January 15, 2020

Supreme Court Remands Stock Drop Case to Consider Insider Information Issues

NCEO founder and senior staff member

In Jander v. Retirement Plans Committee of IBM (2nd Cir. Dec. 10, 2018), the Second Circuit ruled that the Dudenhoeffer rule that "[t]o state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it" raised conflicting standards. The court ruled that the plaintiffs in a case involving stock in IBM’s 401(k) plan had convincingly argued that early disclosure and correction of financial issues raised about accounting and other irregularities at its microelectronics division (which was ultimately sold) could have done more good than harm. The defendants appealed to the Supreme Court.

In Retirement Plans Committee of IBM v. Jander et al., No. 18-165 (Jan. 14, 2020), the Supreme Court sent the case back to the Second Circuit to consider issues not raised in its decision.

The Supreme Court said that committee members argued that “ERISA imposes no duty on an ESOP fiduciary to act on inside information.” The Department of Labor sent in its own arguments on the case, saying that “an ERISA-based duty to disclose inside information that is not otherwise required to be disclosed by the securities laws would ‘conflict’ at least with ‘objectives of’ the ‘complex insider trading and corporate disclosure requirements imposed by the federal securities laws.’” The Court said that “we believe that the Court of Appeals should have an opportunity to decide whether to entertain these arguments in the first instance. For this reason we vacate the judgment below and remand the case, leaving it to the Second Circuit whether to determine their merits, taking such action as it deems appropriate.”

Justice Kagan stated in a concurring opinion that “Dudenhoeffer characterizes the relationship between ERISA’s duty of prudence and the securities laws differently. It recognizes that a fiduciary can have no obligation to take actions ‘violat[ing] the securities laws’ or ‘conflict[ing]’ with their ‘requirements’ or ‘objectives.’ At the same time, the decision explains that when an action does not so conflict, it might fall within an ESOP fiduciary’s duty—even if the securities laws do not require it.”

Justice Gorsuch, in the second concurring opinion, wrote that “the gist of respondents’ [Jander et al.] sole surviving claim is that certain ERISA fiduciaries should have used their positions as corporate insiders to cause the company to make an SEC regulated disclosure… Because ERISA fiduciaries are liable only for actions taken while ‘acting as a fiduciary,’ it would be odd to hold the same fiduciaries liable for ‘alternative action[s they] could have taken’ only in some other capacity.” He also said it might be possible for fiduciaries to take an action that does not conflict with securities law, but the Government’s position would “mostly wipe out that central aspect of the Dudenhoeffer standard…The truth is, Dudenhoeffer was silent on the argument now before us for the simple reason that the parties in Dudenhoeffer were silent on it too. No one in that case asked the Court to decide whether ERISA plaintiffs may hold fiduciaries liable for alternative actions they could have taken only in a nonfiduciary capacity.”

Whatever the outcome of this decision, it is unlikely to have significant implications for closely held companies, where litigation almost never involves the Dudenhoeffer standard.

The NCEO publishes a comprehensive review of all litigation involving ESOPs and 401(k) plan employer stock from 1990 through 2019. 

We also publish a review and analysis of DOL investigations and audits between 2007 and 2017.