Second Circuit Reinstates Judgment Reversing Dismissal Of ERISA Class Action After Supreme Court Vacated And Remanded For Additional Consideration

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Shearman & Sterling LLPOn June 22, 2020, the Second Circuit reinstated its judgment entered pursuant to its initial opinion in an Employment Retirement Income Security Act of 1974 (“ERISA”) class action after the Supreme Court vacated the decision. Jander v. Ret. Plans Comm. of IBM, No. 17-3518 (2d Cir. June 22, 2020). The Supreme Court remanded the action earlier this year in order for the Second Circuit to decide whether to consider in the first instance certain arguments raised for the first time before the Supreme Court. On remand, the Second Circuit reviewed additional submissions from the parties as well as amici and reinstated its original decision, holding that the arguments raised in the supplemental briefs either were previously considered or were not properly raised and thus forfeited. Accordingly, the Second Circuit’s prior opinion stands, holding that plaintiffs adequately pled that employee stock option plan (“ESOP”) fiduciaries violated their duty of prudence by not disclosing, earlier, insider information they allegedly possessed that, when subsequently disclosed, allegedly led to a stock price drop.

As set forth in the Second Circuit’s initial opinion, plaintiffs, participants in an ESOP provided by a technology company (the “Company”), alleged the plan fiduciaries violated their duty under ERISA to manage the plan’s assets prudently, because they knew but failed to disclose that a certain division of the Company, and thus the Company’s stock, was allegedly overvalued. Plaintiffs further alleged that, when the true value of the division was ultimately revealed when the Company announced the sale of that division, the Company’s stock dropped. Plaintiffs brought suit in the Southern District of New York, and the District Court dismissed both the complaint and amended complaint in 2017 after holding that plaintiffs did not plausibly allege a violation because a prudent fiduciary could have concluded that disclosing this alleged information previously would have done “more harm than good,” based on the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014). In Fifth Third, the Supreme Court determined that a duty‐of‐prudence claim may be brought against ESOP plan fiduciaries who allegedly “behaved imprudently by failing to act on the basis of nonpublic information that was available to them because they were [corporate] insiders.” The Supreme Court noted that the duty of prudence cannot require an ESOP fiduciary to violate the securities laws, including concerning insider trading and corporate disclosure requirements. The Court further indicated that to determine whether a plaintiff has adequately pled that a fiduciary violated the duty of prudence, a court must, among other elements, assess the alternatives available to the fiduciary and consider if the complaint plausibly alleged that a “prudent fiduciary in the defendant’s position could not have concluded [that those alternatives] would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”

Plaintiffs appealed the dismissal to the Second Circuit, arguing that, as to the “more harm than good” element, the standard applied by the District Court was more stringent than that set forth in Fifth Third. The Second Circuit examined this question but ultimately found it unnecessary to determine whether the District Court had applied a stricter standard, because the Second Circuit found that plaintiffs plausibly pled a duty‐of‐prudence claim even under this standard. The Second Circuit noted that, in discussing the “more harm than good” analysis, the Supreme Court appeared to set forth two arguably inconsistent tests: (1) “what an average prudent fiduciary might have thought” regarding whether the alternatives would do more harm than good; or (2) “whether any prudent fiduciary could have considered the action to be more harmful than helpful” (emphases added). The Second Circuit observed that lower courts have been split as to how to interpret which of the two tests “determine whether a plaintiff has plausibly alleged that the actions a defendant took were imprudent in light of available alternatives.” However, the Second Circuit concluded that it did not need to decide which of the two standards was correct, because it found that plaintiffs plausibly pled a duty-of-prudence claim even under the more restrictive formulation, based on plaintiffs’ allegations that: defendants allegedly knew that the Company’s stock was artificially inflated through accounting violations; defendants allegedly “had the power to disclose the truth”; a “reasonable business executive could plausibly foresee . . . the disclosure of a longstanding corporate fraud would reflect badly on the company”; the Company’s stock allegedly traded in an efficient market; and defendants allegedly knew that disclosure of the truth regarding the division at issue was inevitable, because the Company was likely to sell the business, at which point the alleged overvaluation would be revealed to the public. Accordingly, the Second Circuit reversed the dismissal and remanded the case to the District Court for further proceedings. That reversal and remand—vacated by the Supreme Court—have now been reinstated.

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Jander v. Ret. Plans Comm. of IBM

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