Most Fiduciary Breach Claims Dismissed in Waste Management Stock Case

March 16, 2009 ( - A federal judge has thrown out most of the fiduciary breach claims in a suit involving allegations State Street Bank & Trust Co. improperly approved a July 1999 securities settlement involving Waste Management stock held in the company's defined contribution plan.

U.S. District Judge   Gladys Kessler of the U.S. District Court for the District of Columbia ruled that the Employee Retirement Income Security Act (ERISA) claims dating from January 1, 1990, through February 24, 1998, were filed too late – more than the permitted three years after first finding out about the potential breach.At the same time, however, Kessler approved similar claims involving fiduciary breaches that occurred between July 15, 1999, and December 1, 1999, with Waste Management, State Street, and the plan’s fiduciaries listed as defendants.

The 1999 claims involved allegations State Street had improperly approved, on behalf of the plan, a July 1999 settlement of an Illinois securities case.   Plaintiffs alleged the settlement involved acquiring approximately $128 million worth of Waste Management stock at artificially inflated prices.

According to Kessler, plaintiffs had properly put forward a legal claim for the July to December 1999 time period against State Street for not protecting potential ERISA claims by releasing them “without investigating the value or viability of those claims, without determining whether the settlement was fair to the Plan and without obtaining consideration for release of the Plan’s unique ERISA claims.”

Kessler said that once State Street learned in the Illinois case that the plan’s fiduciaries had caused the plan to acquire Waste Management stock at inflated prices, State Street had a duty to investigate whether there was any merit to the plan’s potential claims against the fiduciaries.

Wrote Kessler in the opinion: “Depending on the result of that investigation, State Street then had the duty to pursue one of three courses of action: do nothing, object to the proposed settlement unless the Plan was given adequate consideration for release of those potential ERISA claims, or opt out of the Illinois Securities Litigation and file a separate ERISA action.”

The court rejected State Street's argument that the "potential" ERISA claims that were at issue when the settlement was approved were not strong enough to stand on their own because the plan's acquisition of Waste Management stock represented plan design issues rather than matters of fiduciary discretion.

"State Street, as Trustee, had a duty under Section 404(a) of ERISA to ignore the terms of the Plan document if it knew that investment in unit shares of the Stock Fund were no longer a prudent investment," Kessler asserted.

The court also said the employees could go forward with their claim that State Street and Waste Management engaged in prohibited transactions under ERISA Section 406 by approving the plan's participation in the Illinois securities settlement.

Kessler ruled the plaintiffs could also go forward with their claim that State Street breached its fiduciary duties during the period February 7, 2002, through July 15, 2002, when it failed to conduct an adequate review of potential fiduciary breach claims that might have been asserted against the plan's fiduciaries in related Texas securities litigation.

The case is Harris v. Koenig,   D.D.C., No. 02-618 (GK).