In re State St. Bank And Trust Co. Fixed Income Funds Inv. Litig..Prudential Ret. Ins. And Annuity Co.

• Citation: 772 F.Supp.2d 519
• Decision Date: 28 March 2011
• Docket Number: MDL No. 1945.No. 07 Civ. 8488(RJH).
• Parties: In re STATE STREET BANK AND TRUST CO. FIXED INCOME FUNDS INVESTMENT LITIGATION.Prudential Retirement Insurance and Annuity Co., Plaintiff,v.State Street Bank and Trust Company, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

772 F.Supp.2d 519

In re STATE STREET BANK AND TRUST CO. FIXED INCOME FUNDS INVESTMENT LITIGATION.Prudential Retirement Insurance and Annuity Co., Plaintiff,

v.State Street Bank and Trust Company, et al., Defendants.

MDL No. 1945.No. 07 Civ. 8488(RJH).

United States District Court, S.D. New York.

March 28, 2011.

Daniel J. Maher, Lila A. Palmer, Allison M. Boscarine, John D. Donovan, Jr., Ropes & Gray LLP, Thomas James Dougherty, Skadden, Arps, Slate, Meagher & Flom LLP, Felicia H. Ellsworth, Wilmer, Cutler, Pickering, Hale and Dorr, LLP, Boston, MA, Lewis Richard Clayton, Aliza Jordana Balog, Jonathan Hillel Hurwitz, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendants.Edwin G. Schallert, Gordon Eng, Jeremy N. Klatell, Debevoise & Plimpton LLP, New York, NY, for Plaintiff.

MEMORANDUM OPINION AND ORDER

RICHARD J. HOLWELL, District Judge:

Plaintiff Prudential Retirement Insurance and Annuity Co. (“PRIAC”), brought this action pursuant to sections 409(a) and 502(a)(2) and (3) of the Employee Retirement Income Security Act of 1974 (“ERISA”) ¹ against defendants State Street Bank and Trust Company (“State Street”) and State Street Global Advisors, Inc. (“SSgA, Inc.”) on October 1, 2007.² PRIAC commenced this suit as an ERISA fiduciary on behalf of nearly 200 retirement plans (the “Plans”) that invested, through PRIAC, in two collective bank trusts managed by State Street—the Government Credit Bond Fund (“GCBF”) and the Intermediate Bond Fund (“IBF”) (collectively, the “Bond Funds”). In a previous opinion, the Court rejected State Street's challenge to the Plans' standing (and thereby PRIAC's) to bring this suit; denied State Street's motion for partial summary judgment, which argued that certain loans PRIAC made to the Plans would offset any damages awarded in this action; and dismissed PRIAC's claims for restitution, disgorgement, and permanent injunctive relief. See generally In re State Street Bank and Trust Co. ERISA Litig., 579 F.Supp.2d 512 (S.D.N.Y.2008). State Street filed its answer on October 27, 2008, bringing common-law counterclaims for contribution or indemnification and for defamation, and another counterclaim under the Massachusetts Unfair Trade Practices Act, Mass. Gen. Laws. ch. 93A, §§ 2, 11. Now before the Court are (1) State Street's motion for summary judgment based on a failure to mitigate damages and on the doctrine of superseding cause; (2) PRIAC's motion for partial summary judgment on State Street's contribution and indemnity, defamation, and Massachusetts Chapter 93A counterclaims; (3) State Street's cross-motion for partial summary judgment on its contribution counterclaim; and (4) State Street's motion to strike portions of the expert rebuttal report of Dennis E. Logue. The issue at the core of PRIAC's single cause of action—whether State Street breached a fiduciary duty under ERISA—is not addressed by the summary judgment motions. For the reasons that follow, State Street's motion and cross-motion for summary judgment are DENIED; PRIAC's motion for partial summary judgment is GRANTED as to the Massachusetts Chapter 93A counterclaim and DENIED as to the contribution and defamation counterclaims; and State Street's motion to strike sections of the expert report of Dennis E. Logue is DENIED.

BACKGROUND

I. The Parties

Plaintiff was established in 2004 when Prudential Financial, Inc. (“Prudential”) acquired CIGNA Retirement & Investment Services (“CRIS”) and renamed it PRIAC. (Pl.'s Rule 56.1 Stmt. ¶ 1; Def.'s Rule 56.1 Stmt. in Support of Motion for Summary Judgment (“Def.'s SJ Rule 56.1 Stmt”) ¶ 6.) PRIAC provides investment options to defined benefit and defined contribution retirement plans; it provides these options to over 7,000 organizations and three million participants and beneficiaries. (Pl.'s Rule 56.1 Stmt. ¶¶ 1–3.) Plaintiff commenced this suit on behalf of the Plans, who invested in the Bond Funds through ERISA separate accounts (the “Separate Accounts”) that PRIAC maintained. (Pl.'s Rule 56.1 Stmt. ¶ 4.) PRIAC's role with respect to the transactions at issue in this litigation was to serve as an intermediary between State Street and the Plans. (Def.'s SJ Rule 56.1 Stmt. ¶ 9.)

Defendant State Street, as trustee, established the IBF and the GCBF as unregistered collective trust funds. (Def.'s SJ Rule 56.1 Stmt. ¶ 5.) State Street's investment arm, State Street Global Advisors (“SSgA”),³ a large institutional asset manager, managed the Bond Funds at issue in this case. (Pl.'s Rule 56.1 Stmt. ¶¶ 7–9; Def.'s SJ Rule 56.1 Stmt.¶ 3.) The Fixed Income Group within SSgA played a central role in the investment management of the Bond Funds. ( See PA 602 Wands.) ⁴ State Street is a recognized name among institutional asset managers and is regulated by state authorities, the Securities and Exchange Commission (“SEC”), and the Department of Labor. (Pl.'s Rule 56.1 Stmt. ¶¶ 12, 14, 15.)

II. The Bond Funds in PRIAC's “Manager of Managers” Program

The relationship between the parties reaches back to 1996, when CRIS offered the Bond Funds to its retirement plan clients. (Def.'s SJ Rule 56.1 Stmt. ¶ 5.) After Prudential acquired CRIS, PRIAC continued to offer the Bond Funds as part of its “Manager of Managers” (“MOM”) program.⁵ (Def.'s SJ Rule 56.1 Stmt. ¶ 6.) The MOM program was “specifically designed to help [defined contribution and defined benefit] plan sponsors manage their responsibilities in selecting and monitoring investments.” (Palmer Decl. Ex. 5 at 1.) MOM had two major components: the Multi–Manager Matrix and the Prudential Due Diligence Advisor Program (the “DDA Program”). ( Id. at 5.)

A. Institutional Sub–Advised and Alliance Funds in the Multi–Manager Matrix

The first component of the MOM program, the “Multi–Manager Matrix,” classified funds so that plan sponsors could choose from “a comprehensive array of asset classes and fund offerings covering the full spectrum of risk and return objectives,” which included hundreds of funds in various asset classes. (Palmer Decl. Ex. 5 at 6; Pl.'s Rule 56.1 Stmt. ¶ 32.) Each asset class contained two “primary types” of fund offerings: Institutional Sub–Advised and Alliance. (Palmer Decl. Ex. 5 at 6.) PRIAC took a more passive role with the latter category than it did with the former. With Institutional Sub–Advised Funds, PRIAC agreed on an investment strategy with the fund's investment manager and monitored the funds for the degree to which the manager adhered to the stated process and objective. (Pl.'s Rule 56.1 Stmt. ¶ 55.) PRIAC also had the authority to replace the investment manager of an Institutional Sub–Advised Fund. ( Id. ¶ 56.)

With Alliance Funds, however, PRIAC advised clients that it could not “control the investment process in any way and cannot ensure style consistency.” (Palmer Decl. Ex. 5 at 6.) PRIAC acknowledged that it was an ERISA fiduciary “for the selection, monitoring, and, if necessary, the deselection of the investment manager” for the Institutional Sub–Advised Funds, but only one for “selection and monitoring” for the Alliance Funds. ( Id.) Although generally deselection was at the plan sponsor's discretion, “in extenuating circumstances,” PRIAC could terminate an Alliance Fund “as a measure of last resort.” ( See id. at 6, 20.) PRIAC negotiated the investment strategy of an Institutional Sub–Advised Fund, but “the outside manager ... controlled the investment process” of an Alliance Fund; that is, PRIAC had no input as to an outside manager's investment management, risk assessments, and investment decisions for an Alliance Fund. (Palms ¶ 11, PA 3; ⁶ see also Pl.'s Rule 56.1 Stmt. ¶ 10.) Furthermore, although PRIAC selected the funds comprising the menu of Alliance Funds from which plan sponsors and participants could choose, the plan sponsors and participants directed the investments of their plans within that menu. ( See PA 2220.)

The separate accounts invested solely in the Bond Funds were Alliance Funds, in which PRIAC had the authority to discontinue investments only in extenuating circumstances as a measure of last resort. (Pl.'s Rule 56.1 Stmt. ¶ 37; see also Palmer Decl. Ex. 5 at 6.) PRIAC also had two “Balanced Funds,” the Balanced Turner Fund and the Balanced Wellington Fund. (Pl.'s Rule 56.1 Stmt. ¶ 57.) These funds were Institutional Sub–Advised Funds, with 40% of the fund invested in the IBF, and the remainder managed by Turner or Wellington. ( Id. ¶ 58.) For these funds, PRIAC had the authority to discontinue investments in the IBF, even without extenuating circumstances. ( See id. ¶ 56.)

B. The DDA Program

The second component of the MOM program, the DDA Program, was “the cornerstone of [PRIAC's] investment offerings, ... [and] employ[ed] a disciplined process ... for identifying, evaluating and selecting leading investment managers across asset classes.” (Palmer Decl. Ex. 5 at 5.) PRIAC monitored the Bond Funds through the DDA Program, which purported to provide reporting and rigorous and objective analysis on funds. ( See Pl.'s Rule 56.1 Stmt. ¶ 33, 44; Def.'s SJ Rule 56.1 Stmt. ¶ 12.) The MOM Program monitored funds “on an ongoing basis with the understanding that performance goals may not be met quarter to quarter, but are to be achieved over the longer term,” (Palmer Decl. Ex. 5 at 13.), and the DDA Program used a “DDA Score,” a composite score of a fund's past performance that weighted the longer term periods more heavily than shorter term periods, to monitor funds. (Palms ¶ 15, PA 4–5.)

The DDA Program also produced quarterly “DDA Reports” for each fund PRIAC offered, which were made available to clients. (Palms ¶ 14, PA 4.) The DDA Reports contained an explanation of the DDA Program, a summary of activity for each fund on the platform, a market review, fund performance and peer group rankings, and a page of data specific to each fund, such as the ten largest bond holdings of the fund, the fund's net asset value, and commentary on the fund's...