The 6th Circuit U.S. Court of Appeals reversed dismissal of a class-action lawsuit claiming State Street Bank & Trust breached its fiduciary duty and violated ERISA by failing to sell General Motors Corp. stock in GM 401(k) plans before its price collapsed prior to the automaker’s bankruptcy filing in 2009.
The ruling Wednesday by the appellate court in Cincinnati ordered the case be returned to the U.S. District Court in Detroit to reopen litigation.
State Street was independent fiduciary for the GM stock in both plans and was hired in 2006.
Participants in the hourly and salaried plans combined had between $1.45 billion and $1.9 billion in General Motors stock during the period — July 15, 2008, to April 24, 2009 — according plaintiff information cited in the decision. GM stock was one of several investment options in the $11.7 billion salaried employees’ 401(k) plan and $8.6 billion GM hourly employees’ 401(k) plan, as of Dec. 31, 2007, according numbers in an SEC filing.
The 22-page appellate court ruling said that in dismissing the case, U.S. District Court Judge Denise Page Hood in her October 2010 decision “concluded that because plan participants could direct their investments by choosing from a menu of investment options and had the discretion to avoid GM stock altogether, State Street should not be held liable for the plaintiffs’ decisions to stay invested in the General Motors common stock fund. In other words, ‘State Street cannot be held liable for actions which plaintiffs controlled.’ We disagree.”
The appellate ruling said, “A fiduciary cannot avoid liability for offering imprudent investments merely by including them alongside a larger menu of prudent investment options. … Therefore, we reject the district court’s approach because it would insulate the fiduciary from liability for selecting and monitoring the menu of plan offerings so long as some of the investment options were prudent. State Street also cannot escape its duty simply by asserting at the pleadings stage that the plaintiffs themselves caused the losses to the plans by choosing to invest in the General Motors Common Stock Fund.”
State Street argued that “there was a widely publicized expectation of government intervention on GM’s behalf, and therefore, it was not unreasonable for the plans to continue to hold GM stock … until the White House … determined on March 31, 2009, that GM’s ‘viability as a going concern was in serious doubt,’” the decision said.
Geoffrey M. Johnson, plaintiff’s attorney with law firm Scott & Scott, declined to quantify how much participants allegedly lost in their GM stock investments, saying the plaintiffs haven’t had an opportunity to take discovery of pretrial evidence.
The lawsuit was initially filed June 9, 2009, in U.S. District Court in Detroit, by several participants.
GM is not a party to the case, Mr. Johnson added. General Motors Corp., which filed for bankruptcy protection June 1, 2009, was reorganized with the assistance of a federal government bailout as General Motors Co. later in 2009.
Arlene Roberts, State Street vice president, said: “State Street is confident it has at all times acted in accordance with its obligations as a fiduciary for the company stock in the General Motors retirement plan. State Street denies the claims set out in the complaint and will again vigorously defend ourselves in this matter.”
Wilber H. Boies, partner with law firm McDermott Will & Emery, representing State Street, declined to comment.