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Feds Push for Weak ERISA Disclosure Duty in IBM Stock-Drop Case

Aug. 14, 2019, 2:11 PM

Federal benefits law doesn’t require corporate insiders to make public disclosures beyond those required by securities law, U.S. Solicitor General Noel Francisco told the Supreme Court.

The solicitor general’s Aug. 13 brief cautions the justices against interpreting the Employee Retirement Income Security Act to require the disclosure of inside corporate information, absent “extraordinary circumstances.” In this case, a participant in International Business Machine Corp.'s employee stock ownership plan (ESOP) said corporate insiders should have publicly disclosed the company’s struggles with its microchip business in order to help protect workers from a 7% drop in stock price that affected their retirement accounts.

The solicitor’s legal theory, if accepted, would make it harder for retirement plan participants to use ERISA to challenge drops in stock price.

The brief, joined by high-ranking attorneys at the Department of Labor and Securities and Exchange Commission, said that, absent extraordinary circumstances, ERISA’s fiduciary duty of prudence requires the public disclosure of inside information “only when the securities laws require such a disclosure.”

“The federal securities laws provide a comprehensive scheme of public disclosure rules designed to protect investors,” the solicitor general argued. “There is no sound reason to adopt a different set of disclosure rules to protect those investors who are participants in an ESOP.”

The solicitor general emphasized that participants in the same retirement plan can have competing economic interests, which makes it unwise to expect that plan fiduciaries can make an “ad hoc cost-benefit analysis” of when disclosure would benefit them. “The better course is to recognize that Congress and the SEC have already made a judgment about when a public disclosure would do more harm than good, and prudent fiduciaries should generally not second-guess that judgment.”

The case against IBM’s retirement plan committee gives the justices an opportunity to revise or build on their 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer, which established a high pleading standard for cases challenging stock drops under ERISA.

In the aftermath of Dudenhoeffer, ERISA stock-drop cases have been almost universally dismissed, with courts rejecting lawsuits involving WellsFargo, Target, Citigroup, Whole Foods, JPMorgan, and BP Plc, among others. But the Second Circuit bucked the trend in 2018 by reviving the case against the IBM committee, and the justices agreed to intervene.

The justices will hear arguments in the case Nov. 6. They have also received supporting briefs from the Securities Industry and Financial Markets Association, the American Benefits Council, and DRI—The Voice of the Defense Bar.

The case is Ret. Plans Comm. of IBM v. Jander, U.S., No. 18-1165, amicus brief 8/13/19.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bloomberglaw.com

To contact the editors responsible for this story: Jo-el J. Meyer at jmeyer@bloomberglaw.com; Steven Patrick at spatrick@bloomberglaw.com