Court Dismisses Claims against State Street over Mortgage-Backed Investments

U.S. District Judge Richard J. Holwell of the U.S. District Court for the Southern District of New York ruled that State Street could be considered a fiduciary under the Employee Retirement Income Security Act because it provided investment advice to F.W. Webb Company for a fee, but State Street did not breach its fiduciary duties because at the time the Yield Plus Fund changed investment strategies its duties to the company’s retirement plan had passed to CitiStreet.  

Holwell noted that a service agreement between F.W. Webb Company and State Street required the plan to select the components of the investment menu from “among those [investment options] made available by State Street,” creating two menus: a “big menu” of potential investment options that State Street provided to the plan sponsor; and a “small menu” of funds that the plan sponsor drew from the big menu and made available to participants. Webb contended that defendants exercised “discretionary authority or control” over plan assets by setting the big menu.   

Holwell found that State Street’s role in establishing the “big menu” bears too tenuous a connection to the eventual disposition of plan assets to constitute “authority or control” within the meaning of the statute. Two layers of decisionmaking separated defendants from the final decisions about how plan assets would be invested: the plan committee’s selection of the “small menu;” and the individual plan participants’ selection of an investment option or options from the small menu. Thus, State Street is not a fiduciary for establishing the “big menu.” 

Holwell also noted that to plead that a defendant is a fiduciary because it provided “investment advice for a fee,” a plaintiff must plead that (1) the defendant provided individualized investment advice; (2) on a regular basis; (3) pursuant to a mutual agreement, arrangement, or understanding that (4) the advice would serve as a primary basis for the plan’s investment decisions; and (5) the advice was rendered for a fee. The service agreement did not require State Street to provide Webb with fund analyses, but the complaint adequately alleges that they did so anyway. Holwell said at this early stage in the litigation, when all plausible inferences must be drawn in plaintiffs’ favor, the allegations that defendants regularly advised plaintiffs about the funds and provided them with analysis of the portfolio are sufficient to plead that defendants rendered investment advice within the meaning of the statute and regulation, particularly since plaintiffs did not receive investment advice from any other source.   

Holwell pointed out that the statute requires only that the investment adviser receive “a fee or other compensation, direct or indirect” in exchange for investment advice; it does not require that the investment advice be compensated directly.   

Though State Street qualified as a fiduciary under the advice for a fee argument, Holwell noted that State Street’s representation of the Yield Plus Fund was true while it was providing this service to the plan sponsor. Only after the fund switched to its high-risk strategy in 2000 or 2001 did it become false, but by that time CitiStreet had replaced State Street as Webb’s administrative service provider and de facto investment adviser. Neither State Street entity is alleged to have provided plaintiffs with any investment advice, or even any administrative services, after April 2000, so the complaint does not plausibly allege that State Street breached any fiduciary duties under ERISA.  

The Complaint  

F.W. Webb Company filed the suit against State Street Bank and Trust Company, State Street Global Advisors (SSgA), and CitiStreet over what Webb charged were the SSgA Yield Plus Fund's ultimate losses because of its holdings in sub-par mortgage-backed securities (see Bay State Sponsor Sues State Street over Mortgage-Backed Investments).  

Even though the investment option was repeatedly represented to Webb as being like a money market portfolio, only with better returns, starting in 1996, Webb alleged State Street changed the investment strategy for the Yield Plus account to emphasize riskier lower-quality securities.  

According to the suit, the Yield Plus Fund, contrary to its purportedly conservative investment strategy, fell dramatically because of its overexposure to risky, low-quality assets and securities in mid-2007. The Board of Directors for the SSga Yield Plus Fund decided to liquidate the fund as of May 31, 2008.