The Supreme Court decisions in Dudenhoeffer (2014) and Amgen (2016) made it more difficult, as a practical matter, for plaintiffs to bring ERISA duty of prudence claims involving employer stock. In the ensuing years, every stock drop complaint filed by ERISA plan participants around the country was dismissed for failure to allege facts satisfying Dudenhoeffer – until defendants’ winning streak was broken in December 2018.
In Jander v. Retirement Plans Committee of IBM, 910 F. 3d 620 (2d Cir., Dec. 10, 2018) (cert granted), the Second Circuit held that a complaint against the fiduciaries of an ESOP sponsored by IBM sufficiently pled a claim for violation of ERISA’s duty of prudence in connection with alleged overinflated employer stock, and that it was improper for the lower court to have dismissed the complaint.
This ruling caught many observers by surprise, given that all complaints of this type filed in the past 4-5 years have been dismissed.
Aberration or start of a plaintiff-friendly trend in employer stock cases?
General allegations of stock volatility or downward declines in stock price (even those resulting in bankruptcy) have been found insufficient to support a duty of prudence claim since Dudenhoeffer. But the more specific factual allegations in IBM highlight a potential roadmap for plaintiffs:
- Allege that plan defendants knew that the company stock was overvalued due to a failure to disclose some adverse information.
In IBM’s case, the defendants allegedly failed to disclose that the value of a business unit, and therefore the overall stock price, was artificially inflated through accounting violations.
- Allege that the plan fiduciaries had the power to disclose the truth and correct the artificial inflation, but did not.
In IBM’s case, the plan fiduciaries were also the CAO, CFO and GC.
- Allege that the company stock traded on an efficient market such that correcting the accounting fraud would reduce the stock price only by the amount by which it was artificially inflated and that earlier disclosure of the accounting fraud (as opposed to later disclosure) would have reduced the risk of over-correction.
IBM stock is traded on a national exchange.
- Allege that the plan fiduciaries knew that disclosure of the truth was “inevitable.”
In IBM’s case, the court found disclosure was inevitable because IBM was looking to sell this particular business unit and would be unable to hide the overvaluation from the public once a third party buyer vetted the business and a purchase price was disclosed – in the end, IBM actually paid $1.5 billion to a buyer to take the business unit off IBM’s hands, and IBM’s stock dropped by $12 per share.
In the first post-IBM employer stock drop decision, a court made a strong effort to limit IBM to its facts. In Fentress v. Exxon Mobil Corp., No. 4:16-cv-3484 (S.D. Tex., Feb. 4, 2019), the District Court granted Exxon Mobil’s motion to dismiss an employer stock drop case, IBM notwithstanding.
The Exxon court addressed plaintiff’s allegations that defendants violated their duty of prudence because they knew that Exxon’s stock prices were artificially inflated and yet continued to invest in Exxon stock. Plaintiff alleged that defendants should have sought out those responsible for Exxon’s disclosures under federal securities laws and tried to persuade them to refrain from making affirmative misrepresentations regarding the value of Exxon’s oil reserves. The parties submitted briefing on the impact of IBM on the pending motion to dismiss.
The Exxon court held that the two arguments the IBM court appeared to find most persuasive – “that the fraud became more damaging over time and that the eventual disclosure was inevitable” – do not apply to Exxon.
As to reputational damage, the Exxon court held that the Fifth Circuit recently rejected the identical argument in the Whole Foods stock drop case.
As to inevitability, the Exxon court held that there was no major triggering event that made Exxon’s eventual disclosure of its oil reserve troubles inevitable. Though Exxon was being investigated by authorities regarding statements about its oil reserves, investigations are often long and may not result in any charges against a company. Thus, while Exxon’s eventual disclosure was probably foreseeable, the Court could not say it was inevitable.
Supreme Court Agrees to Hear IBM’s Appeal
On June 3, 2019, the Supreme Court granted IBM’s cert petition, adding this employer stock drop case to its docket. The high court will hear at least one other ERISA matter next term (a statute of limitations issue under ERISA’s “actual knowledge” standard). As IBM phrased the issue to be decided on appeal: Whether Dudenhoeffer’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?
Next Bite at the Apple
Plaintiffs recently sued Boeing in an ERISA stock drop case, explicitly raising IBM as a benchmark in the complaint. Plaintiffs allege that Boeing knew about problems with its 737 MAX aircraft before two high-profile crashes brought worldwide attention to this particular aircraft’s issues.
The complaint cites the IBM case, and argues that, as in IBM, here “disclosure [of the allegedly non-disclosed negative information] was inevitable” because Boeing is in a highly-regulated industry. Burke v. The Boeing Company, No. 1:19-cv-02203, N.D. Ill (complaint filed on 3/31/19). Soon the court in Boeing will have a chance to weigh in on whether IBM is a crack in the Dudenhoeffer dam, or simply an aberration.
Stay tuned to www.ERISALitigation.com for updates on these cases.