WASHINGTON—The Supreme Court decided June 3 to consider whether managers of a retirement fund for IBM employees who invested in IBM stock can be sued for not disclosing that the company’s microelectronics business was overvalued.
The high court granted the petition for certiorari in a case known as Retirement Plans Committee of IBM v. Jander, an appeal from a December 2018 decision by the New York-based 2nd Circuit Court of Appeals. IBM, short for International Business Machines Corp., of Armonk, New York, is not a party to the proceeding, but its executives were members of the committee that is a party. The case is likely to be heard in the fall.
Some business advocates view this case as an opportunity for the Supreme Court to curb perceived lawsuit abuses by the plaintiffs’ bar, while investors say they deserve to be treated fairly by plan administrators.
The U.S. Chamber of Commerce had filed a brief urging the Supreme Court to take the case, arguing that if the fund loses this legal battle, companies would be less inclined to offer retirement plans that invest money in company stock. Many companies across the nation offer their employees such programs that are governed by the Employee Retirement Income Security Act (ERISA).
In the case now before the high court, IBM retirement plan participants claimed in 2013 that the company’s microchip-making operation was losing money even though IBM said its value at that time was $2 billion. IBM unloaded the foundering division in 2014, which led to a $12.95 one-day drop in the price of its stock, as the company said it would undertake a $2.4 billion write-down on the value of assets and a separate $800 million write-down for unspecified costs.
Participants claim IBM plan managers failed in their duty to protect investor-employees from the stock price drop, but managers said they did what was legally required of them. Participants lost at the trial level, but their claim was revived by the 2nd Circuit.
According to the Retirement Plans Committee, the circuit court ruling is ripe for abuse.
“The stakes are high as the decision … reopens the door to lawyer-driven class actions that spring up after every stock drop,” the committee stated in its petition.
Although the Private Securities Litigation Reform Act of 1995, “curbed some of the worst abuses of the federal securities laws by private plaintiffs,” the reforms have “caused lawyers to shift their sights” to those who administer plans such as the one the committee administers.
The committee urged the Supreme Court to intervene to make clear what the proper legal standards are for the management of employee retirement plans.
“Courts have consistently recognized the need for some mechanism to deter this migration of meritless suits. The lower courts seized on a presumption, while this Court adopted a demanding pleading standard, but now the Second Circuit, the center of the financial markets, has rendered that pleading standard toothless,” the petition stated.