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At Long Last, Stock Drop Case Settles

Litigation

The parties in a case that promised to set a new fiduciary threshold in stock drop litigation—that went all the way to the U.S. Supreme Court—and back—has settled.

The parties here were those in the case of Jander v. Retirement Plans Committee of IBM, 910 F.3d 620 (2d Cir. 2018)—which had been something of an outlier in the plaintiffs’ victory at the appellate level (in the Second Circuit in 2018, and again after the U.S. Supreme Court[i] weighed in). The essence of the suit was that the employer’s stock price dropped suddenly (here IBM’s stock price fell after the sale of a subsidiary revealed the subsidiary was greatly overvalued), and plaintiffs argued that the plan fiduciaries—who allegedly had awareness of the news and its impact prior to its public disclosure—had an obligation to alert/take action with regard to the retirement plan accounts that had invested in the employer stock. 

Litigation ‘Legacy’ 

The litigation history in these “stock drop” cases—and despite the declining availability of employer stock in retirement plans, there are still plenty[ii] of large employers where it remains not only available, but popular with participants—has not been favorable for plaintiffs. Prior to 2014, the judicial standard of review had been a “presumption of prudence” standard that was effectively unassailable by plaintiffs—meaning that in the vast majority of these cases (including BP and Delta Air LinesLehman and GM) the plaintiffs failed to get past the summary judgment phase. Indeed, the plaintiff in this very suit at one point argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 decision in Harris v. Amgen. They had also noted that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.”

The Fifth Third case (2014) was where the Supreme Court established the “more harm than good” standard. While there was a sense with its passage that the nation’s highest court had intended to lower the litigation threshold, to date this new “standard” hasn’t had much impact on the ultimate result, even though more cases (including this one) did get past the summary judgment stage (we’ll set aside the question of whether that has created “more harm than good”).

That Was ‘Then’

However, earlier this month the very same Second Circuit appellate court rejected similar claims (while distinguishing the fact patterns) that gave the Jander litigation “life” in a case alleging that General Electric Company and Jeffrey Robert Immelt failed to exercise their fiduciary duty of prudence to the participants of the GE Retirement Savings Plan in violation of ERISA. In that case, as in Jander, the U.S. District Court for the Northern District of New York had dismissed the class action complaint, suggesting that Jander might not have been the “game changer”[iii] for plaintiffs that some thought it might be.

As for the settlement, at this point we only know that, “after engaging in mediation discussions with Robert Meyer of JAMS, the parties have agreed in principle on a settlement of the above-titled matter.” And, in a letter to Judge William H. Pauley III of the U.S. District Court for the Southern District of New York, the “parties respectfully request a stay of all deadlines in the case. The parties will confer and submit to the Court by March 8, 2021 a proposed schedule for preliminary approval, notice to class members, and final approval of the matter.”

At which point we’ll have our “Jander reveal.”


[i] While the case got to the Supreme Court, the nation’s highest court didn’t really address any of the issues raised. in January 2020, in a short, unsigned opinion, the justices declined to address arguments raised by the IBM defendants—and the federal government in its amicus brief—that involved federal securities laws. The Supreme Court stated that “the petitioners argued that ERISA imposes no duty on an ESOP fiduciary to act on inside information.” And the government argued that an ERISA-based duty to disclose inside information that is not otherwise required to be disclosed by the securities laws would “conflict” at least with “objectives of” the “complex insider trading and corporate disclosure requirements imposed by the federal securities laws....” And while that was clearly an issue—the nation’s highest court pointed out that “the Second Circuit did not address the[se] argument[s], and, for that reason, neither shall we,” they wrote, kicking the case back to the Second Circuit “to determine their merits, taking such action as it deems appropriate.” 

[ii] According to the Plan Sponsor Council of America’s 63rd Annual Survey of Profit Sharing and 401(k) Plans, 15% of plans allow company stock as an investment option for both participant and company contributions, while 4% restrict access to company contributions only. An average of 22% of total plan assets is invested in company stock; however, more than half of plans which allow company stock as an option have 10%–50% of total plan assets invested in it, and 9% have 50% or more.

[iii] For insights on the case, see Full Court 'Press'?

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