September 17, 2019

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US Supreme Court to Review Unusual Second Circuit Decision in Stock Drop Case Against IBM

On Monday, the US Supreme Court agreed to review the Second Circuit’s decision in Jander v. Retirement Plans Committee of IBM, a “stock drop” lawsuit against IBM’s benefit plan fiduciaries. The Second Circuit’s decision marked one of the few times a federal court permitted a “stock drop” lawsuit to survive dismissal since the Supreme Court’s decisions in Fifth Third Bank v. Dudenhoeffer (2012) and Harris v. Amgen (2016).

Together, the Dudenhoeffer and Amgen decisions set a high pleading bar for plaintiffs who file “stock drop” claims. These lawsuits involve employee stock ownership plans, in which the plan includes employer stock as an investment option, and a subsequent drop in that stock’s price. Plaintiffs allege that by failing to remove the stock from the plan or take other corrective action (such as disclosing information), fiduciaries breached the prudent person standard of care that ERISA imposes on fiduciaries. Dudenhoeffer requires plaintiffs to allege that a prudent fiduciary in the same position could not have concluded that the corrective, alternative action would do more harm than good.

In the Jander lawsuit, the plaintiffs had alleged IBM fiduciaries knew IBM’s market price was artificially inflated due to the undisclosed impairment of one of IBM’s units, which IBM eventually sold. Plaintiffs alleged that when the IBM fiduciaries learned the stock price was artificially inflated, they should have either made corrective disclosures to plan participants about the unit’s “true value” or frozen investments in IBM stock. Plaintiffs emphasized that IBM would eventually be required to disclose the alleged fraud publicly due to the unit’s sale, and cited studies that fraud is more harmful the longer it is left undisclosed. The Second Circuit found these allegations to be “particularly important,” reasoning that “when a drop in the value of the stock already held by the fund is inevitable, it is far more plausible” that failure to disclose would do more harm than good, and that no prudent fiduciary would fail to promptly disclose.

As the IBM fiduciaries observed in their petition for a writ of certiorari with the Supreme Court, the Second Circuit’s decision arguably created a split with the Fifth and Sixth Circuits, which had both previously found generic allegations that disclosure was inevitable and that fraud is more harmful the longer is it undisclosed implausible under Dudenhoeffer. The Supreme Court’s decision to grant the petition and hear the case could result in further clarity about the pleading standards for breach of ERISA duty of prudence claims involving ESOPs.

 

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About this Author

J. Christian Nemeth, McDermott Will, business torts lawyer, aviation matters attorney
Partner

J. Christian (Chris) Nemeth provides legal counsel on complex commercial litigation, including contract disputes, shareholder derivative actions, financial and banking matters, business torts, aviation matters, insurance cases, white-collar criminal matters and health care litigation.

Chris represents clients in courts at the state and federal levels across the country, and has successfully tried cases involving a wide range of matters. He also arbitrates cases in domestic and international forums.

Chris has extensive...

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Allison Crowe Employee Benefits Lawyer MWE Law Firm
Associate

Allison Crowe focuses her practice on employee benefits and executive compensation. She regularly represents clients facing litigation under the Employee Retirement Income Security Act of 1974 (ERISA). She represents plan sponsors, directors, benefits committees and plan fiduciaries of employee benefits plans, including employee stock ownership plans (ESOPs), in class action litigation for breach of fiduciary duty and prohibited transactions, as well as in lawsuits and investigations brought by the Department of Labor.

 

Allison also advises plan sponsors and plan fiduciaries on ERISA-related compliance issues, including fiduciary training, plan governance and mitigation of litigation risk.

*Allison is admitted to practice law in New Jersey & Pennsylvania but is not yet admitted in New York.

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