Supreme Court sends IBM stock-drop case back to 2nd Circuit

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The ERISA “stock-drop” litigation against the fiduciary committee for IBM’s employee stock ownership plan (ESOP) isn’t over yet. The US Supreme Court has vacated the appellate decision that revived the case, originally dismissed by the district court (Retirement Plans Comm. of IBM v. Jander, No. 18–1165 (S. Ct. Jan. 14, 2020)). The case now heads back to the 2nd US Circuit Court of Appeals for consideration of additional arguments.

ESOP fiduciary’s duty to act on inside information debated

Employees with investments in the ESOP brought the case, claiming the plan committee acted imprudently by not disclosing that the company's microelectronics division — which the company was trying to sell — was overvalued. The company eventually corrected the valuation when it sold the microelectronics business. But the plaintiffs argued that earlier disclosure in Securities and Exchange Commission (SEC) filings would have corrected the stock price — only by the amount the stock was overvalued — and protected management’s reputation and the company’s long-term prospects as an investment.

The district court dismissed the case, finding the plaintiffs failed to meet the high standard to bring stock-drop cases involving inside information that the Supreme Court set in Fifth Third Bancorp v. Dudenhoeffer (573 U.S. 409 (2014)). Dudenhoeffer requires plaintiffs bringing stock-drop cases to suggest an alternative course of action that plan fiduciaries could have taken without violating securities laws. Plaintiffs also must plausibly allege that a prudent fiduciary could not have found that the alternative action would have caused more harm than good to the fund.

Since Dudenhoeffer, most courts have dismissed these cases, finding the plaintiffs failed to meet this standard. But in a surprise decision (910 F.3d 620 (2018)), the 2nd Circuit reversed the district court, saying the plaintiffs’ pleadings were sufficient to survive a motion to dismiss. IBM then appealed to the Supreme Court.

Justices send newly raised arguments to 2nd Circuit

In an unsigned opinion, the Supreme Court said the case asks whether Dudenhoeffer’s “more harm than good” standard can be satisfied by “generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.” But the company didn’t address this question in the briefings to the court. Instead, the company argued that ERISA fiduciaries aren’t required to act on inside information. In an amicus brief, the SEC and Labor Department further argued that an ERISA-based duty to disclose inside information, when not required by federal securities laws, would conflict with the objectives of insider trading and corporate disclosure rules.

The Supreme Court declined to address these arguments because they weren’t presented to the 2nd Circuit, but acknowledged they may be relevant to understanding ERISA’s duty of prudence in this context. The justices remanded the case so the 2nd Circuit can decide whether to consider the additional arguments. Where the case goes from here depends on what the 2nd Circuit does next.

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Brian J. Kearney
by Brian J. Kearney

Principal, Mercer’s Law & Policy Group

Margaret Berger
by Margaret Berger

Partner, Mercer’s Law & Policy Group

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