910 F.3d 620
2d Cir.2018Background
- Plaintiffs are IBM employees and participants in IBM’s ESOP who allege Plan fiduciaries (IBM’s Retirement Plans Committee and senior officers) knew IBM’s microelectronics division was overvalued and concealed that information, keeping ESOP investments in IBM stock.
- IBM announced a sale of the microelectronics business in October 2014, disclosed a $4.7 billion pre-tax charge and paid $1.5 billion to GlobalFoundries; IBM’s stock then fell sharply, triggering litigation.
- A parallel securities-fraud suit (Insulators) alleging fraud related to the same facts was dismissed by the district court and not appealed; that court found plaintiffs had not pleaded scienter for securities fraud.
- Jander sued under ERISA for breach of the fiduciary duty of prudence, alleging fiduciaries should have disclosed the impairment (or taken other measures) and that earlier disclosure would have been less harmful to the ESOP than later corrective disclosure.
- The district court twice dismissed Jander’s ERISA complaints, concluding plaintiffs failed to plausibly allege an alternative action that a prudent fiduciary could not have considered more likely to harm than help the fund; Jander appealed.
- The Second Circuit reversed, holding that under the pleading standard of Fifth Third and Amgen, Jander plausibly alleged that earlier corrective disclosure (through normal SEC reporting) was an alternative a prudent fiduciary could not have concluded would do more harm than good.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper pleading standard for ESOP duty-of-prudence claims post-Fifth Third and Amgen | Fifth Third and Amgen should not impose an unduly restrictive test at motion-to-dismiss; plausibility suffices | Defendants: plaintiffs must satisfy the stricter “could not have concluded” formulation and plead detailed facts showing any alternative would not be more harmful | Court did not decide which formulation controls but held claim plausible even under the more restrictive “could not have concluded” test |
| Whether plaintiffs plausibly alleged a viable alternative fiduciary action (corrective disclosure) | Jander: early corrective disclosure via regular SEC filings was feasible, lawful, and would likely limit harm to plan participants | Defendants: earlier disclosure could have spooked markets or buyers and might have harmed the value of stock already held by the fund more than it helped | Court held the complaint plausibly alleged that a prudent fiduciary in defendants’ position could not have concluded earlier disclosure would do more harm than good |
| Whether ERISA claim is precluded or barred by dismissal of parallel securities fraud suit (and PSLRA standards) | Jander: ERISA has different aims and pleading rules; PSLRA’s heightened standards do not apply to ERISA duty claims | Defendants: allowing ERISA claim to proceed would circumvent PSLRA protections and securities-law pleading rigors | Court held Insulators dismissal is not preclusive; PSLRA does not apply to ERISA claims, so ERISA pleading standards govern and Jander may allege knowledge of overvaluation but not re-plead securities fraud |
| Role of market efficiency and inevitability of disclosure in assessing alternatives | Jander: IBM traded in an efficient market; earlier disclosure would have reduced price only by the artificial inflation and reputational harm grows with concealment; sale made disclosure inevitable | Defendants: disclosure risks are speculative and could materially harm fund holdings | Court found allegations about market efficiency, reputational harm, and the likely sale (making disclosure inevitable) sufficiently plausible to support the claim at pleading stage |
Key Cases Cited
- Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (U.S. 2014) (rejected ESOP-specific presumption of prudence; set test for pleading alternatives lawful and not more likely to harm than help)
- Amgen Inc. v. Harris, 136 S. Ct. 758 (U.S. 2016) (summary reversal emphasizing that facts supporting alternatives must appear in complaint; vacated Ninth Circuit dismissal)
- Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995) (earlier articulation of an ESOP fiduciary presumption of prudence)
- In re Citigroup ERISA Litig., 662 F.3d 128 (2d Cir. 2011) (adopted a pro-fiduciary presumption formulation pre-Fifth Third)
- Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56 (2d Cir. 2016) (post-Fifth Third discussion of context-specific assessment whether divestiture could have harmed funds)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (market-price reflects publicly available information; relied on to support efficient-market allegation)
- International Ass'n of Heat & Frost Insulators & Asbestos Workers Local #6 Pension Fund v. Int'l Bus. Mach. Corp., 205 F. Supp. 3d 527 (S.D.N.Y. 2016) (district-court securities-fraud decision dismissing related claims for failure to plead scienter)