This post is the one of two posts discussing claims brought against International Business Machines Corporation (“IBM”) in 2016 regarding a seventeen percent drop in the company’s stock price. This post will specifically focus on claims brought pursuant to the Employee Retirement Income Security Act (“ERISA”). The other post covers claims brought pursuant to federal securities laws.
In Jander v. International Business Machines Corp., No. 15cv3781, 2016 BL 291159 (S.D.N.Y. Sept. 7, 2016), the United States District Court for the Southern District of New York granted IBM’s motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6) with leave to amend Larry W. Jander’s and Richard J. Waksman’s (together, “Plaintiffs”) Amended Complaint.
On behalf of participants in IBM’s 401(k) Plus Plan (the “Plan”), who invested in the IBM Company Stock Fund (the “Fund”) between January 21, 2014, and October 20, 2014, Plaintiffs brought claims against IBM and the Retirement Plans Committee of IBM, including IBM’s Chief Accounting Officer, Richard Carroll, IBM’s Chief Financial Officer, Martin Schroeter, and IBM’s General Counsel, Richard Weber (collectively, “Defendants”) pursuant to Section 502 of ERISA. The Plan permitted employees to defer compensation into various investment options, including the Fund, which was predominately invested in IBM common stock. As members of the Retirement Plans Committees, Defendants Schroeter and Weber were named as fiduciaries under ERISA. Defendant Carroll, as the Plan Administrator, was also named as a fiduciary.
In their Amended Complaint, Plaintiffs alleged that IBM’s stock price was overvalued and dropped approximately 17% as a result of the company’s divestiture announcement. Specifically, in October 2014, the company announced it was transferring its microelectronics business to another company and, consequently, it was taking a $2.4 billion write-down. Additionally, the company announced disappointing third-quarter results. Moreover, in two separate pending cases, allegations that Generally Accepted Accounting Principles (“GAAP”) required the company to record an earlier impairment of its microelectronics assets were asserted.
Defendants moved to dismiss Plaintiffs’ Amended Complaint for failure to state a claim on which relief can be granted arguing the following: (1) Plaintiffs failed to plead the microelectronics assets were impaired; (2) IBM was not a fiduciary; (3) Plaintiffs’ alternative actions assertion failed to meet the requisite standard; and (4) Plaintiffs’ duty to monitor claim was derivative of the underlying claims.
Under ERISA, fiduciaries must “‘act in a prudent manner under the circumstances then prevailing,’ a standard that eschews hindsight and focuses instead on the ‘extent to which plan fiduciaries at a given point in time reasonably could have predicted the outcome that followed.’” In an ERISA action where a GAAP violation is alleged, the higher pleading standard required by Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act regarding scienter are not applicable. As such, the court concluded Plaintiffs’ allegations that the fiduciaries knew the company’s stock price was inflated by undisclosed material facts regarding its microelectronics business plausibly suggested an impairment and, thus, a violation of GAAP.
A threshold question in ERISA cases, however, is whether each defendant acted as a fiduciary of the plan. In addition to named fiduciaries, those who exercise “discretionary control or authority over the plan’s management, administration, or assets” are deemed de facto fiduciaries. The court reasoned that Plaintiffs’ allegations IBM was a de facto fiduciary because it had ultimate oversight over the Plan were bare legal conclusions and, therefore, failed to adequately allege that IBM was a fiduciary.
In cases in which fiduciaries allegedly “behaved imprudently by failing to act on the basis of nonpublic information that was available to them because they were . . . insiders,” pleading a breach of the duty of prudence requires a plaintiff to plausibly allege: (1) “‘an alternative action that the defendant could have taken that would have been consistent with the securities laws,’ and (2) ‘that a prudent fiduciary in the same circumstances [as Defendants] would not have viewed [the alternative action] as more likely to harm the fund than to help it.’”
First, the court determined, as Plaintiffs asserted, Defendants could have issued corrected statements regarding the valuation of the company’s microelectronics business while complying with the federal securities laws. Regarding the second prong, however, the court concluded the company could not reasonably be expected to disclose insider information or halt the Plan from further investing in the company’s stock as Plaintiffs asserted. In so finding, the court reasoned that a prudent fiduciary in Defendants’ circumstances would not have believed that such conduct would be more likely to help rather than harm the Fund.
Lastly, the court held Plaintiffs failed to adequately plead a claim for breach of duty to monitor because such claim was derivative of their claims for breach of duty of prudence, which they failed to sufficiently allege.
Accordingly, the court dismissed Plaintiffs’ claims brought pursuant to ERISA without prejudice and allowed Plaintiffs to file a Second Amended Complaint within thirty days.
Primary materials for this case may be found on the DU Corporate Governance website.