In a stock-drop case to be argued before the U.S. Supreme Court in November, the Justice Department is recommending that the court vacate the ruling by a federal appeals court that favored 401(k) plan participants and return the case to federal District Court.
"The court of appeals' and the parties' alternative approaches are misguided," said the friend-of-the-court brief filed Tuesday by Noel J. Francisco, solicitor general, in commenting on Retirement Plans Committee of IBM et al. vs. Larry Jander et al.
Declaring that this brief supports "neither party," the solicitor general criticized arguments by both parties and the lower courts in interpreting stock-drop guidelines issued by the Supreme Court in 2014 in Fifth Third Bancorp vs. Dudenhoeffer et al.
IBM 401(k) plan participants sued in 2015 alleging that plan managers violated their fiduciary duties, saying the managers failed to protect owners of company stock when IBM wrote down $2.4 billion of a troubled microelectronics unit and paid $1.5 billion to another company to take the unit.
A U.S. District Court judge in New York ruled in September 2016 and September 2017 that participants failed to show a prudent fiduciary could have taken actions without causing more harm than good, referencing the Supreme Court's guidelines in the Dudenhoeffer case.
However, in December 2018, the 2nd U.S. Circuit Court of Appeals in New York reversed and remanded the ruling.
A three-judge panel said participants "plausibly allege" that plan managers "had the requisite knowledge" that IBM's stock was overvalued due to the microelectronics unit's problems.
"The allegations regarding the sale of the microelectronics business … tip the scales toward plausibility," the court wrote.
The Retirement Plans Committee of IBM asked the Supreme Court to review the case in March, arguing that the appeals court had misinterpreted the Dudenhoeffer guidelines. The Supreme Court agreed in June to hear the case. Oral arguments are set for Nov. 6.
Mr. Francisco's brief argued that the appeals court reached its conclusion "by invoking an ad hoc balancing approach to determining when a public disclosure would do more harm than good, rather than considering the judgment reflected in the securities laws." He maintained that the District Court erred, too.
"Because neither court applied the correct legal standard in determining whether respondents have plausibly alleged a violation of ERISA's duty of prudence, they should be given the first opportunity to apply that standard here," Mr. Francisco wrote. "The judgment of the court of appeals should be vacated and the case remanded for further proceedings."
The solicitor general was joined in his amicus brief by lawyers representing the Department of Labor and the Securities and Exchange Commission.
