Supreme Court Remands Second Circuit Stock Drop Decision

The U.S. Supreme Court is poised for a flurry of ERISA-related activity this year, with four cases on the docket. The first decision out of this quartet came on January 14, 2020, when the Supreme Court remanded the closely watched Retirement Plans Committee of IBM v. Jander to the Second Circuit Court to consider issues that were not fully developed at the court of appeals.

In Jander, the plaintiffs were participants in IBM’s employee stock ownership plan (ESOP), which invested in IBM stock. The plaintiffs alleged that the ESOP fiduciaries’ failure to make early corrective disclosures about an incorrect business valuation was a breach of fiduciary duty that caused the IBM stock to drop significantly.

“Stock drop” claims such as this are governed by the Supreme Court’s 2014 decision in Fifth Third Bancorp v. Dudenhoeffer, which held that to state a claim for breach of the duty of prudence on the basis of corporate insider information, a plaintiff must plausibly allege an alternative action that the ERISA fiduciary could have taken that (1) would have been consistent with the securities laws and (2) a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. Although many stock drop cases are dismissed because plaintiffs cannot meet Dudenhoeffer’s “more harm than good” standard, in Jander, the Second Circuit found that the plaintiffs had plausibly alleged that the fiduciaries could not have concluded that an earlier corrective disclosure of the business valuation would do more harm than good.

The issue for the Supreme Court in Jander was whether the “more harm than good” pleading standard could be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time. The briefing and arguments submitted to the Supreme Court, however, focused on different issues. Specifically, the ESOP fiduciaries argued that ERISA imposes no duty on a fiduciary to act on inside information. And the government (presenting the views of the Securities Exchange Commission (SEC) and the Department of Labor (DOL)) argued that an ERISA-based duty to disclose inside information that is not otherwise required to be disclosed by securities laws would “conflict” with the objectives of the complex insider trading and corporate disclosure requirements imposed by the federal securities laws.

In a per curiam opinion, the Supreme Court declined to consider these arguments because they had not been addressed by (or presented to) the Second Circuit. Noting that the views of the SEC might be relevant when analyzing the duty of prudence in this context, the Supreme Court vacated and remanded the case to the Second Circuit “to decide whether to entertain these arguments in the first instance.”

Justice Elena Kagan (joined by Justice Ruth Bader Ginsburg) and Justice Neil Gorsuch filed separate concurring opinions. Justice Kagan observed that Dudenhoeffer “makes clear that an ESOP fiduciary at times” has a duty to act on insider information, when doing so would not conflict with securities laws. She also noted that the Second Circuit may decline to consider arguments raised by the IBM fiduciaries if it determines those arguments have been waived. Justice Gorsuch, however, warned that if the Second Circuit did not address the merits of IBM’s position now, it would “only prove unavoidable later.” Justice Gorsuch also indicated his disagreement with Justice Kagan, noting that “[b]ecause ERISA fiduciaries are liable only for actions taken while ‘acting as a fiduciary,’ it would be odd to hold the same fiduciaries liable for” failure to make early corrective disclosures, an action that could only be taken in their capacity as corporate officers.

The concurring opinions in Jander highlight the tension between ERISA and securities laws when corporate officers also serve as fiduciaries on retirement plan committees. One way for plans to avoid conflict and breach of fiduciary duty claims in this ambiguous area is to preclude corporate officers from serving as ERISA fiduciaries. At a minimum, fiduciaries should be aware of these unsettled issues and pay close attention to the Second Circuit’s remand review in Jander.