April 30, 2021

After more than five years of litigation and a trip to the Supreme Court, the ERISA stock-drop litigation against fiduciaries for IBM’s employee stock ownership plan (ESOP) has ended with a modest $4.75 million settlement (Jander v. Ret. Plans Comm. of IBM, No. 1:15-cv-03781 (S.D.N.Y. April 2, 2021)). The opinion of the 2nd US Circuit Court of Appeals in the case — which found plaintiffs’ pleadings sufficient to survive a motion to dismiss — still stands, possibly leaving a narrow path for future stock-drop litigation.

Case tested Dudenhoeffer pleading standard

The plaintiffs claimed the plan committee acted imprudently by not disclosing that the company’s microelectronics division — which the company was trying to sell — was overvalued. Although the company eventually corrected the valuation when selling the division, the plaintiffs argued that earlier disclosure in Securities and Exchange Commission (SEC) filings would have corrected the stock price’s overvaluation and protected the company’s reputation and long-term prospects as an investment.
 

The district court dismissed the case, finding that the plaintiffs failed to meet the Supreme Court’s pleading standard set in Fifth Third Bancorp vs. Dudenhoeffer (573 U.S. 409 (2014)) for imprudence claims involving inside information. That decision requires plaintiffs to propose an alternative action that doesn’t violate securities laws and plausibly allege that no prudent fiduciary in the defendant’s position could have concluded that action would have done more harm than good. This standard has proved very difficult to meet, and most similar stock-drop lawsuits since Dudenhoeffer have been dismissed.
 

But on appeal in Jander, the 2nd Circuit found the plaintiffs had met the Dudenhoeffer pleading standard. The case then went to the Supreme Court, which viewed the central issue as whether general allegations of harm due to a delay of an inevitable disclosure were sufficient under the Dudenhoeffer standard. The justices declined to rule on the issue for procedural reasons and sent the case back to the 2nd Circuit, which reinstated its earlier decision for the plaintiffs. The parties then settled, leaving the 2nd Circuit’s ruling intact.
 

2nd Circuit’s opinion may be an outlier

The 2nd Circuit’s decision appeared to signal a possible path for stock-drop cases involving inside information that eventually would become public, but that path appears to be very narrow for now. Several courts have declined to follow Jander when plaintiffs claimed a disclosure was inevitable, including in cases against plan fiduciaries for Target and Wells Fargo in the 8th Circuit and against Johnson & Johnson in a New Jersey district court.
 

Even the 2nd Circuit distinguished Jander from a similar case against fiduciaries for General Electric’s ESOP (Varga v. Gen. Elec. Co., No. 20-1144-cv (2nd Cir. Feb. 4, 2021)). In that case, plaintiffs claimed the fiduciaries should have disclosed sooner that the company’s insurance subsidiaries had insufficient reserves to cover their liabilities — information that would eventually become public. But the 2nd Circuit disagreed, finding no triggering event made that disclosure a certainty. This differs from Jander, where the sale of the microelectronics division ensured disclosure of the overvaluation.
 

These cases suggest that general allegations that a disclosure is inevitable or that a delayed disclosure causes more harm than good are likely insufficient to satisfy the Dudenhoeffer standard. Plaintiffs apparently need to point out specific facts that made disclosure of the inside information a certainty and show that delaying the disclosure caused more harm than good to the plan. Whether courts continue to apply this narrow reading of Jander remains to be seen.
 

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Margaret Berger
by Margaret Berger

Partner, Mercer’s Law & Policy Group

Brian Kearney
by Brian Kearney

Principal, Mercer’s Law & Policy Group


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