IBM Defeats Twin Challenges to Stock Drop

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By Jacklyn Wille

Sept. 7 — International Business Machines Corp. and its executives won dismissal of lawsuits claiming that a 17 percent drop in the company’s stock price implicated federal securities laws and caused workers to lose retirement savings in violation of ERISA ( Jander v. Int’l Bus. Machs. Corp. , 2016 BL 291159, S.D.N.Y., No. 1:15-cv-03781-WHP, 9/6/16 and Int’l Assoc. of Heat & Frost Insulators & Asbestos Workers Local #6 Pension Fund v. Int’l Bus. Machs. Corp. , S.D.N.Y., No. 1:15-cv-02492-WHP, 9/7/16 ).

A federal judge in simultaneous orders Sept. 7 dismissed separate lawsuits challenging the IBM stock drop under both the Employee Retirement Income Security Act and federal securities laws. The judge’s orders allow the IBM workers bringing ERISA-based claims—but not the investors bringing securities claims—another opportunity to make their case.

In the rulings, Judge William H. Pauley III of the U.S. District Court for the Southern District of New York squarely addressed the different standards applicable to stock-drop challenges brought under ERISA and under securities laws. Pauley said that the allegations against the IBM executives were insufficient to meet the “scienter” requirement of the Private Securities Litigation Reform Act, but they stated a plausible claim under the “lower pleading standards applicable to an ERISA action.”

ERISA’s Pleading Standards

In the ERISA case, Pauley considered a conflict running through ERISA stock-drop challenges since the U.S. Supreme Court established new pleading standards in 2014.

Under Supreme Court precedent, stock-drop cases based on publicly available information are generally implausible, while claims based on executives’ inside information can succeed if plaintiffs meet certain requirements—specifically, the requirement to plead an alternative course of action that plan fiduciaries could have taken that wouldn’t, in the view of a prudent fiduciary, be likely to do more harm than good to the value of company stock.

In the ERISA lawsuit against IBM, the company’s workers argued that their case was based on inside information and therefore subject to the somewhat more plaintiff-friendly pleading standard. IBM disagreed with this characterization and argued in its motion to dismiss that the case was actually based on public information and therefore had to satisfy the stricter standard.

On this point, Pauley agreed with the workers, finding that their lawsuit rested on allegations of inside information and therefore was subject to the lower pleading standard.

Even so, Pauley made clear that this lower pleading standard was actually “highly demanding.” Pauley found that the workers failed to identify an alternative action that the IBM executives could have taken that wouldn’t have been seen as more likely to do harm than good to the stock price.

Citing recent court decisions in favor of Lehman Bros. and JPMorgan Chase, Pauley called this “more harm than good” requirement a “highly exacting standard which is difficult to satisfy.”

Zamansky LLC represents the IBM workers in the ERISA case. Labaton Sucharow LLP and Motley Rice LLC represent the investors in the securities case. Davis Polk & Wardwell represents IBM.

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

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

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