Employee stock ownership plan fiduciaries, including corporate insiders, don't have an obligation to use information gained in a corporate capacity in a fiduciary capacity, an attorney argued Wednesday in front of the U.S. Supreme Court.
Those fiduciaries can't make a special disclosure to plan participants, "it has to be to the entire market through regular corporate disclosure channels," said Paul D. Clement, a partner at Kirkland & Ellis partner who argued on behalf of the Retirement Plans Committee of IBM.
In June, the Supreme Court accepted an IBM petition to revisit a unanimous 2014 ruling in Fifth Third Bancorp et al. vs. Dudenhoeffer et al., which established a series of guidelines for lower courts to use in assessing stock-drop complaints.
Participants sued IBM in 2015, saying its 401(k) plan managers should have acted to protect holders of company stock due to IBM's writing down $2.4 billion of a troubled microelectronics unit and paying $1.5 billion to another company to take the unit.
A District Court judge 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 December 2018, the 2nd Circuit Court of Appeals 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.
Samuel Bonderoff, a partner at Zamansky LLC who represents the IBM employees, argued that because IBM was trying to sell its microelectronics unit for roughly a year, it was "inevitable" that the unit's overvaluation would be disclosed and the company should have divulged it sooner rather than later to avoid a further drop in the stock price.
Upon rebuttal, Mr. Clement disagreed. "The sale of the unit was hardly inevitable," a point he said is demonstrated by the one-year period it took to sell.
Mr. Clement also argued that the plaintiff's entire argument is a securities law complaint, and should be addressed under securities law.
Justices Stephen Breyer and Ruth Bader Ginsburg voiced apprehension in getting involved in a discussion on the relationship between ERISA and federal securities laws. Mr. Breyer said that question was not what the Supreme Court agreed to hear and should be left to the lower courts to decide first.
"There is this tension between securities laws and ERISA fiduciary duties," said Kimberly Jones, a Chicago-based partner with Drinker Biddle & Reath who has followed the case closely.
IBM's petition is supported by the U.S. Chamber of Commerce, American Benefits Council and the ERISA Industry Committee, whose amicus brief warned that if the appeals court decision stands, "plan sponsors will be discouraged from offering (employee stock ownership plans), harming participants and sponsors alike."
That point was argued in court Wednesday by Mr. Clement and is a view shared by Ms. Jones.
"If the court makes the standard more plaintiff friendly then there will be no shortage of these cases being filed," she said. "It could really open the floodgates to more stock-drop cases. I think the court is very aware of that, so I would be surprised if they loosened the standard, but it's possible."
Staff writer Robert Steyer contributed to this article.
