investment and legal issues. Mr. Halpern, who was aware of the case but not its details, said, “This complaint doesn't change that proposition.
“Inherently, putting an independent fiduciary that is truly expert and objective in place reduces the chances of litigation, but doesn't eliminate it,” he said.