OPINION & ORDER
The Retirement Plans Committee of IBM, Richard Carroll, Martin Schroeter, and Robert Weber (together, the “Defendants”) move to dismiss the Second Amended Class Complaint (the “Complaint”). For the following reasons, the Defendants’ motion is granted.
BACKGROUND
This stock-drop action prises from IBM’s' ■ October 2014 announcement regarding the sale of its Microelectronic business and a concomitant $2.4 billion write-down of its assets.
I. Relevant Allegations
For purposes of this motion, the factual allegations in the Complaint are accepted as true. The Plan is a defined contribution benefit plan sponsored by IBM toward which eligible employees may defer up to 10% of their compensation. (Complaint (“Compl.”), ECF No. 38, ¶ 44.) Under the Plan’s governing documents, the Retirement Plans Committee (“Committee”) is a named fiduciary.under the Employee Retirement Income Security Act (“ERISA”). (Compl. ¶ 40.) Defendants Schroeter and Weber, as members of the Committee, along with Carroll, the Plan Administrator, are also named fiduciaries. The Plan offered a suite of investment options that Plan participants could choose from, including the Fund, an employee stock option plan (“ESOP”) that primarily invested in IBM stock.
In 2013, IBM began searching for á buyer to purchase its Microelectronics business, a division of its Systems and Technology Segment responsible for designing and producing microchips. (Compl. ¶¶ 55, 59.) IBM hired an investment bank to solicit offers from potential suitors but had difficulty finding a buyer. (Compl. ¶¶ 59-60.) -While IBM was engaged in the search for a buyer, it continued to operate the Microelectronics business, making periodic disclosures to the market about its financial condition.
From January 21, 2014 to October 20, 2014 (the “Class Period”), IBM reported positive news and figures regarding the value of - its Microelectronics business. (Compl. ‘ ¶¶ 64-76). In reality, however, IBM and Defendants concealed - the truth — that the Microelectronics business was “a massive money-loser” whose'continued operation had a “substantial negative impact” on the Systems and Technology Segment’s overall business. (Compl. ¶ 69.) For nearly a year as IBM searched for a buyer, the Microelectronics business hemorrhaged money. (Compl. ¶ 17.)
II. Procedural History
In September. 2016, this Court dismissed Plaintiffs’ claims on grounds that their complaint failed to state a claim for breach of the duty of prudence. More specifically, Plaintiffs “fail[ed] to plead facts giving rise to an inference that Defendants could not have concluded that public disclosures, or halting the Plan from further investing in IBM stock, were more likely to harm than help the fund.” Jander,
This Court further held that in order to prevail on an ERISA claim, Plaintiffs must satisfy a “highly demanding pleading standard”' — one under which a “rote recitation of proposed remedies without the necessary facts and allegations supporting Plaintiffs’ proposition” would not suffice. Jander,
-Notwithstanding dismissal of the first complaint, this Court afforded Plaintiffs another opportunity to re-plead their claims after “undertakfing] the necessary due diligence to provide facts [with] greater specificity.” Jander,
DISCUSSION
I. Standard
On a motion to dismiss, a complaint “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
Nevertheless, this Court must accept as true all well-pleaded allegations — including documents attached to the Complaint or
II. Analysis
Plaintiffs offer three alternative actions that Defendants could have taken to mitigate the deleterious effects on IBM’s stock price following the divestiture announcement. In their previous complaint, Plaintiffs alleged two alternative actions — that Defendants (i) could have made an earlier corrective disclosure to the market and (ii) could have halted all purchases and sales of IBM stock. They reiterate those alternatives and add a third in this Complaint, namely that Defendants could have purchased a hedging product to offset any losses to the Plan.
Under ERISA, an ESOP fiduciary owes the duty to act prudently “under the circumstances then prevailing.” 29 U.S.C. § 1104(a)(1)(B). In other words, the duty of prudence is not evaluated from the “vantage point of hindsight.” Roth v. Sawyer-Cleator Lumber Co.,
When a duty of prudence claim is alleged on the basis of nonpublic information, Dudenhoeffer dictates that “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”
A mere two years after Dudenhoeffer, the Supreme Court validated this exacting standard, directing lower courts to scrutinize the “facts and allegations supporting” a duty of prudence claim. Amgen Inc. v. Harris, — U.S. -,
Here, the allegations in the Complaint fall short of the standard set forth in Du-denhoeffer and Amgen. The Complaint is longer than its previous iteration, but much of it is adorned with conclusory allegations aimed at advancing the general theory that Plaintiffs’ proposed' alternative actions would have protected the Plan from its losses. Beyond a rote explanation of how those alternative actions would have mitigated the harm, the Complaint is bereft of context-specific details to show that a- prudent fiduciary would not have viewed the proposed alternatives as more likely to-do more harm than good. Amgen,
A. Issuing Earlier Corrective Disclosure ;
Plaintiffs allege that Defendants “could have issued truthful or corrective disclosures much earlier to cure the fraud and to make its stock a prudent investment again for the Plan.” (Compl. ¶ 104.) Employing this alternative could have' “ended the' artificial inflation in IBM’s stock price, which was damaging all purchasers through the Plan who paid excessive, fraudulent prices for the stock.” (Compl. ¶ 105.) That is all the more true, Plaintiffs claim, since the Plan was a net buyer of approximately $111 million worth of IBM. stock in 2014. (Compl. ¶ 106).
While these allegations are plausible on a theoretical basis, they fail to shed any light on whether a prudent fiduciary in Defendants’ position under circumstances then prevailing believed that a corrective disclosure would not have done more harm than good to the Fund. As an initial matter, “courts have routinely rejected the allegation that the longer a fraud goes on, the harsher the correction as support for corrective disclosure as a plausible alternative.” Graham v. Fearon,
Plaintiffs allege that the failure of IBM’s share price to rebound in the aftermath of the company’s October 2014 divestiture announcement validates the viability of making a corrective disclosure. Specifically, they assert that IBM’s stagnant stock price two years after the divestiture announcement is evidence of the lingering
Plaintiffs advance one additional, allegation that is remotely context specific — that the Fund was a net buyer of IBM stock, purchasing approximately $111 million in 2014. (Compl. K106.) A prudent fiduciary, they argue, would have saved unwitting buyers from a steeper decline in the value of their stock even if certain “Plan participants who managed to sell at inflated prices” ultimately benefited. (Compl. ¶ 106.) And based on that, a prudent fiduciary would have concluded that “more harm, than good to the Plan could not possibly be done by continuing to let the artificial inflation go uncorrected.” (Compl. ¶106.) But this allegation omits sales of approximately $391 million of IBM stock during the same period that Plan participants purchased $111 million of stock. That turns the Fund into a net seller for the year. (Declaration of Lawrence Port-noy in Support of Motion to Dismiss, ECF No. 46, Ex. H, SEC Form' 11-K for FY 2014.) This, context-specific fact radically changes the analysis regarding what a prudent fiduciary would have concluded. With net sales eclipsing net purchases, it is entirely conceivable that a prudent fiduciary could have concluded that issuing an early corrective disclosure would.do more harm than good.
Moreover, Plaintiffs’ allegations merely track the theory of corrective disclosure— that releasing news of the fraud earlier would mitigate a precipitous drop in stock price following the divestiture announcement. (See Compl. ¶¶ 114-115, 118-119.) Plaintiffs offer no insight into how far the stock price would have dropped if disclosure was made earlier. More importantly, “Dudenhoeffer expressly instructs courts to consider whether publicly disclosing negative information would do more harm than good to the fund by causing.a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.” In re BP P.L.C. Sec. Litig.,
Pleading these concepts requires more substance, which is why this Court, in allowing Plaintiffs to file the Complaint, presumed that they would “undertake the necessary due diligence to provide facts of this greater specificity, including those data, regarding the Fund’s Class Period purchases ... and possibly retaining an expert to perform a quantitative analysis to show more precisely how Plan participants are harmed in the short and long term by purchasing Fund shares at artificially high prices.”
Beyond the absence of context specific allegations, however, the Complaint suffers from the failure to consider how a prudent fiduciary, when confronted with the inevitability of disclosing the impending sale of its Microelectronic business, would have accounted for the potential ill-effects resulting from a premature disclosure. “[G]iven the negative impact of disclosure, a prudent fiduciary could very easily conclude that such an action would do more harm than good.” Graham,
Plaintiffs contend that no prudent fiduciary could have concluded that earlier disclosure would have done more harm than good, and urge this Court to take them at their word at this juncture in the litigation. But the whole point of Dudenhoeffer was to weed out meritless claims based on nothing more than-Plaintiffs’ ipse dixit assertions, and to encourage “careful judicial consideration” of alternative actions predicated on context-specific allegations that a prudent fiduciary under circumstances then prevailing would have weighed. Here, Plaintiffs give short shrift to Dudenhoef-fer’s demands, only alleging in- conclusory fashion that “in weighing, harm versus good, [Defendants] should have concluded that [ ] a disclosure ... would, in this case, be less harmful than waiting .for the disclosure to happen through some other mechanism.” (Compl, ¶ 118.)
B. Halting Trading of IBM Stock
Plaintiffs proffer a second, alternative— that Defendants, who had the authority to issue new investment guidelines for the
Plaintiffs gloss over the context-specific factors at play during the Class Period that a prudent fiduciary could have considered in determining whether halting the trading of IBM stock would do more harm than good. They reference on multiple occasions that the divestiture announcement caused a 7% decline in the stock value, and that Defendants were well-positioned to protect Plan participants from overpaying or provide them the opportunity to allocate their money toward other prudent alternative investment options under the Plan. (Compl. ¶¶ 129-130.) But these are the type of “naked assertions [ ] analogous to those the Supreme Court found insufficient in Amgen.” Target,
Moreover, the Complaint overlooks the possibility that halting trades “could send mixed signals,” such as diminished confidence in IBM stock, “causing a drop in stock price” that could have done more harm than good to the Fund. Target,
C. Purchasing a Hedging Product
Finally, the Complaint asserts that purchasing a low-cost hedging product to offset any losses resulting from precipitous decline in stock price would not have done more harm than good. Plaintiffs allege that, in January 2013, Defendants were offered the option to “provide protection to Plan participants who were invested in IBM stock against the risk of an IBM stock price decline,” but they rejected such a proposal after “virtually no consideration.” (Compl. ¶ 131.) The Complaint also describes these “available hedging products” as low-cost alternatives “requir[ing] annual cash deposits of l-2%.” (Compl. ¶ 134.) Absent any losses triggering the hedge, “refunds of over half of the amount of annual contributions” would put the “cost of participation down to 0.10% per year.” (Compl. ¶ 134.)
Beyond those allegations, however, the Complaint adds only surplusage to the contention that a hedging product would have been a better option than doing nothing. Defendants, as ESOP fiduciaries, have no duty to diversify since ESOPs, by their very nature, are intended to encourage stock ownership in one company. See Dudenhoeffer,
Plaintiffs give no consideration to the costs — and harm to the Fund — that could have been incurred from purchasing this generic hedging product. First, depending on its parameters, the expense of obtaining a hedge may have outweighed its benefit. There is no telling how much the Fund would have been reimbursed, or protected, had a devastating disclosure such as the divestiture announcement triggered the hedge. The point.of highlighting these deficiencies, however, is not that Plaintiffs were required to account for every detail and contingency. It is to underscore the need for some detail about an alternative action that a prudent fiduciary necessarily would have had to weigh and explore in making the ultimate determination that such action would not have done more harm than good to the Fund. The Complaint offers little from which this Court could conceive of such a result.
Second, like the other alternative actions, obtaining a hedging product may have required' disclosure. Even if this Court accepted Plaintiffs’ assurances that such a purchase would not require disclosure through a filing with the SEC or Department of Labor, Section 404 of ERISA mandates the Plan Administrator to provide Plan participants with notice of any “qualified change in investment options.” See 29 U.S.C. § 1104(c)(4)(C). That would include investing in a hedging product on behalf of a Fund otherwise comprised of IBM stock. Such notice could have prompted questions about why a hedging product was necessary in the first place, “rais[ing] concerns in the broader market regarding the health of the Company or hasten the ultimately disclosure of the alleged” misrepresentations. Martone v. Robb,
More troubling, this alternative may have invited Defendants to defraud a coun-terparty. If, for example, an insurer required Defendants to submit information about IBM, Defendants might have misrepresented the value of the Microelectronics business to conceal the reason they were seeking a hedge. That places a prudent fiduciary in a Catch-22. On the one hand, Plaintiffs complain that a prudent fiduciary should not have concealed the purported fraud for as long as it did; on the other, they suggest a hedge should have been obtained under false pretenses to mitigate the inevitable harm resulting from the concealed fraud. This point further suggests that purchasing a hedge during the circumstances then prevailing may not have been a real possibility at all. And if it was — assuming a counterparty agreed to provide the hedge in spite of knowing about IBM’s impending disclosure — a prudent fiduciary may have wondered whether it had just purchased a product whose benefits were illusory. These are all critical considerations that would have factored into a prudent fiduciary’s calculus.
Fidelity to Dudenhoeffer’s standard — to allege that a prudent fiduciary could not conclude that the alternative action would do more harm than good — requires a balancing of the countervailing outcomes to an alternative action under the circumstances. “In other words, in weighing the ‘harm’ and ‘good’ that would result from Plaintiffs’ propos[ed] [alternative action]” such as early corrective disclosure, “a prudent fiduciary would have considered the harmful prospect of a stock drop that was imminent, substantial, and likely to occur.”
CONCLUSION
■ For the foregoing reasons, Defendants’ motion to dismiss is granted. The Clerk of Court is directed to terminate the motion pending at ECF No. 43, and mark this case as closed.
SO ORDERED:
Notes
. Familiarity with this Court's prior Opinions and Orders in Int’l Assoc. of Heat & Frost Insulators & Asbestos Workers Local # 6 Pension Fund v. Int’l Bus. Machs. Corp.,
, But even that may not be enough. In BP P.L.C., to "quantify the hypothetical effect of making an [earlier disclosure],” the plaintiffs hired a financial markets expert who surmised a "3 to 5% decline from an early disclosure,” which was substantially less than the 50% drop that actually occurred when BP’s undisclosed safety risks materialized.