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Feds Draw Fiduciary Line on Company Stock Disclosures for SCOTUS

Litigation

The U.S. Solicitor General has weighed in with the Supreme Court on a case involving where, and how, to draw the line between the obligations of corporate officials and ERISA plan fiduciaries.

That line – contained in an amicus brief to the justices of the U.S. Supreme Court – was drawn pretty simply: “Absent extraordinary circumstances, ERISA’s duty of prudence requires an ESOP fiduciary to publicly disclose inside information only when the securities laws require such a disclosure.”

How We Got ‘Here’

Back in June, the Supreme Court decided (Ret. Plans Comm. of IBM v. Jander, U.S., No. 18-1165, certiorari granted 6/3/19) to consider “Whether Fifth Third Bancorp v. Dudenhoeffer’s ‘more harm than good' pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.”

The defendants in the case were fiduciaries of the IBM plan (IBM itself, along with the Retirement Plans Committee of IBM; Richard Carroll, IBM’s Chief Accounting Officer; Martin Schroeter, IBM’s CFO; and Richard Weber, IBM’s general counsel) that the plaintiff alleged had failed to prudently and loyally manage the plan’s assets and adequately monitor the plan’s fiduciaries. Specifically, they argued that once the defendants learned that IBM’s stock price was artificially inflated, they should have either disclosed that fact, or issued new investment guidelines temporarily freezing further investments in IBM stock by the plan.

Judge William H. Pauley III of the U.S. District Court for the Southern District of New York initially held that the plaintiffs failed to establish that the defendants were de facto fiduciaries, then went to apply the standards for such cases established in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ___, 134 S.Ct. 2459 (2014), which had been the law of the land in such matters since – well, 2014. Under that Fifth Third standard, plaintiffs had to “plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

But on appeal, Judge Pauley’s IBM decision was overturned by Chief Judge Robert A. Katzmann (joined in the opinion by Judges Robert D. Sack and Reena Raggi) of the U.S. Court of Appeals for the Second Circuit, who, in December 2018, concluded that in fact, the plaintiffs plausibly alleged facts showing that a prudent ERISA fiduciary “could not have concluded” that a corrective disclosure of an allegedly overvalued IBM business would have done “more harm than good to the fund.” That turned out to be a relatively rare “win” for the plaintiffs in such cases – and one that the Supreme Court is now reviewing.

Extraordinary Circumstances

Which brings us to the amicus (friend of the court) brief filed in this case (Ret. Plans Comm. of IBM v. Jander, U.S., No. 18-1165, amicus brief 8/13/19). Joined by attorneys at the Securities and Exchange Commission as well as the Department of Labor, the 41-page document covers a lot of ground, but as noted above, you can sum it all up in one simple sentence: “Absent extraordinary circumstances, ERISA’s duty of prudence requires an ESOP fiduciary to publicly disclose inside information only when the securities laws require such a disclosure.”

Beyond that, the brief offers some interesting context on the Fifth Third v. Dudenhoeffer standard that has been the law of the land. The brief reminds us that, “In Dudenhoeffer, the Court identified three considerations that should inform whether an ERISA plaintiff has plausibly stated a duty-of-prudence claim against an ESOP fiduciary for failing to disclose inside information about the employer’s stock” – and that while the parties here “largely focus on the third consideration—whether a prudent fiduciary could not have concluded that disclosure would do more harm than good—the proper analysis should be informed by the requirements and objectives of the securities laws.” Those laws, according to the brief, “provide a comprehensive scheme of public disclosure rules designed to protect investors” – and they go on to note, “There is no sound reason to adopt a different set of disclosure rules to protect those investors who are participants in an ESOP.”

Ad Hoc Predictions? 

The brief cautions that “the courts below and the parties appear to expect a fiduciary to make an ad hoc prediction about whether a public disclosure would do more harm than good in a particular case. But ESOPs have multiple participants and beneficiaries who, at any given time, are likely to have competing economic interests. Both the direction and the strength of those interests in a public disclosure would turn on information about the future that, in many cases, neither the participant nor a fiduciary would know with reasonable certainty. An ad hoc cost benefit analysis is therefore too indeterminate to serve the meaningful filtering role the Court contemplated.

“The better course,” the brief concludes, “is to recognize that Congress and the SEC have already made a judgment about when a public disclosure would do more harm than good, and prudent fiduciaries should generally not second-guess that judgment.”

And the Solicitor General notes that, “Because the courts below did not apply the correct legal standard, this Court should vacate the judgment below and remand the case for further consideration.”

The justices will hear arguments in the case on November 6.

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