In re State Street Bank and Trust Co. Erisa Lit.

• Decision Date: 30 September 2008
• Docket Number: No. 07 CIV. 8488(RJH).,07 CIV. 8488(RJH).
• Citation: 579 F.Supp.2d 512
• Parties: In re STATE STREET BANK AND TRUST CO. ERISA LITIGATION. This document relates to: 07 Civ. 8488.
• Court: U.S. District Court — Southern District of New York

579 F.Supp.2d 512

In re STATE STREET BANK AND TRUST CO. ERISA LITIGATION This document relates to: 07 Civ. 8488.

No. 07 CIV. 8488(RJH).

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

September 30, 2008.

COPYRIGHT MATERIAL OMITTED

Avi Josefson, Jonathan Andrew Harris, Edwin G. Schallert, Debevoise & Plimpton, LLP, Jerald D. Bien-Willner, Gerald H. Silk, Bernstein Litowitz Berger & Grossmann LLP, David Steven Preminger, Keller Rohrback L.L.P., New York, NY, Laura R. Gerber, Derek W. Loeser, Karin B. Swope, Lynn Lincoln Sarko, Tyler L. Farmer, Keller Rohrback L.L.P., Gretchen Freeman Cappio, Seattle, WA, Patrick T. Egan, Jeffrey Craig Block, Berman DeValerio Pease Tabacco Burt & Pucillo, Boston, MA, for Plaintiffs.

Christopher G. Green, Harvey J. Wolkoff, Jeffrey P. Palmer, Olivia S. Choe, Robert A. Skinner, Ropes & Gray, LLP, Boston, MA, Jerome Charles Katz, Ropes & Gray, LLP, New York, NY, for Defendants.

MEMORANDUM OPINION AND ORDER

RICHARD J. HOLWELL, District Judge.

This is an action brought pursuant to sections 409(a) and 502(a)(2) and (3) of the Employee Retirement Income Security Act of 1974 ("ERISA") by plaintiff Prudential Retirement Insurance and Annuity Company ("Prudential") as the fiduciary of over two hundred retirement plans (the "Plans") to recover losses due to the Plans' investments in funds offered by defendants State Street Bank and Trust Company and/or State Street Global Advisors, Inc. (collectively, "State Street"). Prudential alleges that two State Street funds lost significant value due to State Street's breaches of fiduciary duties in managing these funds. State Street now moves to dismiss the complaint filed in this action ("Complaint" or "Compl.") pursuant to Federal Rules of Civil Procedure 12(b)(1), for lack of standing, and 12(b)(6), for failure to state a claim, or in the alternative for summary judgment. For the reasons stated below, the motion is granted in part and denied in part.

BACKGROUND

Plaintiff Prudential "offers institutional retirement plan sponsors access to a wide variety of mutual funds and bank collective trusts ... enabling plan sponsors to assemble a menu of investment choices for retirement plans and plan participants." (Compl.¶ 10.) Prudential is an ERISA fiduciary of 210 or 215 retirement plans that invested, through Prudential, in two collective bank trusts managed by State Street—the "Government Credit Fund" and the "Intermediate Bond Fund" (collectively, the "Funds"). By virtue of its control over plan assets invested in the Funds, State Street also acts as an ERISA fiduciary with respect to each Plan. (Id. ¶¶ 15, 31.)¹ The Plans invest their assets through Prudential by investing in a "separate account" set up by Prudential to correspond to each fund on its "menu". The assets of Plans that wish to invest in a particular fund through Prudential are pooled in the appropriate separate account, which then purchases an interest in that fund. (Id. ¶¶ 11, 14, 32.)

According to the Complaint, the Plans lost roughly $80 million in the summer of 2007 due to State Street's overly risky investment strategies, including "undisclosed, highly leveraged positions in mortgage-based financial derivatives." (Id. ¶ 3.) By concentrating the holdings of the Funds in such assets, State Street "exposed the ... Funds to an inappropriate level of risk," contrary to State Street's representations that the Funds were "enhanced bond index" funds that sought "`stable, predictable returns' slightly above an index consisting of investment-grade U.S. Government and corporate bonds." (Id. ¶¶ 2, 3.)

In October 2007, Prudential made the Plans a proposal under which Prudential would loan a participating plan an "up-front payment" in an amount that to some extent compensated a plan for losses from its investment in the State Street Funds (the "Loan"), in exchange for the plan's authorization for Prudential to commence litigation against State Street on its behalf. (See, e.g., Goldman Decl. Exs. 4, 5, 6.)

The proposed Loans consisted of (1) an amount necessary to increase a plan's balance to the value it would have achieved had it been invested in the Lehman Brothers Intermediate U.S. Government Credit Index (the "Benchmark Index") instead of the State Street Funds between July 1 and August 29, 2007, plus (2) the return that would have been received on the plan's July and August losses in the State Street Funds if these had instead been invested in the Benchmark Index from August 29, 2007 to October 8, 2007, plus (3) a portion of the costs of bringing legal action against State Street. (See, e.g., Goldman Decl. Exs. 4, 5, 6; Siegel Decl. Ex. C.)

To accept the proposal, Plans were required to respond before December 1, 2007. Prudential has represented that 190 of the Plans accepted Prudential's Loan proposal (the "Participating Plans") (Siegel Decl. Ex. D), and that the total amount of the Loans was approximately $80 million (Goldman Decl. Exs. 1, 2, 3). Under the terms of the agreement entered into by the Participating Plans (the "Authorization Agreement"), a plan that receives a Loan is only obligated to repay Prudential from the proceeds (by judgment, settlement, or otherwise) of litigation against State Street. (See, e.g., id. Ex. 4 at 6.) If the amount of such recovery is less than the Loan amount, the unpaid balance is forgiven. (See, e.g., id. Ex. 4 at 3.) If the amount of recovery exceeds the Loan amount, the excess will be paid to the Plan. (See, e.g., id. Ex. 4 at 4, 6.)

The Loans are structured such that the Loans are not paid directly to individual Plans, but rather to the separate accounts previously invested in the Funds (the "Separate Accounts"). (See, e.g., id. Ex. 4; Siegel Decl. Ex. C.) The Separate Accounts are then obliged to pay disbursements to the Plans and to make repayment to Prudential out of any litigation proceeds that are received. (See, e.g., Goldman Decl. Ex. 4; Siegel Decl. Ex. C.)

State Street has moved to dismiss the Complaint pursuant to Rule 12(b)(1), asserting that Prudential lacks standing to bring this action because (1) it can only act on behalf of the Plans, which State Street contends have been "made whole" as a result of the Loans, and (2) it seeks recovery on behalf of the Separate Accounts, in which State Street contends the Plans no longer have any interest. In the alternative, State Street seeks partial summary judgment that the Loan amount shall be set off against any damages awarded in this action. Finally, State Street moves under Rule 12(b)(6) to dismiss all of Prudential's claims brought pursuant to ERISA Section 502(a)(3), claiming that the Complaint states no viable claim for equitable relief.

DISCUSSION

I. The Plans Do Not Lack Standing to Recover Amounts Received From Prudential

State Street characterizes its motion as a challenge to Prudential's standing pursuant to Rule 12(b)(1). See Alliance For Envtl. Renewal, Inc. v. Pyramid Crossgates Co., 436 F.3d 82, 89 n. 6 (2d Cir.2006) (stating that the proper procedural route for a challenge to standing is a motion under Rule 12(b)(1)). However, a plaintiff's standing is "assessed as of the time the lawsuit is brought," Comer v. Cisneros, 37 F.3d 775, 787 (2d Cir.1994), in this case October 1, 2007. There is no evidence that any Plan had accepted Prudential's Loan proposal or received any payment from Prudential on or before this date. Indeed, State Street's own evidence indicates that the Authorization Agreements and materials describing the proposal were distributed to the Plans sometime in October 2007 and that these materials refer to the fact that this action had already been filed. (See Goldman Decl. Exs. 4, 5, 6, 8.)

State Street appears to contend that the Plans lacked standing at the time of filing because Prudential "publicly offered to make the Plans whole" in an October 1, 2007 SEC filing in which Prudential stated that it was "implementing a process under which affected plan clients ... will receive payments ... for the losses [from investments in State Street funds]," because at this time, "the Plans had the legal right and ability to be made whole, and thus had no injury-in-fact." (Reply Mem. 5; Goldman Decl. Ex. A.) This argument has no basis in the law and is rejected.

Because standing undisputedly existed when the complaint was filed, State Street's motion is properly characterized not as a challenge to standing but as a challenge based on mootness due to post-filing events. See Comer, 37 F.3d at 797-98 (explaining that "[w]hile the standing doctrine evaluates a litigant's personal stake at the onset of a case, the mootness doctrine ensures that the litigant's interest in the outcome continues throughout the life of the lawsuit," and that "[i]n general a case is moot when the issues presented are no longer live or the parties lack a legally cognizable interest in the outcome"). "A case can become moot at any stage of litigation, though the burden on the party alleging mootness is a `heavy' one." Associated Gen. Contractors of Conn., Inc. v. City of New Haven, 41 F.3d 62, 65 (2d Cir.1994).

The Court therefore interprets State Street's motion as seeking to dismiss this action as moot because the Plans no longer have any interest in this litigation, having already been "made whole" by Prudential. According to State Street, the Plans no longer have a legally cognizable injury because Prudential intended the Loans as complete compensation for the Plans' losses in State Street funds and referred to portions of the Loans in materials describing the proposal as "Make Whole Amounts". (See, e.g., Defs.' Mem. 1-11 (citing Goldman Decl. Ex. 4).) As an alternative to dismissal for lack of standing, State Street seeks partial summary judgment that the $79 million Loan amount shall be set off against any damages awarded in this action.

The premise of State Street's motions—that an action is necessarily mooted when a plaintiff's damages are reimbursed—is flawed....