A Second Circuit panel on Monday gave a proposed class of IBM employees another shot at proving the company improperly invested workers’ retirement savings in overpriced IBM stock, saying a New York federal judge shouldn’t have tossed claims that the alleged actions flouted the Employee Retirement Income Security Act.
The workers provided adequate support for their claim that IBM breached its fiduciary duty of prudence by continuing to invest their savings in company stock despite secretly knowing IBM’s microelectronic business was overvalued, the panel wrote in its opinion.
In rendering its decision, the panel overturned U.S. District Judge William H. Pauley III’s ruling that a prudent fiduciary might have thought that behaving a different way — for example, notifying workers that IBM’s microelectronic business was losing $700 million per year — would hurt the employee retirement fund rather than help it.
“The district court held that [the workers] failed to state a duty‐of‐prudence claim under ERISA because a prudent fiduciary could have concluded that the three alternative actions proposed in the complaint — disclosure, halting trades of IBM stock, or purchasing a hedging product — would do more harm than good to the fund. We respectfully disagree,” the panel wrote.
The “more harm than good” standard arose from the U.S. Supreme Court’s 2014 decision in Fifth Third Bancorp. v. Dudenhoeffer, a case that made it more difficult for workers to bring ERISA suits over drops in the stock prices of plan investments.
The IBM workers argued that the case law arising from Dudenhoeffer made it “functionally impossible to plead a duty‐of‐prudence violation.”
The Second Circuit acknowledged the workers’ argument on Monday, but it said it didn’t need to respond because their case against IBM was strong enough to meet the “more harm than good” standard.
An attorney for the workers, Zamansky LLC partner Samuel Bonderoff, said Monday that he appreciated the Second Circuit’s guidance into how workers can successfully plead duty-of-prudence violations after Dudenhoeffer.
“I think the fact that the court found that we had adequately pleaded a claim under Dudenhoeffer even under the more restrictive application of the ‘more harm than good’ standard provides helpful guidance to lawyers in this field pleading these kinds of cases going forward,” he said.
IBM said Monday that it plans to continue defending itself against the workers’ claims.
“While the court’s ruling on this preliminary matter is disappointing, IBM will continue to vigorously defend against these claims,” the company said.
The IBM workers’ lawsuit accused the company of hiding its microelectronics business’ struggles from investors, failing to disclose a situation that became alarmingly public when IBM paid another company $1.5 billion to take the business off IBM’s hands. The company’s stocks plummeted after the transaction, causing losses to the retirement plan, workers said.
A prudent fiduciary would have told the workers about the microelectronics business’ performance, halted trades of company stock or made other strategic investments for the retirement plan to counterbalance losses incurred by investments in IBM stock, they argued.
The IBM workers represented by Samuel Ethan Bonderoff and Jacob H. Zamansky of Zamansky LLC.