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Appeals court rejects IBM’s request to halt stock-drop lawsuit

A federal appeals court in New York ruled that a stock-drop lawsuit against International Business Machines Corp. can proceed, rejecting IBM's request that the case be halted so the company could file a petition for review by the U.S. Supreme Court.

"The motion to stay the mandate is denied," said the ruling Monday by a three-judge panel for the 2nd U.S. Circuit Court of Appeals, New York, offering no comment on its decision. The panel previously had ruled against IBM.

Participants in an IBM 401(k) plan argued that plan fiduciaries failed to prudently manage an IBM company stock fund within the plan's investment lineup.

The mandate refers to the appeals court decision Dec. 10, reversing a ruling by U.S. District Judge William H. Pauley III in New York and sending the case back to the judge.

In September 2016 and again in September 2017, Mr. Pauley ruled for IBM when he dismissed the participants' arguments that plan fiduciaries should have taken actions to protect 401(k) plan investors when IBM stock declined following the company's efforts to sell its microelectronics unit in 2014.

However, the federal appeals court panel ruled unanimously, that the participants had effectively supported their arguments.

The plaintiffs "plausibly allege that the plan defendants had the requisite knowledge of (stock) overvaluation to raise fiduciary responsibilities consistent with the standard" set by the U.S. Supreme Court regarding stock-drop litigation in ERISA cases, the ruling said.

"The allegations regarding the sale of the microelectronics business … tip the scales toward plausibility," the appeals court wrote.

Successful petitions for halting a lower court case so litigants can appeal to the Supreme Court are rare. They usually focus on arguments that various federal appeals courts disagree on broad legal principles — a circuit split — or that a court incorrectly interpreted a Supreme Court decision.

IBM offered both reasons in its Jan. 24 request that the appeals court halt the case. IBM said the appeals court misinterpreted the June 2014 U.S. Supreme Court ruling on stock-drop cases, Fifth Third Bancorp et al. vs. Dudenhoeffer et al.

The Supreme Court established a series of guidelines for lower courts to determine whether stock-drop cases should be dismissed or allowed to go to trial. These guidelines have presented a high bar to plaintiffs, and the New York appeals court's reversal represented a rare win for participants.

IBM attorneys also said two other federal appeals courts differed in their interpretation of the Supreme Court guidelines compared to the New York appeals court, thus triggering a circuit split.

On Jan. 30, participants' attorneys asked the appeals court to deny IBM's request to halt the case, saying there is no circuit split and that IBM has misinterpreted the Supreme Court's guidelines.

The IBM 401(k) Plus Plan had assets of $53.9 billion as of Dec. 31, 2017, according to the latest 11-K filing with the Securities and Exchange Commission. The IBM Stock fund accounted for $1.3 billion, or 2.4% of total plan assets.