A federal district court judge has dismissed a stock-drop lawsuit against State Street Bank & Trust Co. in its role as an independent fiduciary for two 401(k) plans sponsored by General Motors Co.
The automaker wasn't named as a defendant in the case of Pfeil et al. vs. State Street Bank & Trust, which was dismissed April 11 in U.S. District Court in Detroit. The plaintiffs sued State Street “for failure to prudently manage the plans' assets” in violation of the Employee Retirement Income Security Act, according to Judge Denise Page Hood's ruling.
State Street was the independent fiduciary for the GM Common Stock Fund, one of several investment options for the plans. The plaintiffs said State Street failed to act quickly enough to halt participants' investments in the stock fund as GM's stock plummeted and its financial condition deteriorated, the judge's ruling said.
State Street suspended further purchases of the stock fund on Nov. 21, 2008. On March 31, 2009, State Street said it would sell the plans' holdings in company stock, and it completed the sale on April 24, 2009, the judge's ruling said. General Motors filed for bankruptcy protection on June 1, 2009.
Ms. Hood wrote that State Street had acted prudently. “This court is unable to conclude that State Street's decision not to divest the stock until March 31, 2009, was an imprudent decision in light of the presumption of reasonableness standard,” her ruling said.
The presumption of reasonableness standard is a legal principle established in a 1995 case. This principle has been used by many defendants in stock-drop lawsuits to defeat plaintiffs' claims at the motion-to-dismiss stage.
A fiduciary's decision in an employee stock ownership plan case — the GM stock fund was an ESOP — is presumed to be reasonable, Ms. Hood wrote. Plaintiffs may rebut this presumption if they can show that “a prudent fiduciary acting under similar circumstances would have made a different investment decision,” her ruling stated.
“We are pleased by the court's ruling, which recognizes that State Street acted prudently when it made the difficult decision to sell the company stock out of the GM plans,” wrote Alicia Curran Sweeney, a State Street spokeswoman, in an e-mail.
This is the second time that Ms. Hood has dismissed the Pfeil case, which was initially submitted June 9, 2009. The 6th U.S. Circuit Court of Appeals in Cincinnati reversed her September 2010 decision to dismiss the case on Feb. 22, 2012, and remanded the case to the district court.
In the first dismissal, Ms. Hood had rejected the plaintiffs' argument because it “concluded that the plaintiffs had not plausibly alleged that State Street's breach proximately caused losses to the plans,” the appeals court said. The appeals court reversed the district court's decision, saying the lower court should have allowed the complaint to go to trial.
Geoffrey Johnson, an attorney for the plaintiffs, did not return a call seeking comment.
The U.S. Supreme Court heard oral arguments April 2 on the use of the presumption of prudence in another case, Fifth Third Bancorp et al. vs. John Dudenhoeffer et al.