Attorneys with the Department of Labor, Department of Justice and the Securities and Exchange Commission (SEC) have filed a brief as amicus curiae supporting neither party in the case of Retirement Plans Committee of IBM v. Larry W. Jander in the U.S. Supreme Court.
The U.S. Government concludes in its brief that, because the lower courts did not apply the correct legal standard, the Supreme Court should vacate the judgment and remand the case for further consideration.
IBM asked the Supreme Court to answer “whether Fifth Third’s ‘more harm than good’ pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.”
According to the brief, the Supreme Court in Fifth Third v. Dudenhoeffer identified three considerations that should inform whether an Employee Retirement Income Security Act (ERISA) plaintiff has plausibly stated a duty-of-prudence claim against an employee stock ownership plan (ESOP) fiduciary for failing to disclose inside information about the employer’s stock. “Although the parties largely focus on the third consideration—whether a prudent fiduciary could not have concluded that disclosure would do more harm than good—the proper analysis should be informed by the requirements and objectives of the securities laws,” it says, adding that, “The federal securities laws provide a comprehensive scheme of public disclosure rules designed to protect investors. There is no sound reason to adopt a different set of disclosure rules to protect those investors who are participants in an ESOP.”
The original lawsuit alleged that the defendants continued to invest retirement plan assets in IBM common stock despite their being aware of undisclosed troubles relating to IBM’s microelectronic business. Referring to new pleading standards set forth in the Supreme Court’s decision in Fifth Third, the plaintiffs said, “Once defendants learned that IBM’s stock price was artificially inflated, defendants should have either disclosed the truth about microelectronics’ value or issued new investment guidelines that would temporarily freeze further investments in IBM stock.”
The U.S. Government’s brief explains how securities law relates to disclosure and nondisclosure of an artificially inflated price.
Writers of the brief say, “The courts below and the parties appear to expect a fiduciary to make an ad hoc prediction about whether a public disclosure would do more harm than good in a particular case. But ESOPs have multiple participants and beneficiaries who, at any given time, are likely to have competing economic interests. Both the direction and the strength of those interests in a public disclosure would turn on information about the future that, in many cases, neither the participant nor a fiduciary would know with reasonable certainty. An ad hoc cost-benefit analysis is therefore too indeterminate to serve the meaningful filtering role the Court contemplated.”
It concludes that 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 brief states that “absent extraordinary circumstances, ERISA’s duty of prudence requires an ESOP fiduciary to publicly disclose inside information only when the securities laws require such disclosure.”