IBM Beats ERISA Lawsuit Over Company Stock in 401(k), Again

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Carmen Castro-Pagan

The retirement plan committee of International Business Machines Corp. and its executives again defeated a lawsuit accusing them of failing to mitigate a “foreseeable drop” in the company’s stock and protect participants from losing millions of dollars in retirement savings ( Jander v. Ret. Plans Comm. of IBM , 2017 BL 346271, S.D.N.Y., No. 1:15-cv-03781-WHP, motion to dismiss granted 9/29/17 ).

The participants offered three alternative actions IBM and the executives could’ve taken to mitigate the risks to the plan, but this wasn’t enough to support a fiduciary breach claim, a federal judge in New York held Sept. 29. Those three alternative actions included issuing a corrective disclosure earlier, halting all purchases and sales of IBM stock, and purchasing a hedging product.

The decision comes almost a year after the same judge—William H. Pauley III of the U.S. District Court for the Southern District of New York— dismissed the participants’ lawsuit for the first time. In that ruling, Pauley said the participants didn’t allege facts inferring that IBM couldn’t have concluded that public disclosures or halting the plan from further investing in IBM stock were more likely to harm than help the plan.

Employees challenging losses in their retirement savings as a result of company stock drops are consistently losing in court. This is due to a 2014 U.S. Supreme Court decision that heightened the pleading standard for claims of breach of fiduciary duty of prudence on the basis of inside information under the Employee Retirement Income Security Act.

Since then, a growing list of companies have defeated such lawsuits, including WellsFargo Co., Target Corp., Cliffs Natural Resources Inc., Reliance Trust Co., Lehman Brothers Holdings Inc., State Street Bank & Trust Co., RadioShack, Citigroup, Eaton Corp., Whole Foods Corp., JPMorgan Chase & Co., and BP Plc.

The participants accused IBM executives of artificially inflating the value of the company’s stock by issuing misleading financial statements related to its microelectronics business.

Pauley rejected the participants’ claim that an earlier disclosure could have ended the artificial inflation. While the allegations were plausible on a theoretical basis, they fail to shed light on whether a prudent fiduciary in the executives’ position under circumstances then prevailing believed that a corrective disclosure wouldn’t have done more harm than good to the plan, Pauley said.

As to halting trades, Pauley said that participants overlooked the possibility that this action “could send mixed signals,” such as diminished confidence in IBM stock, causing a drop in stock price that could have done more harm than good to the plan.

Rejecting the participants’ alternative action of purchasing a low-cost hedging product, Pauley said they failed to give consideration to the costs that could have been incurred from taking this action. He also pointed out that obtaining this kind of product may have required disclosure under ERISA.

Zamansky LLC represents the participants. Davis Polk & Wardwell LLP represents the committee and the executives.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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