Authors: Shaylor Steele and Joe Yonadi
On September 7, 2016 the U.S. District Court for the Southern District of NY dismissed separate lawsuits challenging IBM’s stock drop under both ERISA and the federal securities laws. In Jander v. IBM (S.D.N.Y. Sept 7, 2016), the Court clearly outlines the heightened Dudenhoeffer pleading standard where the plaintiff’s must allege: (1) an alternative action that the defendant could have taken that would have been consistent with the securities laws, and (2) that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the stock fund than to help the stock fund.
The facts in Jander set forth that IBM provided an ESOP as one of its investment options. IBM’s stock price dropped 17% when it announced that it was taking a $2.4 billion write-down in connection with selling its microelectronic business to another company. There is a factual argument the write-down should have occurred earlier under Generally Accepted Accounting Principles. As such, Plaintiffs brought a claim under Section 502 of ERISA alleging that IBM failed to prudently and loyally manage the Plan’s assets, and failed to adequately monitor the Plan’s fiduciaries especially once they learned that IBM’s stock price was artificially inflated. IBM further claimed the defendants should have disclosed the truth about Microelectronics’ value or issued new investment guidelines temporarily freezing investments by the Fund in IBM stock. IBM’s committee make-up consisted of their CFO, General Counsel and Chief Accounting Officer.
The Court granted IBM’s motion to dismiss with leave to replead. In its decision, the Court drilled down on the securities case law and cited several cases setting forth that the “securities laws create a system of periodic rather than continual disclosures…the disclosure structure set out by the SEC and the case law recognized how unworkable and potentially misleading a system of instantaneous disclosure outside the normal reporting periods.” The Court further explained that in Dudenhoeffer, the Supreme Court recognized the possibility that the issuance of corrective disclosures (or the decision to alter trading strategies in view of inside information) could be inconsistent with the securities laws, explaining that courts should consider: (1) “that the duty of prudence, under ERISA as under the common law of trusts, does not require a fiduciary to break the law”; and (2) “the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate
As such, the Jander District Court concluded that the plaintiffs failed to plead facts giving rise to an inference that defendants could not have concluded that public disclosures or halting the plan from further investing in IBM stock was more likely to harm than help the fund.
In short, Dudenhoeffer has imposed a very high pleading standard for plaintiffs that would most likely involve a fact pattern that includes accounting fraud to move past the Motion to Dismiss phase. Notably, courts are reluctant to run afoul of the securities laws, and ERISA seems to prevent fiduciary-insiders from disclosing non-public information that may negatively affect a stock fund.