Corey Rosen
IBM Employees Get Rehearing of Stock Drop Case
Jander v. Retirement Plans Committee of IBM, No. 17-3518, (6th Cir., Dec. 10, 2018) is a potentially important ruling that runs against recent trends in stock drop cases. The Second Circuit reversed and remanded a lower court ruling that found that the trustees of IBM’s ESOP were not in violation of their fiduciary duty when they failed to disclose that a major division of the company was overvalued. The lower court ruled that plaintiffs failed to show disclosure would not have done more harm than good. The Sixth Circuit, however, ruled that this standard is too strict. The court said the Dudenhoeffer ruling laid out two conflicting standards for determining if a fiduciary should have concluded an action would have done more harm than good. The first is whether an average fiduciary would have made that conclusion; the second is that any fiduciary could have made that decision. Here the court chose not to decide which standard applied, saying that the plaintiffs met either test. The plaintiffs had convincingly argued, the court said, that early disclosure and correction would not have resulted in more damage to the stock price than ultimately resulted when the division in question was sold and information came out about the accounting irregularities and other issues the division faced. The fiduciaries, the plaintiffs argued, could have taken action to correct these issues earlier and disclosed them to the market. In a presumably efficient market, the court said, the price would ultimately reflect the problems anyway. In light of all this, the court said the plaintiffs had made a sufficient plea to require remanding.
