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
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.
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
Katzmann, Chief Judge
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.
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.
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.
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.
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
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").
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).
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.
Standard of Review
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'