Judge Drops Shareholder Derivative Suit Against State Street Directors

A shareholder derivative suit against State Street directors has been dropped.

Members of the board of directors of State Street Corporation were accused of breach of fiduciary duty, waste of corporate assets, and unjust enrichment. Specifically, the suit accused the directors of failing to adequately supervise State Street’s foreign exchange business and investment assets, particularly mortgage-backed securities.

The defendants moved to dismiss the action by appointing an independent committee to investigate the matter. The committee’s decision not to pursue a prior action was backed by the federal judge.

The suit is grounded in several other lawsuits dating back to December 2009, when a class action suit was filed against State Street and certain of its officers alleging liability under federal securities laws. Subsequently, two additional actions were brought, according to the latest case filing—one alleging the same or similar securities law claims, and the other alleging a substantially similar claim under the Employee Retirement Income Security Act (ERISA). The actions were consolidated and are currently pending before the federal court for the district of Massachusetts (Hill v. State Street Corporation). There is also a separate case pending in which similar ERISA claims are made (Kenney v. State Street Corporation). The claims in those suits pertain in general to two sets of allegations: first, that the defendants failed to disclose material adverse financial information relating to the value of State Street’s investment assets, including those assets held in off-balance-sheet conduits, and second, that the defendants failed to prevent misleading practices with respect to State Street’s foreign exchange transactions. Some of the defendants in this case were added as defendants in the Hill case by subsequent amendment.

Between 2009 and 2011, three separate shareholders sent derivative action demand letters to State Street requesting investigation and prosecution of claims against officers and directors relating to the claims alleged in the securities and ERISA litigation. In response to each letter, the State Street board of directors appointed a special committee of independent directors to investigate the demands, assisted by outside, independent counsel. With respect to each demand, the committee recommended against pursuing the demanded litigation, and the board approved the recommendation.

The first such demand, by a shareholder named Lazar, demanded that State Street bring an action against certain officers and directors in response to the Kenney case. The board appointed a committee to investigate and make a recommendation to the board. The committee concluded that it would not be in the best interest of State Street to pursue the demanded litigation and conveyed that conclusion as a recommendation to the board, which accepted it.

In September 2010, another shareholder, Himmel, demanded an investigation and initiation of litigation relating to the conduit, portfolio, and foreign exchange allegations in the Hill complaint. The same committee appointed to investigate the Kenney case concluded that litigation would not be in the best interest of State Street and its shareholders. It relied on its analysis of management decisions concerning conduits and the investment portfolio from the Lazar demand and additionally concluded that “no State Street individual personally benefited from the Company’s rational and standardized process” for the pricing of foreign exchange transactions. The committee found no evidence of a scheme to overcharge clients for foreign exchange transactions and no defendants to target or meritorious claims to assert. Based on the committee’s recommendation, the directors voted not to initiate litigation.

After the board had rejected their demands, neither Lazar nor Himmel took any further action. However, on Oct. 13, 2011, the same counsel who had represented Himmel sent a demand letter to State Street on behalf of the Operative Plasterers’ and Cement Masons’ Local Union Officers’ and Employees’ Pension Fund. Specifically, the plaintiff demanded suit against State Street officers and directors based on the foreign exchange, conduit, and asset portfolio allegations stated in the Hill complaint.

The directors appointed the same committee. Neither the committee nor the board regarded that additional development as significant enough to warrant a different conclusion, and again the directors unanimously agreed that litigation was not in the best interest of the company or the shareholders.

The pension fund thereupon filed this latest case, purporting to act on behalf of the corporation and alleging that the directors all had breached their fiduciary duty to the corporation by failing to adequately supervise State Street’s foreign exchange business and investment assets, particularly mortgage backed securities.

A statement from State Street said: “We are pleased with the Judge’s decision and the fact that he agreed with our position in this case.”