U.S. Supreme Court Remands “Stock Drop” Case Back to Second Circuit

The United States Supreme Court, in a per curiam decision, declined to address whether plan participants sufficiently alleged breach of fiduciary duty claims under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) against fiduciaries of an employee stock ownership plan for failing to disclose inside information that ultimately led to a declining stock value, remanding the case to the Court of Appeals for the Second Circuit.  Retirement Plans Committee of IBM v. Jander, 589 U.S.  _____ (2020).

The US Supreme Court, in its 2014 opinion in Fifth Third Bancorp v. Dudenhoeffer, set forth a new pleading standard for “stock drop” cases on the basis of a failure to act on inside information.  Under Dudenhoeffer, to survive a motion to dismiss, the plaintiff “must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities law and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

In the Jander case, participants alleged that IBM in-house plan fiduciaries ‎violated their fiduciary duty of prudence by continuing to invest retirement plan assets in IBM ‎common stock despite knowing that the stock’s market price was artificially inflated due to ‎IBM’s misrepresentation of the value of one of its business units, which was eventually sold.  The Second Circuit concluded that the Dudenhoeffer’s “more harm than good” standard was met because no prudent fiduciary could have concluded that an earlier corrective disclosure would do more harm than good to the plan.  The basis for this conclusion was a determination by the Second Circuit that the “more harm than good” pleading standard could be satisfied by generalized allegations that “the harm of an inevitable disclosure of an alleged fraud generally increases over time.”  This position represents the first case in which a plaintiff potentially satisfied the high pleading ‎standard from Dudenhoeffer.‎

Although this specific question was presented to the Supreme Court, and was expected to ‎provide the basis for future litigation in this area, attorneys for both ‎IBM’s in-house fiduciaries and the Government (presenting the view of the Securities and Exchange Commission and the Department of Labor) focused their arguments on different issues.  Specifically, the ESOP fiduciaries “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 with the objectives” of the federal securities laws.  These arguments collectively focus on a key underlying conflict in Federal law – whether the ‎ERISA-based duties of loyalty and prudence require a fiduciary to act on inside information can ‎be reconciled with federal securities laws which allow insiders to not immediately disclose ‎information which could have a material impact on the price of a plan sponsor’s publicly traded ‎securities.‎

The Supreme Court declined to address those arguments, finding that “the Second Circuit did not address the[se] argument[s], and for that reason, neither shall we.”  The Court then vacated and remanded the case to the Second Circuit, leaving it to the Court of Appeals to determine whether to address those arguments.

Justice Kagan (joined by Justice Ginsburg) and Justice Gorsuch filed separate concurring opinions.  Justice Kagan suggested that IBM’s argument that ERISA “imposes no duty on an ERISA fiduciary to act on insider information” conflicts with Dudenhoeffer, which makes clear that an ESOP fiduciary, at times, has such a duty, as long as that disclosure does violate the federal securities laws.  In this regard, Justice Kagan noted that “when an action does not so conflict, it might fall within an ESOP fiduciary’s duty” to disclose, even if the securities laws do not require it.

On the other hand, Justice Gorusch’s opined that in permitting a special disclosure, the inside fiduciaries “would be acting in their capacity as corporate officers, not ERISA fiduciaries.”  Because ERISA fiduciaries are liable only for actions taken while “acting as a fiduciary”,  Justice Gorush noted that “it would be odd to hold the same fiduciaries liable for ‘alternative action[s they] could have taken’ only in some other capacity.”

For the time being, the Dudenhoeffer pleading standard remains in place.  It remains to be seen how the Second Circuit will address these issues upon remand.

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