Compliance June 5, 2019
IBM Stock Drop Case Makes Its Way to Supreme Court
A district court determined the plaintiffs did not plausibly plead a violation of ERISA’s duty of prudence, because a prudent fiduciary could have concluded that earlier corrective disclosure would have done more harm than good, mirroring many stock drop decisions handed down after the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer.
Reported by Lee Barney
The Supreme Court has accepted IBM’s request to hear Retirement Plans Committee of IBM v. Larry W. Jander. Last March, IBM asked the high court to hear the case after the 2nd U.S. Circuit Court of Appeals reversed the company’s district court win. Plaintiffs allege that IBM imprudently managed company stock investments in one of its retirement plans.
IBM asked the Supreme Court to answer “whether Fifth Third’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 lawsuit alleges that the defendants continued to invest retirement plan assets in IBM common stock despite their being aware of undisclosed troubles relating to IBM’s microelectronic business. In doing so, the plaintiffs argue, the company violated its fiduciary duty of prudence to plaintiffs under the Employee Retirement Income Security Act (ERISA).
The lawsuit says IBM, in 2013, tried to find buyers for its microelectronics business, which was then losing $700 million a year. The plaintiffs say IBM did not publicly disclose these losses and continued to value the business at approximately $2 billion.
Then, on October 20, 2014, IBM announced that it would pay GlobalFoundries Inc. $1.5 billion to take the business off its hands and that IBM would take a $4.7 billion pre-tax charge—which caused the technology giant’s stock to drop by more than $12 a share.
Referring to new pleading standards set forth in the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, the plaintiffs say, “Once defendants learned that IBM’s stock price was artificially inflated, defendants should have either disclosed the truth about microelectronics’ value or issued new investment guidelines that would temporarily freeze further investments in IBM stock.”
In its initial ruling on these arguments, the district court determined that the plaintiffs did not plausibly plead a violation of ERISA’s duty of prudence, because a prudent fiduciary could have concluded that earlier corrective disclosure would have done more harm than good. This ruling mirrors many stock drop decisions handed down after the Supreme Court’s consequential decision in Fifth Third Bancorp v. Dudenhoeffer.
IBM asked the Supreme Court to answer “whether Fifth Third’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 lawsuit alleges that the defendants continued to invest retirement plan assets in IBM common stock despite their being aware of undisclosed troubles relating to IBM’s microelectronic business. In doing so, the plaintiffs argue, the company violated its fiduciary duty of prudence to plaintiffs under the Employee Retirement Income Security Act (ERISA).
The lawsuit says IBM, in 2013, tried to find buyers for its microelectronics business, which was then losing $700 million a year. The plaintiffs say IBM did not publicly disclose these losses and continued to value the business at approximately $2 billion.
Then, on October 20, 2014, IBM announced that it would pay GlobalFoundries Inc. $1.5 billion to take the business off its hands and that IBM would take a $4.7 billion pre-tax charge—which caused the technology giant’s stock to drop by more than $12 a share.
Referring to new pleading standards set forth in the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, the plaintiffs say, “Once defendants learned that IBM’s stock price was artificially inflated, defendants should have either disclosed the truth about microelectronics’ value or issued new investment guidelines that would temporarily freeze further investments in IBM stock.”
In its initial ruling on these arguments, the district court determined that the plaintiffs did not plausibly plead a violation of ERISA’s duty of prudence, because a prudent fiduciary could have concluded that earlier corrective disclosure would have done more harm than good. This ruling mirrors many stock drop decisions handed down after the Supreme Court’s consequential decision in Fifth Third Bancorp v. Dudenhoeffer.
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