Sixth Circuit Lets GM Fiduciary Slide

CHICAGO (CN) - The Sixth Circuit ruled that a General Motors pension plan fiduciary did not act imprudently when it continued to buy and hold GM stock in 2008 when the company was clearly in financial distress.

General Motors, like many others, faced severe financial difficulties during the 2008 economic meltdown, and ultimately filed for bankruptcy and was bailed out by the federal government, at a cost to taxpayers of $11 billion, though the company has made money since the bailout.

The financial problems were evident early in the year, but the fiduciary of GM's employee pension plan, State Street Bank, did not stop buying GM stock until November 2008, and continued to hold GM stock until March 2009.

GM employee Raymond Pfeil sued State Street soon thereafter, claiming its investment decisions were imprudent.

A federal judge in Detroit found for the bank, and the Sixth Circuit affirmed on Tuesday.

"Summary judgment to State Street was appropriate if Pfeil failed to demonstrate a genuine issue of material fact concerning the methods of State Street's investigation of the merits of investing in GM, or the appropriateness of those methods," Sixth Circuit Judge Danny Boggs wrote for the 2-1 majority.

The independent fiduciary committee met in person or by conference call 41 times between November 2008 and March 2009 to discuss GM investments. This level of attention shows that the bank clearly was concerned about the investment. It decided to hold GM stock until a GM bankruptcy was "imminent," as required by its contract with the company.

In Fifth Third Bancorp v. Dudenhoeffer, the unanimous Supreme Court ruled last year that courts may not presume plan fiduciaries acted prudently, vacating a Sixth Circuit opinion in the case.

Fifth Third employees lost about 75 percent of their retirement savings in the 2008 market crash, because their assets were primarily invested in an employee stock ownership plan.

Pfeil identified four dates on which he claims State Street knew or should have known that General Motors was a risky investment.

But even under the stricter review required by Dudenhoeffer, "State Street's decisions were not imprudent or unreasonable simply because it could have made a different decision in response to GM's financial difficulties," Boggs wrote.

"Pfeil does not offer a legal reason why the four events he has chosen suffice to trigger a particular reevaluation process," Boggs wrote. "To the extent that Pfeil instead relies on the observation that, after the four events it picked, GM's stock decreased in value, Pfeil invites us to engage in precisely the sort of post-hoc inquiry that the doctrine rightly forbids."

Judge Helene White dissented, citing Dudenhoeffer: "The duty of prudence trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary."

She added: "State Street's reliance on the plan documents, rather than the fiduciary duty of prudence under the circumstances, was misplaced, regardless whether its interpretation of the documents was correct."

Judge Richard Suhrenreich joined Boggs in the majority.

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