Surprise IBM Stock-Drop Ruling Puts Fiduciaries on Notice – Bloomberg Law


Win or lose, the distressed workers challenging IBM’s handling of its overinflated stock-filled retirement plan have opened a door for others pursuing similar fraud cases.

The U.S. Court of Appeals for the Second Circuit’s recent decision to resuscitate the years-old case of Jander v. Retirement Plans Committee of IBM is a rare victory in a series of related Employee Retirement Income Security Act cases that have gone nowhere.

Dan Feinberg, a partner with Feinberg Jackson Worth man & Wasow LLP in Berkeley, Calif., hailed the unexpected move as something to build on.

“The Second Circuit is suggesting that a lot of these cases need to go through expert discovery. And that’s not something we’ve seen before,”he told Bloomberg Law. Rallying sympathetic legal scholars and industry professionals to one’s cause typically requires time and resources not available to every plaintiff. Courts have routinely dismissed these types of cases, shelving five other examples in as many years.

The Second Circuit changed things Dec. 10 by holding that fiduciaries of IBM’s 401 (k) plan might be liable under ERISA for failing to make an early disclosure of the company’s struggles. Workers were right to argue that no prudent ERISA plan fiduciary in IBM’s position could have concluded that an early corrective disclosure would have done more harm than good to the company’s stock price, the court said.

Feinberg said Chief Judge Robert A. Katzman’s decision prods the U.S. Supreme Court to address the ambiguity surrounding the “more harm than good” standard established in 2014 by Fifth Third Bancorp v. Dudenhoeffer. Under that scenario, plan fiduciaries must find the least harmful course of action for all parties involved.

Feinberg said the Second Circuit ruling gave “a more thoughtful consideration to what fiduciaries might have done other than failing to disclose the bad news.” Drilling down on the need to come clean about poor decisions is significant. “Nondisclosure is the most common issue in all these cases,” Feinberg argued.

The decision could persuade other judges to ask for more fact-finding in similar cases, he said. The expanded discovery process could include expert testimony, academic studies, business models, or other information that helps project the amount of damage the company will ultimately suffer.

Joseph Faucher, an attorney with Trucker Huss in Los Angeles, said employees have reason to celebrate given that “most courts have been fairly hostile to these ‘company stock’ cases since the Dudenhoeffer decision.”

The latest action gives them grounds to argue against dismissal, which has been the trend so far. But he said defense attorneys will likely try to contain the damage by painting IBM’s shortsightedness as the exception rather than the rule.

Erin Riley, an attorney with Keller Rohrback LLP in Seattle, said the decision is a welcome change. “We are pleased that the Second Circuit recognized that Dudenhoeffer and Amgen are not the death knell for ERISA company stock claims-as plan participants invested in ESOPs continue to be harmed when plan fiduciaries breach their duty of prudence,” she said.

Meanwhile, Jander litigator Sam Bonderoff is pleased that he’s still in the fight.

“We hope the Second Circuit’s ruling will show other courts that the Dudenhoeffer ‘more harm than good’ pleading standard was never intended to function as a blanket prohibition on duty-of-prudence cases,” he told Bloomberg Law. “That the Second Circuit found that plaintiffs had adequately pleaded their claims even under the ‘could not’ standard is especially significant in this regard.”

Click here to view the full article from Bloomberg Law