Supreme Court Remands IBM v. Jander Stock Drop Challenge

The Supreme Court has ruled in Retirement Plans Committee of IBM v. Larry W. Jander, remanding the case back to the 2nd U.S. Circuit Court of Appeals.

In mid-2019, IBM asked the high court to hear the case after the 2nd Circuit reversed the company’s district court win. Plaintiffs allege that IBM imprudently managed company stock investments in one of its retirement plans, and their lawsuit is a classic example of “stock drop litigation.”

“The question presented in this case concerned what it takes to plausibly allege an alternative action that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it,” the decision explains. “It asked 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. In their briefing on the merits, however, the petitioners (fiduciaries of the employee stock ownership plan at issue here) and the Federal Government (presenting the views of the Securities and Exchange Commission as well as the Department of Labor), focused their arguments primarily upon other matters.”

The decision notes the petitioners argued that the Employee Retirement Income Security Act (ERISA) imposes no duty on an employee stock ownership plan fiduciary to act on inside information. For its part, 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 at least with objectives of the complex insider trading and corporate disclosure requirements imposed by the federal securities laws.

“The Second Circuit did not address these arguments, and, for that reason, neither shall we,” the Supreme Court rules. “We are a court of review, not of first view. Nevertheless, in light of our statement in Dudenhoeffer that the views of the U. S. Securities and Exchange Commission might well be relevant to discerning the content of ERISA’s duty of prudence in this context … we believe that the Court of Appeals should have an opportunity to decide whether to entertain these arguments in the first instance. For this reason we vacate the judgment below and remand the case, leaving it to the Second Circuit whether to determine their merits, taking such action as it deems appropriate.”

The full text of the Supreme Court ruling, including two consenting opinions, is here.