Recognizing that it cannot rely on a presumption of prudence following the Supreme Court’s decision in Fifth Third Bank 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 Dudenhoeffer 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 plaintiffs Raymond M. Pfeil and Michael Kammer failed to show a special circumstance such that State Street should not have relied on market pricing. The plaintiffs argued that there were four dates at which it would have been prudent for State Street to divest the plan from GM company stock.

However, the court found that the plaintiffs did not offer legal reason why the four events suffice to trigger a particular reevaluation process, but instead rely on the observation that, after the four events, GM’s stock decreased in value. “We must evaluate the prudence or imprudence of State Street’s conduct as of ‘the time it occurred,’ not ‘post facto’,” the appellate court’s opinion says, noting that the plaintiffs’ reasoning invites a ‘post-hoc inquiry’ that MPT forbids.

NEXT: State Street’s prudent process

The appellate court agreed with a lower court that State Street had engaged in a prudent process for evaluating GM stock.

The opinion notes that State Street discussed GM stock scores of times during the class period. State Street’s managers repeatedly discussed at length whether to continue the investments in GM that are at issue in the case. State Street’s Independent Fiduciary Committee held more than forty meetings during the Class Period of less than nine months to discuss whether to retain GM stock. 

At those meetings, State Street employees discussed the performance of General Motors, both its stock and its business, and factors that may have affected that performance. Meetings often culminated in decisive votes, ultimately to divest the fund of GM stocks.

In addition, State Street was advised by outside legal and financial advisers which testified that State Street’s process for monitoring GM stock was prudent. And fiduciaries of other pension plans and non-pension-plan investment funds decided, like State Street, to hold GM Common Stock on each of the four “imprudent dates” chosen by the plaintiffs.

The 6^th Circuit held that State Street’s actual processes demonstrated prudence, and the decision of other expert professionals both to invest and not to divest on or near the dates that State Street made its decisions demonstrates the reasonable nature of those decisions. 

NEXT: Case history

State Street was hired as the independent fiduciary for the ESOP component of the GM 401(k) plans in June 2006. The suit charged that State Street waited too long to sell off the GM stock in the company’s 401(k) plans; it divested in April 2009, but the plaintiffs claim that after July 2008, offering company stock was no longer prudent. The giant automaker filed for Chapter 11 bankruptcy June 1, 2009.

In 2010, a federal judge in Michigan threw out the case, saying that because participants could choose other investments in the plan, State Street could not be held liable. But, the 6th Circuit disagreed, sending the case back to the district court, saying it erred in relying on the Employee Retirement Income Security Act (ERISA) Section 404(c) safe harbor defense at this stage of the proceedings. 

In 2014, the district court again dismissed the case, finding that State Street engaged in a prudent decision-making process.

The 6th Circuit affirmed this decision. Its opinion in Pfeil v. State Street Bank and Trust is here.