On September 30, 2010, the United States District Court for the Eastern District of Michigan dismissed a putative class action law suit brought by General Motors Corp. employees against State Street Bank and Trust Co. ("State Street"). See Pfeil v. State Street Bank and Trust Co., E.D. Mich., No. 09 CV 12229. The lawsuit alleged that State Street breached its fiduciary duties owed to the employees by waiting too long to divest GM's tax code Section 401(k) plans of their holdings in GM stock. The District Court found that, although the GM employees were likely to overcome the “presumption of prudence” that attaches to pension plans that invest in employer stock, State Street did not cause losses to the employees' pension accounts because the employees retained control over their investment selections in their 401(k) accounts. According to the Court, “[a]s alleged in their complaint, Plaintiffs had knowledge at the time State Street became the fiduciary, that GM was in financial trouble yet they continued to invest in the [employee stock ownership plan]. State Street cannot be held liable for actions which Plaintiffs controlled."
Two GM employees filed the lawsuit against State Street in June 2009, alleging that as a fiduciary of the ESOP component of GM's Section 401(k) plans, State Street had a duty to rid the plans of GM stock by no later than July 15, 2008, because at that point the stock was no longer a prudent investment for plan participants. State Street was, at the time, the independent fiduciary for the ESOP. The GM employees alleged that in that same year, analyst reports consistently warned that GM's future was bleak, and that despite these warnings and numerous others that followed in 2007 and 2008, State Street kept the plans invested in GM stock. State Street eventually began to sell off GM stock in March 2009 and completed the sale of all GM stock on April 24, 2009. GM filed Chapter 11 bankruptcy on June 1, 2009. The lawsuit alleged that in its role as the independent fiduciary of the ESOP, State Street had a fiduciary duty under ERISA to determine whether GM stock remained a prudent investment for the plan. According to the lawsuit, GM stock became an imprudent investment for the plans long before the date in which State Street began to sell off the GM stock.
State Street argued in a motion to dismiss the lawsuit that the GM employees had not alleged facts that would overcome the “presumption of prudence” that attaches to plans that invest in employer stock - commonly referred to as the "Moench" presumption. In addition, State Street asserted that the plaintiffs failed to allege facts showing that State Street proximately caused any loss to plan participants. As to the Moench presumption, the court found that the trustee agreement between GM and State Street limited State Street's discretion over the ESOP. The agreement required State Street to invest exclusively in GM stock unless: (1) there was a serious question concerning GM's short-term viability as a going concern without resorting to bankruptcy proceedings, or (2) there was no possibility in the short-term of recouping any substantial proceeds from the sale of stock in the bankruptcy proceedings. In rejecting State Street's Moench defense, the court found that the employees had sufficiently alleged that GM was in serious financial trouble in June 2006 when State Street became the ESOP plan fiduciary. The court further found that the complaint alleged sufficient facts to allow the reasonable inference that there existed a serious question concerning GM's short-term viability as a going concern without resorting to bankruptcy proceedings or there was no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings sufficient for State Street to exercise its fiduciary discretion. The court further noted that the complaint sufficiently alleged numerous “red flags” that should have placed State Street on notice of a need to cease offering GM stock to Plan participants or to liquidate the ESOP funds prior to March 2009.
Two GM employees filed the lawsuit against State Street in June 2009, alleging that as a fiduciary of the ESOP component of GM's Section 401(k) plans, State Street had a duty to rid the plans of GM stock by no later than July 15, 2008, because at that point the stock was no longer a prudent investment for plan participants. State Street was, at the time, the independent fiduciary for the ESOP. The GM employees alleged that in that same year, analyst reports consistently warned that GM's future was bleak, and that despite these warnings and numerous others that followed in 2007 and 2008, State Street kept the plans invested in GM stock. State Street eventually began to sell off GM stock in March 2009 and completed the sale of all GM stock on April 24, 2009. GM filed Chapter 11 bankruptcy on June 1, 2009. The lawsuit alleged that in its role as the independent fiduciary of the ESOP, State Street had a fiduciary duty under ERISA to determine whether GM stock remained a prudent investment for the plan. According to the lawsuit, GM stock became an imprudent investment for the plans long before the date in which State Street began to sell off the GM stock.
State Street argued in a motion to dismiss the lawsuit that the GM employees had not alleged facts that would overcome the “presumption of prudence” that attaches to plans that invest in employer stock - commonly referred to as the "Moench" presumption. In addition, State Street asserted that the plaintiffs failed to allege facts showing that State Street proximately caused any loss to plan participants. As to the Moench presumption, the court found that the trustee agreement between GM and State Street limited State Street's discretion over the ESOP. The agreement required State Street to invest exclusively in GM stock unless: (1) there was a serious question concerning GM's short-term viability as a going concern without resorting to bankruptcy proceedings, or (2) there was no possibility in the short-term of recouping any substantial proceeds from the sale of stock in the bankruptcy proceedings. In rejecting State Street's Moench defense, the court found that the employees had sufficiently alleged that GM was in serious financial trouble in June 2006 when State Street became the ESOP plan fiduciary. The court further found that the complaint alleged sufficient facts to allow the reasonable inference that there existed a serious question concerning GM's short-term viability as a going concern without resorting to bankruptcy proceedings or there was no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings sufficient for State Street to exercise its fiduciary discretion. The court further noted that the complaint sufficiently alleged numerous “red flags” that should have placed State Street on notice of a need to cease offering GM stock to Plan participants or to liquidate the ESOP funds prior to March 2009.
Although the court found that the employees had alleged sufficient facts to rebut the Moench presumption, the court agreed with State Street that the GM employees had not shown that State Street proximately caused any loss to the employees. According to the court, the plans offered several diverse investment options for participants to choose for themselves and the participants had total control over how to allocate their investments. The court said that the participants had knowledge at the time State Street became the fiduciary that GM was in financial trouble yet they continued to invest in GM stock. The Court found that State Street could not be held liable for the employees' investment choices, and, therefore, determined that State Street had not caused the participants' investment losses.
