Stock Drop Defendants Attempt En Banc ‘Shot’

Having lost their case in a recent appellate court decision, plan fiduciaries are now seeking a hearing with the full court.

The plaintiffs in this case had 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 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.

De Facto ‘Fail’

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) – but that decision was recently 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 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.”

Banc ‘Shot’

In petitioning for an “en banc” hearing by the full court, the IBM defendants argue that the decision conflicts with: (1) the United States Supreme Court’s decision in Pegram v. Herdrich (where the court held that liability for fiduciary breaches under ERISA arises from a person’s actions “as a fiduciary”); (2) with this particular circuit’s decision in Gearren v. McGraw-Hill Cos. (where it held that public disclosures on behalf of a company are made in a corporate, and not fiduciary, capacity); and that (3) it “contradicts the plain language of the governing statutory standard of prudence.” As a consequence, they wrote that “Consideration by the full Court is therefore necessary to secure and maintain the correctness and uniformity of this Court’s decisions, as well to adhere to Supreme Court rulings.”

In their petition, the IBM defendants explained that in so doing, that ruling “held defendants could be liable for acts and omissions in their capacity as corporate officers for IBM, rather than in their capacity as fiduciaries for the company’s employee stock ownership plan (“ESOP”),” and that it similarly imposed a “reasonable business executive” standard in place of the statutory standard of a prudent person “acting in a like capacity” to a fiduciary. Consequently, it “ignored these limitations on fiduciary liability in its erroneous holding that plaintiffs’ proffered alternative course of action satisfied the Supreme Court’s directives in Fifth Third Bancorp v. Dudenhoeffer,” and in so doing, “failed to apply the Supreme Court’s Fifth Third standard in a manner consistent with every other circuit court in the country and the overwhelming number of district courts.”

If that weren’t sufficient, the defendants caution that the “decisions from this Court now provide conflicting standards to ESOP fiduciaries who also serve as corporate officers,” and that the “resulting confusion could very well frustrate one of Congress’s stated intentions for ERISA, which was to encourage companies to offer ESOPs to their employees.” Moreover, while the defendants note that “the panel decision purported to apply a ‘restrictive’ construction of Fifth Third, it explicitly suggested that a different, more lenient standard might nonetheless be applicable, thereby creating ambiguity for district courts within this Circuit as to which standard is appropriate and how Fifth Third should be applied to generic allegations that can — and now will — be made in every case that claims there should have been an earlier disclosure.”

The defendants go on to claim that the ruling “not only exacerbates this confusion, but it will also inevitably encourage forum shopping among plaintiffs desperate to avoid the uniformly contrary rulings in other circuits.”

Will their arguments be persuasive? We shall see.

The case is Jander v. Ret. Plans Comm. of IBM, 2d Cir., No. 17-3718, petition for rehearing en banc 12/21/18.

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