Jander advanced complicated breach of fiduciary duty claims and had a long procedural history. But potential claimants in ERISA lawsuits are still left scratching their heads about the fundamental issue – what must they show to prevail in ESOP “stock drop” lawsuits. As one commentator noted, the case is settled, but the issues are not.
Secrets about a tanking business
Larry Jander, Richard Waksman and others were participants in IBM’s retirement plan. They invested in the IBM Company Stock Fund, an ESOP governed by ERISA. During the relevant years, members of the Retirement Plans Committee, which was responsible for overseeing the retirement plan’s management, were also part of the company’s senior leadership.
IBM began trying to find buyers for its microelectronics business in 2013, at which time that business was on track to lose $700 million a year. IBM, however, failed to publicly disclose these actual and anticipated losses and continued to value the business at approximately $2 billion. Jander alleged that senior leadership, including the retirement plan’s management, knew or should have known about these undisclosed financial problems.
In October 2014, IBM announced the sale of the microelectronics business to GlobalFoundries Inc. The announcement revealed that IBM would pay $1.5 billion to GlobalFoundries to take the business off IBM’s hands and supply it with semiconductors, and that IBM would take a $4.7 billion pre‐tax charge, reflecting an impairment in the stated value of the microelectronics business. IBM’s stock price declined by more than $12.00 per share. Investors, including the retirement plan participants, lost money. Two lawsuits followed. The first focused on securities fraud, and the second was this ERISA lawsuit.
Jander alleges that the Retirement Plan Committee continued to invest the ESOP’s funds in IBM common stock despite their knowledge of undisclosed troubles concerning the microelectronics business. In doing so, Jander claims that they violated their ERISA fiduciary duty to plan participants. Further, the plan participants assert that “once Defendants learned that IBM’s stock price was artificially inflated, Defendants should have either disclosed the truth about Microelectronics’ value or issued new investment guidelines that would temporarily freeze further investments in IBM stock.”
Conflicting obligations; Dudenhoeffer’s ambiguous guidance
The fiduciaries argue that IBM senior management members who knew about the overvaluation and were on the retirement plan management committee were subject to conflicting legal obligations. Under securities laws, they were prohibited from disclosing otherwise non-public information that would permit certain investors, including the plan to make advantageous investment decisions. Under ERISA, they had a duty to act solely for the benefit of plan participants and beneficiaries in a way that a prudent investment professional would act. A prudent investment professional with all the relevant information would presumably have dropped the stock or otherwise limited financial exposure.
This dilemma is not unique to the IBM Retirement Committee, since retirement plan fiduciaries are frequently members of senior management, who might be privy to non-public information. In Fifth Third Bancorp v. Dudenhoeffer the Supreme Court held that, in such situations, to make a case for breach of the duty of prudence, a complaint must plausibly allege an alternative action that the defendant could have taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. This is often shorthanded as the “more harm than good” standard.
The standard has proved to be extraordinarily difficult for plaintiff participants to apply. Jander was among the very few ESOP breach of fiduciary duty ERISA lawsuits to survive the summary judgment stage.
Up and down through the federal court system
Jander was first filed in 2015 in the Southern District of New York. The SDNY ultimately granted the Retirement Plan Committee’s summary judgment motion to dismiss. The participants appealed to the Second Circuit, which reversed the District Court. The Supreme Court of the United States granted Defendants’ petition for a writ of certiorari. On January 14, 2020, the Supreme Court vacated the Second Circuit’s decision and remanded the lawsuit back to the Second Circuit for further briefing and argument.
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Potential plaintiffs in ESOP stock drop lawsuits still have very little guidance on how to apply the “more harm than good” standard. Apparently, generalized allegations that disclosure of securities fraud is inevitable and that the harm of that disclosure increases over time are not sufficient. What does it take to claim that there was an alternative action that a prudent fiduciary in the same circumstances would see as more likely to help the fund than to harm it?