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IBM Stock Drop Settles Case, Not Issue(s)

Fiduciary Rules and Practices

After nearly six years of litigation, the settlement terms of an ERISA litigation case that has been all the way to the U.S. Supreme Court (and “back”) have come to light.

Specifically, plaintiffs Larry W. Jander and Richard Waksman and Defendants Retirement Plans Committee of IBM, Richard Carroll, Martin Schroeter, and Robert Weber, have agreed to a settlement (Jander v. Ret. Plans Comm. of IBM, S.D.N.Y., No. 1:15-cv-03781, motion for settlement approval 4/2/21) of this case for $4,750,000. 

The achievement of a settlement agreement had been announced at the end of February. The essence of the suit was that the employer’s stock price dropped suddenly (here IBM’s stock price fell after the sale of a subsidiary revealed the subsidiary was greatly overvalued), and plaintiffs argued that the plan fiduciaries—who allegedly had awareness of the news and its impact prior to its public disclosure—had an obligation to alert/take action with regard to the retirement plan accounts that had invested in the employer stock. 

Why it Matters

The case had drawn significant attention—in no small part because on its way up to the Supreme Court, the Second Circuit had been something of an outlier here, first in 2018, and again after the U.S. Supreme Court[1] weighed in). It was seen by many as an opportunity to at least revisit, and perhaps reset, the standard of fiduciary responsibility in such matters, where plan fiduciaries also have a role of authority with regard to corporate matters. The current standard came about in the Fifth Third case (2014) where the Supreme Court established the “more harm than good” standard. 

While there was a sense with its passage that the nation’s highest court had intended to lower the litigation threshold, as we’ve noted previously, the Fifth Third “standard” hasn’t had much impact on the ultimate result, even though more cases (including this one) did get past the summary judgment stage (we’ll set aside the question of whether that has created “more harm than good”). Indeed, this settlement agreement itself concedes that “the vast majority of ERISA stock-fund cases brought as duty-of-prudence claims do not make it past the motion-to-dismiss stage, and most of those that have reached the trial stage have been won by defendants. The risks of establishing liability in this case are substantial.”

Why it Won’t

That said, no new standard was set, either by the Supreme Court in its review of the issues,[1] or by this court. Instead, the parties—after the aforementioned litigation period have agreed to disagree, noting that the cash settlement “…will provide a substantial recovery to the Class,” and that “in light of the significant costs and risks of continued litigation, the proposed Settlement constitutes a fair, reasonable and adequate outcome for all parties and is in the best interests of the Class.”

The settlement—“achieved with the assistance of a highly experienced and respected mediator, Robert Meyer, and was negotiated at arm’s length by well-informed and experienced counsel”—was described as “substantially similar to those that have been used and approved in numerous other settled ERISA actions, and they are designed to ensure that due process and the requirements of Federal Rule of Civil Procedure 23 are protected and upheld.”

Reasons Able?

The settlement agreement notes that “a trial might not take place until a year or more from now, and even if Plaintiffs prevail, the decision could be appealed for years to come.[2] Both sides will take on enormous expense in the meantime. Thus, it could easily be several more years before Class members see any recovery under the most optimistic projection. And, during that wait, the increased expense of the litigation could diminish the amount of money that ultimately is available to Class members. Because of “the lengthy, costly, and uncertain course of further litigation, the settlement provides a significant and expeditious route to recovery for the Class,” and “it may be preferable ‘to take the bird in the hand instead of the prospective flock in the bush.’”

As for the range of reasonableness relative to a possible recovery, the settlement agreement acknowledges that “plaintiffs’ expert conducted a preliminary analysis of the total possible damages, and the outer limit of those possible damages is approximately $18.4 million,” a figure the settlement says “presumes, of course, that every factual dispute and legal argument is resolved in Plaintiffs’ favor,” concluding that the Settlement amount of $4.75 million represents approximately 25.8% of the most optimistic estimate of recoverable damages.”

We’ll see if the court agrees on that point. As for the “more harm than good” standard in such cases… 

Footnotes

[1] While the case got to the Supreme Court, the nation’s highest court didn’t really address any of the issues raised. in January 2020, in a short, unsigned opinion, the justices declined to address arguments raised by the IBM defendants—and the federal government in its amicus brief—that involved federal securities laws. The Supreme Court stated that “the petitioners argued that ERISA imposes no duty on an ESOP fiduciary to act on inside information.” And the government argued 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....” And while that was clearly an issue—the nation’s highest court pointed out that “the Second Circuit did not address the[se] argument[s], and, for that reason, neither shall we,” they wrote, kicking the case back to the Second Circuit “to determine their merits, taking such action as it deems appropriate.” 

[2] The settlement further acknowledges that in order to prevail, “Plaintiffs will have to prove that IBM’s stock was indeed artificially inflated during the Class Period, and that the drop in the stock price that occurred at the conclusion of the Class Period can be attributed, at least in part, to the revelation of the value of the Microelectronics business. Defendants will vigorously contest this issue and argue that the stock-price drop was attributable to other factors and that the market was aware of the true value of Microelectronics before IBM announced its sale. Defendants will also argue that the Company’s decision not to write down the value of Microelectronics before the end of the Class Period was consistent with generally accepted accounting principles. In addition, Defendants will argue that Defendants adequately fulfilled any and all fiduciary duties they had to the Plan during the Class Period. Each of these arguments could ultimately challenge Plaintiffs’ ability to prove their case. While Plaintiffs have arguments to make in response to all of these contentions, their success is by no means guaranteed. Indeed, the vast majority of ERISA stock-fund cases brought as duty-of-prudence claims do not make it past the motion-to-dismiss stage, and most of those that have reached the trial stage have been won by defendants. The risks of establishing liability in this case are substantial.”