An appellate court’s dismissal of a lawsuit against State Street Bank and Trust Company over its handling of the employee stock ownership portion of General Motors (GM) 401(k) plan still stands.
The U.S. Supreme Court denied a petition for writ of certiorari filed by Raymond M. Pfeil and Michael Kammer, participants in the GM plan.
Recognizing that it couldn’t rely on a presumption of prudence following the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, the 6th U.S. Circuit Court of Appeals said it evaluated State Street’s actions according to a prudent-process standard. The court interpreted the Fifth Third decision to mean, and it held, that a plaintiff claiming that an employee stock ownership plan’s (ESOP’s) investment in a publicly traded security was imprudent must show special circumstances to survive a motion to dismiss.
Using the rule of Modern Portfolio Theory (MPT), the court found that Pfeil and Kammer failed to show a special circumstance such that State Street should not have relied on market pricing.
The petition by Pfiel and Kammer questioned whether the Supreme Court’s decision in Fifth Third affords fiduciaries for employee stock ownership plans (ESOPs) per se immunity from fiduciary liability whenever the underlying company stock investment in the ESOP trades in an “efficient market,” no matter how speculative the stock has become or how close the company is to filing bankruptcy.
It also raised the question of whether the Employee Retirement Income Security Act’s (ERISA’s) duty of prudence requires a plan fiduciary simply to monitor plan investments, or whether it also has a substantive component that requires fiduciaries to remove investments from the plan that are objectively imprudent—i.e., investments that are too risky to hold in a plan based on objective characteristics.
In a brief filed with the court, State Street’s counsel, McDermott Will & Emery LLP, said the petition should be denied because the case does not present either a conflict with Fifth Third or a conflict among the circuits about application of Fifth Third. The 6th Circuit correctly applied the high court’s decision in Fifth Third and there is no circuit split regarding the application of the decision, the brief says.In addition, State Street’s counsel argued that the 6th Circuit correctly determined that petitioners did not establish the existence of a genuine issue of material fact concerning the reasonableness of respondent’s fiduciary decisions.
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