A federal appeals court affirmed the dismissal of a lawsuit by participants in two General Motors 401(k) plans who had alleged that State Street Bank failed to prudently manage a GM stock fund offered as an investment option.
“We hold that State Street's actual processes demonstrated prudence,” said a 2-1 decision on Nov. 10 in the 6th U.S. Circuit Court of Appeals in Cincinnati in the case of Pfeil et al. vs. State Street Bank and Trust Co. The decision upholds the 2014 dismissal of the case by U.S. District Court Judge Denise Page Hood in Detroit.
“To fulfill its responsibilities, State Street discussed GM stock scores of times” during the period cited by the participants, said the majority opinion. “Given the prudent process in which State Street engaged, Pfeil failed to demonstrate a genuine issue as to whether State Street satisfied its duty of prudence.”
General Motors wasn't named in the class-action suit, which covered the period July 15, 2008, through March 31, 2009. State Street was the independent fiduciary in charge of managing the stock fund, a common practice among defined contribution plans. The stock fund was an employee stock ownership plan within the 401(k) plans.
This is the second attempt by the plaintiffs to hold State Street liable for what they claimed was the imprudent management of the GM stock fund, arguing that State Street didn't move quickly enough to stop participants' investing in the GM stock fund as General Motors' stock declined in 2008.
State Street suspended participants' purchases of the stock fund in November 2008, according to court documents. On March 31, 2009, State Street said it would sell the plans' holdings in company stock, and it completed the sale April 24, 2009. The participants sued in April 2009, and General Motors filed for bankruptcy protection June 1, 2009.
In September 2010, Ms. Hood first dismissed the plaintiffs' claim of imprudent management, citing the “presumption of prudence” principle that gave fiduciaries a legal benefit of the doubt in managing company stock funds.
But the 6th U.S. Circuit Court of Appeals reversed the decision in February 2012 and remanded the case. In April 2014, Ms. Hood again dismissed the claim, and the participants appealed again.
However, in June 2014, the U.S. Supreme Court unanimously rejected the presumption of prudence principle. The decision in Fifth Third Bancorp et al. vs. Dudenhoeffer et al. was a response to a ruling by the 6th Circuit Court of Appeals in another stock-drop case. The Supreme Court issued new guidelines for courts to review stock-drop cases.
With the presumption of prudence principle eliminated, the 6th Circuit applied the Supreme Court's guidance to the GM stock fund case. This time, the appeals court supported the District Court's dismissal of the case. “Even viewed in the light most favorable to Pfeil, State Street's action were not actionably imprudent,” the appeals court majority wrote.
