Hill v. State St. Corp.
| Decision Date | 03 August 2011 |
| Docket Number | Master Docket No. 09cv12146-NG |
| Parties | TIMOTHY W. HILL, et al., Plaintiffs, v. STATE STREET CORPORATION, et al., Defendants. |
| Court | U.S. District Court — District of Massachusetts |
GERTNER, D.J.:
TABLE OF CONTENTS
MOTIONS TO DISMISS SECURITIES ACTION AND ERISA ACTION
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
TIMOTHY W. HILL, et al., Plaintiffs,
v.
STATE STREET CORPORATION, et al., Defendants.
Master Docket No. 09cv12146-NG
MOTIONS TO DISMISS SECURITIES ACTION AND ERISA ACTION
August 3, 2011
This case involves two separate but related class actions which have been consolidated: First, a federal securities action, alleging violations of both the Securities Exchange Act of 1934 ("Exchange Act") and the Securities Act of 1933 ("Securities Act") (collectively the "Securities Action"); and second, an Employee Retirement Income Security Act ("ERISA") action (the "ERISA Action"). Although the plaintiffs in these two cases are different, they have claims stemming from the same conduct by the main defendant in each case, State Street Corporation ("State Street").
Between October 17, 2006, and October 19, 2009 ("the Securities Action class period"), State Street allegedly deceived its investors in two separate ways. First, State Street impermissibly charged its clients a different exchange rate than the one the bank actually used to execute Foreign Exchange ("FX") trades requested by its clients. Second, State Street misled the market regarding State Street's exposure when it assured investors in the fall of 2008 that debt securities contained in its investment portfolio and in four specific off-balance-sheet commercial paper conduits collateralized in part by risky mortgage-backed securities were of high quality.
Lead Plaintiffs in the Securities Action -- two institutional investors, Public Employees' Retirement System of Mississippi ("MPERS") and Union Asset Management Holding AG ("Union") bring federal securities claims on behalf of themselves and all other similarly-situated State Street stock holders (collectively the "Securities Plaintiffs"), asserting violations of both the Exchange Act and the Securities Act. With respect to the Exchange Act, Securities Plaintiffs claim that State Street and two of its executive officers (collectively the "Exchange Act Defendants") made false and misleading statements about both State Street's FX practice and its conduits/portfolio in violation of §§ 10(b) and 20(a) of the Exchange Act. In addition, Securities Plaintiffs raise claims under §§ 11, 12, and 15 of the Securities Act, alleging that State Street, along with various high-ranking company officers, members of its board of directors, auditors, and underwriters (collectively the "Securities Act Defendants"), conducted an offering of State Street stock in June 2008 pursuant to a shelf registration statement and prospectus that contained allegedly untrue and misleading statements about State Street's FX trading practices and the assets in its portfolio and conduits. As a result of the improper statements, those Securities Plaintiffs who purchased State Street stock pursuant and/or traceable to the June 2008 offering supposedly suffered substantial damages.
The ERISA Action also concerns State Street's FX practice. Lead Plaintiff Casey J. Richard ("Richard"), a participant in the State Street Corporation Salary Savings Plan (the "Plan"), brings a class action on behalf of himself and all other similarly-situated participants in the Plan (collectively, the "ERISA Plaintiffs") against the fiduciaries of the Plan (collectively the "ERISA Defendants"). State Street common stock was one of the investment options offered to participants under the Plan. Richard charges that ERISA Defendants breached their fiduciaryduties by, among other things, imprudently offering State Street stock as an investment option to Plan participants. Richard claims that offering State Street stock as an investment option was imprudent because the stock was artificially inflated and overvalued by reason of State Street's material misrepresentations and omissions concerning its FX trading practices and revenue. While Richard does not allege the date on which State Street stock began to be an imprudent investment, he does allege that the period at issue ended on October 20, 2009, when the California Attorney General ("AG") announced that he had intervened in a qui tam lawsuit over the rates at which State Street executed a certain type of FX for two California pension plans.
The Securities Act Defendants, the Exchange Act Defendants, and the ERISA Defendants all move to dismiss. For the following reasons, their motions (documents #58, 67, 68, 71) are DENIED.
Taking all well-plead allegations as true, the relevant facts are as follows:
A. FX Practice
One of the financial services that State Street offers its clients is foreign exchange ("FX") trading, which enables clients to exchange U.S. Dollars into foreign currency and vice-versa. State Street's clients typically use these services to trade foreign securities or to convert foreign currency held in their custodial accounts into U.S. Dollars. Securities Compl. ¶ 39 (document #51). All foreign exchange transactions are executed at a prevailing exchange rate, which determines how much one currency is worth in terms of another. The most commonly used exchange rate is the Interbank rate, which fluctuates throughout each day and is tracked and published by various industry sources. Id. ¶ 40.
State Street's revenue from FX trading services grew dramatically from 2005 through 2008, and comprised a significant percentage of the Company's overall revenue:
+-----------------------------------------------------------+
¦Year-End¦Foreign Exchange¦Percent Increase¦Percent of Total¦
+--------+----------------+----------------+----------------¦
¦ ¦Revenue ¦from Prior Year ¦Revenue ¦
+--------+----------------+----------------+----------------¦
¦2005 ¦$468 million ¦10% ¦8.5% ¦
+--------+----------------+----------------+----------------¦
¦2006 ¦$611 million ¦31% ¦9.7% ¦
+--------+----------------+----------------+----------------¦
¦2007 ¦$802 million ¦31% ¦9.7% ¦
+--------+----------------+----------------+----------------¦
¦2008 ¦$1.08 billion ¦25% ¦10.1% ¦
+-----------------------------------------------------------+
State Street regularly provided a break-out of its foreign exchange revenue in the Company's SEC filings and press releases, often touting the substantial revenue increases. Id. ¶ 45. For instance, in the Company's Form 10-K for the year ended 2006,1 State Street told investors that "foreign exchange trading revenue increased 31%, to $611 million from $468 million in 2005, and benefitted from a strong first half of the year." Id. ¶ 45. Similarly, on a conference call held on October 16, 2007, State Street's CEO, Defendant Ronald E. Logue ("Logue") stated:
[W]hile market conditions in the third quarter presented challenges . . . it also created more opportunities in foreign exchange and in securities finance than we usually expect in the third quarter . . . . Revenue from foreign exchange increased 98% from the year ago quarter, and 29% from the second quarter.
Id. In its annual and quarterly filings, the...
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