Kenney v. STATE STREET CORPORATION

694 F. Supp.2d 67

Thomas U. KENNEY, on Behalf of Himself and a Class of Persons Similarly Situated, Plaintiff, v. STATE STREET CORPORATION; North America Regional Benefits Committee of State Street Corporation; Alison Quirk; Pamela Gormley; Ross McLellan; David O'leary; Skip Curtrell; Jayne Donahue; David Gutschenritter; James Malerba State Street Corporation Investment Committee; and John Does 1-10, Defendants.

Civil Action No. 09-CV-10750-PBS.

United States District Court, D. Massachusetts.

March 15, 2010.

Lauren G. Brunswick, John J. Butts, William H. Paine, Timothy J. Perla, Jeffrey B. Rudman, Wilmer Hale LLP, Boston, MA, for Defendants.

Michael J. Klein, Mark Levine, Edwin J. Mills, Stull Stull & Brody, New York, NY, Kevin T. Peters, Todd & Weld LLP, Boston, MA, for Plaintiff.

MEMORANDUM AND ORDER

SARIS, District Judge.

I. INTRODUCTION

Plaintiff Thomas U. Kenney ("Kenney"), a former State Street employee, brings this action for breach of fiduciary duty under Section 502(a) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001-1461, on behalf of himself and a class of similarly situated participants in the State Street Salary Savings Plan ("the Plan") who chose to invest their retirement savings in State Street's Employee Stock Ownership Plan ("ESOP").

Plaintiff alleges that State Street Corporation, the Benefits and Investment Committees of its Board of Directors, and the individual members thereof (collectively, "Defendants" or "State Street") negligently misrepresented and failed to disclose critical aspects of State Street's financial condition during a class period running from January 3, 2008, to January 20, 2009. During that time, defendants allegedly exposed the company to over $9 billion in potential losses through high-risk assets held in its investment portfolio and four asset-backed commercial paper conduits, which led to a massive decline in State Street's stock value. Plaintiff claims that defendants mismanaged Plan assets and breached their ERISA duties of prudence and loyalty by continuing to invest Plan funds in State Street stock. Additionally, Plaintiff alleges that the individual defendants breached their duty of loyalty by failing to act solely in the Plan participants' interests and that State Street failed to appoint, monitor, and inform the committees and their members so as to ensure adequate management of the Plan.

Defendants have moved to dismiss on the grounds that they made full and truthful disclosures regarding the status of the company and the riskiness of its assets and that plaintiff has failed to rebut the "presumption of prudence" afforded ESOPs under ERISA caselaw. After hearing, the Court ALLOWS in part and DENIES in part defendants' Motion to Dismiss.

II. BACKGROUND

The following facts are drawn principally from plaintiff's Amended Complaint, with all reasonable inferences drawn in his favor. The Court also takes judicial notice of documents on which the Amended Complaint depends, including the Summary Plan Descriptions and SEC filings incorporated therein. (Am. Compl. ¶ 61.) Beddall v. State Street Bank & Trust Co., 137 F.3d 12, 17 (1st Cir.1998) (documents on which a complaint depends and to which it refers "merge into the pleadings and the trial court can review them in deciding a Rule 12(b)(6) motion"); Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir.1994) (noting that court may take notice on motion to dismiss of facts present in publicly available government documents). Neither party objects to consideration of State Street's SEC filings.

A. ESOP's Fable

The Plan's purpose is to enable and encourage State Street employees to save for retirement.¹ Participants may invest their contributions across an array of twenty fund options, including the ESOP, which allows employees to allocate up to twenty-five percent of their accounts to State Street's common stock. As of December 31, 2007, approximately 28.2% of total Plan assets were invested in State Street common stock; this percentage dropped to 17% on December 31, 2008, representing an aggregate loss of approximately $200 million in the value of participants' shares.

Described by the Boston Globe as the "world's biggest money manager for institutions," State Street does not make loans, offer credit cards, or engage in other traditional consumer banking activities, but rather acts as a securities custodian. (Am. Compl. ¶ 49.) During the class period, State Street promoted its "reputation for stability and safety," causing the market to perceive it as less vulnerable to market losses than broad-based commercial and investment banks. (Id. ¶ 52.) Despite this reputation, State Street in fact held "high risk investment securities and conduits," which represented a "ticking time bomb" for the company's balance sheet. (Id. ¶¶ 42, 43.) In plaintiff's view, State Street common stock was no longer a prudent investment for the Plan participants during the class period, and the fiduciaries failed to make full and timely disclosure of State Street's true financial and operating condition to them.

B. State Street's Statements

State Street made various statements in press releases and accompanying Form 8-Ks over the course of the class period that allegedly failed to disclose its high risk investments. On January 3, 2008, the start of the class period, State Street issued a press release announcing the establishment of a reserve to address "customer concerns" relating to its investment management arm. (Id. ¶ 44.) Plaintiff claims that Chief Executive Officer Ronald E. Logue said that State Street's business "continues to be very strong," that customer complaints were without merit, and that "we will continue to defend ourselves vigorously against inappropriate claims." (Id.)

On April 15, 2008, State Street issued a Form 8-K with a press release related to the first quarter of 2008, which ended March 31. Logue stated, "I am extremely pleased with this record revenue performance, particularly in today's challenging environment." (Id. ¶ 46.) Similarly, on July 15, 2008, in another Form 8-K, Logue highlighted State Street's "strong performance in the second quarter." (Id. ¶ 48.) Two days later, the Boston Globe reported that State Street was "forecasting no write-downs tied to the collapse of the subprime mortgage market." (Id. ¶ 49.)

On October 1, 2008, the Globe reported, "Investors were concerned that the mounting credit crisis would cause increased losses in their bond holdings and off-balance funds called conduits—a problem that State Street has stressed it is not facing." (Id. ¶ 51.) On October 15, 2008, State Street issued a Form 8-K and press release addressing the third quarter, which ended September 30. Among other things, Logue stated:

Due to the unprecedented market illiquidity in the third quarter, the unrealized after-tax mark-to-market² losses at quarter end on State Street's investment portfolio have increased to $3.3 billion and in the asset-backed commercial paper conduits to $2.1 billion. However, as we have said in the past, the asset quality of both our investment portfolio and the conduit program remains high.

(Id. ¶ 52.) Describing the "strong performance" in the first nine months of 2008, he confirmed earlier predictions for expected growth in operating earnings per share approaching the high end of the ten to fifteen percent range. (Id.)

C. "Ticking Time Bomb"

On January 16, 2009, at the end of the class period, State Street filed a Form 8-K updating its risk factor disclosures and warning of approximately $9 billion in potential unrealized losses in its investment portfolio and conduits, almost double the figure cited by Logue in October 2008. (Id. ¶ 53.) The statement indicated that, as "2008 progressed, rating agencies imposed an increasing number of downgrades and credit watches on the securities in our investment portfolio, which contributed to the decline in market values." (Id.) The announcement included a lengthy discussion of risks with respect to the conduits:

Our asset-backed commercial paper conduit program experienced significantly reduced demand for its commercial paper financing beginning in the third quarter of 2007. As the disruption in the credit markets continued through 2008, our liquidity management of the conduits resulted in our purchasing historically high levels of commercial paper from the conducts. During 2008, the amount of commercial paper issued by the conduits on our consolidated balance sheet increased from approximately $2 million as of December 31, 2007 to approximately $292 million as of March 31, 2008, approximately $212 million as of June 30, 2008, and approximately $7.82 billion as of September 30, 2008. . . .

(Id.) At its peak during the fourth quarter of 2008, State Street's overnight holdings of the conduits' commercial paper totaled $8.9 billion. State Street also disclosed:

Purchase of the assets of the conduits pursuant to the contractual agreements described above could affect the size of our consolidated balance sheet and related funding requirements, our capital ratios, and if the conduit assets include unrealized losses, could require us to recognize those losses. As of December 31, 2008, there were $3.6 billion of after tax net unrealized losses associated with portfolio holdings of the conduits. Because of our contractual agreements to purchase assets from the conduits under specified conditions, we are exposed to the credit risks in the conduits' portfolios.³

(Id.)

Following these announcements, shares of State Street shed more than half their value, falling from $36.35 on January 16, 2009, to $14.89 on January 20, 2009. One analyst stated that State Street was a "paradox" because its daily operations were "respectable," "but the balance sheet, the unrealized losses in the investment portfolio are very, very substantial." (Id. ¶ 54.) In addition, all three major ratings agencies downgraded the company's main...