Prudential Retirement Insurance & Annuity v. State Street Bank & Trust Co.
842 F. Supp. 2d 614
S.D.N.Y.2012Background
- PRIAC sued State Street under ERISA §409(a) and §502(a)(2)/(3) for losses tied to the Bond Funds (GCBF and IBF) invested by PRIAC’s Plans.
- State Street managed the Bond Funds; PRIAC served as intermediary for nearly 200 Plans with no input into Bond Funds’ management.
- Bond Funds’ benchmarks were Lehman Government Credit Bond and Lehman Intermediate Government Credit Bond; investment objective was to match or exceed the benchmark and to invest only investment-grade securities.
- PRIAC contended the Bond Funds were enhanced index funds (low tracking error, risk-controlled) and that State Street portrayed them as such to PRIAC.
- State Street increased Bond Funds’ alpha targets and predicted tracking error (from 20–40 bp/40–50 bp to 50–75 bp and later 70–80 bp), while maintaining disclosures that misrepresented risk, and relied on off-index, levered strategies (TRS, ABX) with substantial subprime exposure.
- Bond Funds suffered large losses in mid-2007 as subprime market deteriorated, triggering PRIAC’s damages theory and Supreme Court guidance on causation and damages under ERISA.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Prudence of Bond Funds management | PRIAC argues State Street breached the prudent man standard by managing risks beyond disclosed limits. | State Street contends risk levels were within reasonable bounds and disclosure was adequate. | State Street violated the prudent man standard. |
| Loyalty to Plan participants | PRIAC claims conflicts of interest tainted decisions aimed at the sponsor’s interests. | No showing that decisions were motivated by sponsor/manager interests rather than plan benefits. | PRIAC failed to prove breach of loyalty. |
| Diversification duty | State Street concentrated off-index risk in subprime assets, violating diversification duties. | Bond Funds were externally diversified and subprime risk within internal diversification was acceptable. | State Street breached diversification duty. |
| Damages and causation under ERISA | Damages should reflect pattern-of-investment loss using comparable enhanced-index funds as proxies. | Damages should tie to specific imprudent positions or a Restatement-based method. | PRIAC’s damages calculation approved; causation established; Fair Fund credit applied; net judgment for PRIAC. |
Key Cases Cited
- Loomis v. Loomis Sayles & Co., 259 F.3d 1036 (9th Cir. 2001) (damages may be limited to the prudent level of exposure (permissible percentage))
- Dardaganis v. Grace Capital Inc., 889 F.2d 1237 (2d Cir. 1989) (pattern-of-investment damages; permissive averaging where prudent allocation needed)
- Bierwirth v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985) ( damages framework for ERISA §409 claims; restoration principle)
- Silverman v. Mutual Benefit Life Ins. Co., 138 F.3d 98 (2d Cir. 1998) (causation and damages standards in ERISA §409 context; majority view on causation considerations)