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Jander v. Retirement Plans Comittee of IBM

United States Court of Appeals, Second Circuit

December 10, 2018

Larry W. Jander, and all other individuals similarly situated, Richard J. Waksman, Plaintiffs-Appellants,
Retirement Plans Comittee of IBM, Richard Carroll, Robert Weber, Martin Schroeter, Defendants-Appellees, International Business Machines Corporation, Defendant.

          Argued: September 7, 2018

         Plaintiffs-appellants Larry Jander and Richard Waksman appeal from a judgment of the Southern District of New York (Pauley, J.) dismissing their suit against fiduciaries of IBM's employee stock option plan ("ESOP"). Plaintiffs- appellants claim that the defendants violated their duty under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1104(a)(1)(B), to manage the ESOP's assets prudently, because they knew but failed to disclose that IBM's microelectronics division (and thus IBM's stock) was overvalued. The district court determined that plaintiffs-appellants did not plausibly plead a violation of ERISA's duty of prudence, because a prudent fiduciary could have concluded that earlier corrective disclosure would have done more harm than good. On appeal, plaintiffs-appellants assert that this standard is stricter than the one set out in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014), and that the district court and others have applied this stricter standard in a manner that makes it functionally impossible to plead a duty-of-prudence violation. We find it unnecessary to determine whether plaintiffs-appellants are correct, because they plausibly plead a duty-of-prudence claim even under the stricter standard used by the district court. Accordingly, the judgment of the district court is REVERSED and the case is REMANDED for further proceedings.

          Samuel E. Bonderoff (argued), Jacob H. Zamansky, Zamansky LLC, New York, NY, for Plaintiffs-Appellants.

          Lawrence Portnoy (argued), J. Stan Barrett, Michael S. Flynn, W. Trent Thompson, Davis Polk & Wardwell LLP, New York, NY, for Defendants-Appellees.

          Before: Katzmann, Chief Judge, Sack and Raggi, Circuit Judges.

          Katzmann, Chief Judge

         The Employee Retirement Income Security Act ("ERISA") requires fiduciaries of retirement plans to manage the plans' assets prudently. 29 U.S.C. § 1104(a)(1)(B). One form of retirement plan, the employee stock option plan ("ESOP"), primarily invests in the common stock of the plan participant's employer. This case asks what standard one must meet to plausibly allege that fiduciaries of an ESOP have violated ERISA's duty of prudence.

         The plaintiffs here, IBM employees who were participants in the company's ESOP, claim that the plan's fiduciaries knew that a division of the company was overvalued but failed to disclose that fact. This failure, the plaintiffs allege, artificially inflated IBM's stock price, harming the ESOP's members. To state a duty-of-prudence claim, plaintiffs must plausibly allege that a proposed alternative action would not have done more harm than good. The parties disagree about how high a standard the plaintiffs must meet to make this showing. However, we need not resolve this dispute today, because we find that the plaintiffs have plausibly alleged an ERISA violation even under a more restrictive interpretation of recent Supreme Court rulings. We therefore REVERSE the district court's judgment dismissing this case and REMAND for further proceedings.


         Plaintiffs-appellants Larry Jander and Richard Waksman, along with other unnamed plaintiffs (collectively, "Jander"), are participants in IBM's retirement plan. They invested in the IBM Company Stock Fund, an ESOP governed by ERISA. During the relevant time period, defendants-appellees the Retirement Plans Committee of IBM, Richard Carroll, Robert Weber, and Martin Schroeter (collectively, "the Plan defendants") were fiduciaries charged with overseeing the retirement plan's management. The individual defendants were also part of IBM's senior leadership: Carroll was the Chief Accounting Officer, Schroeter the Chief Financial Officer, and Weber the General Counsel.

         Jander alleges that IBM began trying to find buyers for its microelectronics business in 2013, at which time that business was on track to incur annual losses of $700 million. Through what Jander deems accounting legerdemain, IBM failed to publicly disclose these losses and continued to value the business at approximately $2 billion. It is further alleged that the Plan defendants knew or should have known about these undisclosed issues with the microelectronics business. On October 20, 2014, IBM announced the sale of the microelectronics business to GlobalFoundries Inc. The announcement revealed that IBM would pay $1.5 billion to GlobalFoundries to take the business off IBM's hands and supply it with semiconductors, and that IBM would take a $4.7 billion pre-tax charge, reflecting in part an impairment in the stated value of the microelectronics business. Thereafter, IBM's stock price declined by more than $12.00 per share, spawning two pertinent lawsuits.

         The first is International Ass'n of Heat & Frost Insulators & Asbestos Workers Local #6 Pension Fund v. International Business Machines Corp., 205 F.Supp.3d 527 (S.D.N.Y. 2016) ("Insulators"), a securities fraud class action that was dismissed on September 7, 2016. The district court found that the investor plaintiffs had "plausibly plead[ed] that Microelectronics' decreased value, combined with its operating losses, may have constituted an impairment indicator under" Generally Accepted Accounting Principles ("GAAP"). Id. at 535. The district court nevertheless dismissed the claims because the plaintiffs "fail[ed] to raise a strong inference that the need to write-down Microelectronics was so apparent to Defendants before the announcement, that a failure to take an earlier write-down amount[ed] to fraud," id. at 537 (internal quotation marks and alterations omitted), or that the defendants knew that IBM's earnings-per-share projections "lacked a reasonable basis when they were made," id. at 537-38. That decision has not been appealed.

         The second action is this case. Here, Jander alleges that the Plan defendants continued to invest the ESOP's funds in IBM common stock despite the Plan defendants' knowledge of undisclosed troubles relating to IBM's microelectronics business. In doing so, Jander alleges, the Plan defendants violated their fiduciary duty of prudence to the pensioner plaintiffs under ERISA. The plaintiffs also pleaded that "once Defendants learned that IBM's stock price was artificially inflated, Defendants should have either disclosed the truth about Microelectronics' value or issued new investment guidelines that would temporarily freeze further investments in IBM stock." Jander v. Int'l Bus. Mach. Corp., 205 F.Supp.3d 538, 544 (S.D.N.Y. 2016) ("Jander I").

         The district court first dismissed Jander's case on the same day it decided the securities fraud lawsuit. See id. at 540-41. As an initial matter, the district court relied on the reasoning set forth in its securities fraud decision to find that the pensioner plaintiffs had "plausibly pled that IBM's Microelectronics unit was impaired and that the Plan fiduciaries were aware of its impairment." Id. at 542. The court noted that knowledge was a sufficient level of scienter because ERISA plaintiffs need not meet the heightened pleading standards that apply in securities actions. Id. But the district court nevertheless dismissed the action because Jander had "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." Id. at 545 (citing Fifth Third, 134 S.Ct. at 2472).

         Rather than dismiss the action with prejudice, however, the district court granted Jander an opportunity to file a second amended complaint. Id. at 546. Jander availed himself of that opportunity, adding further details and alleging a third alternative by which the Plan defendants could have avoided breaching their fiduciary duty: by purchasing hedging products to mitigate potential declines in the value of IBM common stock. The district court again found lacking the allegations concerning the three alternatives available to the Plan defendants, determining that each might have caused more harm than good. Jander v. Ret. Plans Comm. of IBM, 272 F.Supp.3d 444, 451-54 (S.D.N.Y. 2017) ("Jander II"). This appeal followed.


         I. Standard of Review

         "To survive a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a complaint must allege sufficient facts, taken as true, to state a plausible claim for relief. We review de novo a dismissal for failure to state a claim, accepting as true all material factual allegations in the complaint and drawing all reasonable inferences in plaintiffs' ...

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