A federal court has once again tossed a case involving a precipitous drop in a 401(k) employer stock because the plaintiffs failed to prove that disclosure would have cleared the “more harm than good” standard. But they’ll get another chance.
One of the cases (Jander et al. vs. International Business Machines Corp. et al.) was brought by participants in IBM’s 401(k) plan. Those plaintiffs alleged that the IBM defendants (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) failed to prudently and loyally manage the plan’s assets, and failed to 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 the truth about Microelectronics’ value or issued new investment guidelines temporarily freezing further investments in IBM stock by the plan.
Dudenhoeffer Dictates
Judge William H. Pauley III of the U.S. District Court for the Southern District of New York 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). In that case the Supreme Court ultimately held that while the fiduciaries of an ESOP have the same duty of prudence and loyalty as the fiduciaries of other retirement plans, and that, absent “special circumstances affecting the reliability of the market price,” allegations that a fiduciary should have recognized the overvaluation of the stock based on publicly available information are “implausible” and that allegations based on non-public information are similarly “problematic.”
In that same case, the nation’s high court also directed lower courts to “consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases — which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment — or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”
In the IBM case, Judge Pauley noted that Dudenhoeffer “recognized the possibility that prudent fiduciaries could “conclude that stopping purchases — which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment — or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”
More Harm Than Good
Citing precedents in other recent stock drop cases, Judge Pauley said that to be successful, a complaint must contain “facts and allegations” which “‘plausibly allege’ that a prudent fiduciary in the same position ‘could not have concluded’ that the alternative action ‘would do more harm than good,’” and found that the plaintiffs in the IBM case failed to do so. More precisely, he wrote: “Simply put, Dudenhoeffer sets a highly demanding pleading standard. Because the Amended Complaint offers only a rote recitation of proposed remedies without the necessary “facts and allegations supporting [Plaintiffs’] proposition,” it fails to meet that threshold.”
However, noting that the plaintiffs sought permission to file a Second Amended Complaint that “would allow plaintiffs to undertake the necessary due diligence to provide facts of this greater specificity, including those data regarding the Fund’s Class Period purchases … and possibly retaining an expert to perform a quantitative analysis to show more precisely how Plan participants are harmed in the short and long term by purchasing Fund shares at artificially high prices,” Judge Pauley acquiesced to that request, giving them 30 days to do so.
In the second case (Int’l Assoc. of Heat & Frost Insulators & Asbestos Workers Local #6 Pension Fund v. Int'l Bus. Machs. Corp., S.D.N.Y., No. 1:15-cv-02492-WHP, 9/7/16), plaintiffs representing a pension fund and other investors in IBM stock argued that IBM officials had violated Securities and Exchange Commission rules by failing to adequately disclose information about the transaction noted above. The case was dismissed because Judge Pauley said that the plaintiffs failed to prove IBM’s intent to keep information hidden. “It is far more plausible the defendants were not deceitful but mistaken,” he wrote.
