NERA's Role in Fishman Haygood Phelps Walmsley Willis & Swanson, LLP v. State Street Corporation, et al.

The Situation

In a complaint filed in April 2009, plaintiffs Fishman Haygood Phelps Walmsley Willis & Swanson, LLP brought action against State Street alleging that the defendants had breached their duties of prudence and loyalty by engaging in a securities lending program as part of their administration of a trust fund in which plaintiffs were investors. Plaintiffs alleged that State Street reinvested cash collateral in "long-term, high-risk instruments" leading to realized and unrealized losses, rather than making more "prudent" investments in money market funds or Treasury securities. In response, State Street through its counsel, Wilmer Hale, filed a motion to dismiss on the grounds that the plaintiffs lacked Article III standing under the Employee Retirement Income Security Act (ERISA), as they had not suffered any actual injury.

NERA's Role

Dr. Robert Mackay, Affiliated Consultant for NERA Economic Consulting's Global Securities and Finance Practice, provided expert analysis on behalf of State Street Corporation. Dr. Mackay demonstrated that the plaintiffs had not suffered a direct injury from unrealized losses and that any future injury was not imminent. Even though the mark-to-market value of cash collateral pool units was below par, the plaintiffs and the trust they were invested in had continued to transact cash collateral pool units at par. In addition, Dr. Mackay noted that the plaintiffs did not face any restriction on redemptions; that there was sufficient liquidity in cash collateral pools; and that none of the securities held by the cash collateral pools had defaulted or was impaired. As such, the plaintiffs' unrealized losses did not establish injury for the purposes of Article III.

The Result

In a decision announced on 25 March 2010, United States District Court Judge Patti Saris allowed the motion to dismiss filed by the Wilmer Hale team led by Ms. Lori Martin, citing at length Dr. Mackay's testimony and expert analysis for the defense affirming the lack of plaintiff injury and breach of fiduciary duties. As the Court's decision noted, Dr. Mackay "show(ed) that the allegedly imprudent investments made by State Street outperformed hypothetical investments in 'short-term Treasuries' and money market funds at all times ... " during the complaint period even after consideration of realized losses in cash collateral pools. These hypothetical investments had been put forward by the plaintiffs and their expert as "prudent" investments for purposes of measurement of damages. Hence, the Court held that, "under the measure of damages defined by the First Circuit in Evans, the plaintiff has not established injury-in-fact for the purposes of Article III standing."

This case is noteworthy as it demonstrates that unrealized losses caused by mark-to-market values being below par do not automatically lead to investor injury.