Jander v. Int'l Bus. Machs. Corp.

• Decision Date: 07 September 2016
• Docket Number: 15cv3781
• Citation: 205 F.Supp.3d 538
• Parties: Larry W. JANDER, Richard J. Waksman, and all other individuals similarly situated, Plaintiffs, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

205 F.Supp.3d 538

Larry W. JANDER, Richard J. Waksman, and all other individuals similarly situated, Plaintiffs,

v.INTERNATIONAL BUSINESS MACHINES CORPORATION, et al., Defendants.

15cv3781

United States District Court, S.D. New York.

Signed September 7, 2016

Edward H. Glenn, Jr., Jacob H. Zamansky, Samuel Ethan Bonderoff, Zamansky L.L.C., New York, NY, for Plaintiffs.

Lawrence Jay Portnoy, John Stanley Barrett, III, Michael S. Flynn, William Trent Thompson, Davis Polk & Wardwell, New York, NY, for Defendants.

OPINION & ORDER

WILLIAM H. PAULEY III, District Judge:

In October 2014, International Business Machines Corp. ("IBM") announced that it was taking a $2.4 billion write-down in connection with transferring its microelectronics business to another company. Following that announcement—which coincided with the disclosure of disappointing third-quarter operating results—IBM's share price dropped by approximately 17%. Two separate cases pending before this Court allege that Generally Accepted Accounting Principles ("GAAP") required IBM and its corporate officers to record an earlier impairment of its microelectronics assets, and that IBM's stock price was overvalued and fell as a result of the divestiture announcement.

Jander and Waksman, on behalf of participants in IBM's 401(k) Plus Plan (the "Plan") who invested in the IBM Company Stock Fund (the "Fund") between January 21, 2014 and October 20, 2014, bring this action under Section 502 of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1132. The Amended Complaint names IBM as a defendant, along with the Retirement Plans Committee of IBM, Richard Carroll (IBM's Chief Accounting Officer) Martin Schroeter (IBM's CFO), and Richard Weber (IBM's general counsel).

Defendants move to dismiss the Amended Complaint for failure to state a claim. Defendants' motion to dismiss is granted with leave to replead.

BACKGROUND

The Plan is a defined-contribution benefit plan, sponsored by IBM that permits employees to defer some of their compensation into a number of various investment options. One of those options is the Fund, which is predominantly invested in IBM common stock. (AC ¶¶ 3, 26.) Such plans are known as employee stock ownership plans (or "ESOPs"). Throughout the class period, both Schroeter and Weber were members of the Retirement Plans Committee; thus, each was a "named fiduciary" under ERISA. (AC ¶¶ 22, 24–25.) As the Plan Administrator, Defendant Carroll was also a named fiduciary. Plaintiffs allege that IBM was a de facto fiduciary because it had ultimate oversight and was empowered to amend the Plan. (AC ¶¶ 21, 27–33.)

In a separate Opinion & Order, filed simultaneously, this Court addressed substantially similar factual allegations brought by shareholders under Section 10(b) of the Securities Exchange Act. See Int'l Assoc. of Heat and Frost Insulators and Asbestos Workers Local # 6 Pension Fund v. International Business Machines Corporation , 15cv2492 (S.D.N.Y.) ("the Insulators Securities Action"). Familiarity with that Opinion & Order is presumed, and the allegations concerning Microelectronics' alleged impairment are not repeated here.¹

LEGAL STANDARD

To withstand a motion to dismiss, pleadings "must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). Courts must accept as true all well-pleaded factual allegations. See Hooks v. Forman, Holt, Eliades & Ravin, LLC , 717 F.3d 282, 284 (2d Cir.2013). Additionally, courts may consider "legally required public disclosure documents filed with the SEC" as well as documents "incorporated into the complaint by reference" or relied upon by the plaintiff "in bringing suit." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd. , 493 F.3d 87, 98 (2d Cir.2007). However, "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.

DISCUSSION

Pursuant to 29 U.S.C. § 1104(a)(1)(B), "ERISA imposes an obligation on fiduciaries to ‘act in a prudent manner under the circumstances then prevailing,’ a standard that eschews hindsight and focuses instead on the ‘extent to which plan fiduciaries at a given point in time reasonably could have predicted the outcome that followed.’ " In re Lehman Bros. Sec. & ERISA Litig. , 113 F.Supp.3d 745, 754 (S.D.N.Y.2015) (quoting Pension Benefit Guar. Corp. v. Morgan Stanley Inv. Mgmt., Inc. , 712 F.3d 705, 716 (2d Cir.2013) ). Plaintiffs allege that Defendants failed to prudently and loyally manage the Plan's assets, and failed to adequately monitor the Plan's fiduciaries. Specifically, they argue that 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 temporarily freezing further investments by the Fund in IBM stock.

In support of their motion to dismiss, Defendants argue, among other things, that: (1) Plaintiffs fail to plead that the Microelectronics assets were impaired; (2) IBM was not a fiduciary; (3) Plaintiffs' proposed alternative actions fail to satisfy the standard set forth in Fifth Third Bancorp v. Dudenhoeffer , ––– U.S. ––––, 134 S.Ct. 2459, 189 L.Ed.2d 457 (2014) and its progeny; and (4) the "duty to monitor" claim is derivative of Plaintiffs' underlying claims.

I. Impairment of Microelectronics' Assets

Both parties incorporate the arguments made in the Insulators Securities Action concerning Defendants' alleged obligation to write-down Microelectronics' value under GAAP. In Insulators , this Court found that plaintiffs had plausibly alleged a GAAP violation, but failed to sufficiently allege scienter as required by the Private Securities Litigation Reform Act and Federal Rule of Civil Procedure 9(b). However, "allegations similar to fraud do not implicate Rule 9(b) where ‘the gravamen of the claim is grounded in ERISA.’ " In re Polaroid ERISA Litig. , 362 F.Supp.2d 461, 470 (S.D.N.Y.2005) (quoting Rankin v. Rots , 278 F.Supp.2d 853, 866 (E.D.Mich.2003) ); see also In re Bear Stearns Companies, Inc. Secs., Derivative, & Employee Ret. Income Sec. Act (Erisa) Litig. , No. 08–md–1963 (RWS), 2009 WL 50132, at *4 (S.D.N.Y. Jan. 5, 2009) (noting that unlike securities fraud cases, ERISA cases are not governed by the PSLRA). Thus, for purposes of evaluating the Amended Complaint in this action, this Court need not consider whether Plaintiffs have alleged, with particularity, that "the failure to take a write-down amounted to highly unreasonable conduct which represents an extreme departure from the standards of ordinary care." Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce , 694 F.Supp.2d 287, 301 (S.D.N.Y.2010) (quotations, citations, and alterations omitted).

Plaintiffs allege that the Plan fiduciaries "knew that IBM's stock price had been artificially inflated by undisclosed material facts," namely that the "Microelectronics business was hemorrhaging money and that IBM could not sell it without having to pay another company $1.5 billion to take the failing business off its hands." (AC ¶¶ 8, 10.) Specifically, Plaintiffs allege that: (1) Schroeter, as CFO, was a Sarbanes-Oxley co-signatory of IBM's SEC filings and made many of the allegedly misleading statements; (2) Weber played a central role in preparing IBM's financial reporting; and (3) Carroll was the most senior accounting officer at IBM with intimate knowledge of Microelectronics' financial condition. While such allegations are insufficient to allege scienter under the PSLRA, in view of the lower pleading standards applicable to an ERISA action, Plaintiffs have plausibly pled that IBM's Microelectronics unit was impaired and that the Plan fiduciaries were aware of its impairment.

II. IBM as Fiduciary

In ERISA cases, "[a] threshold question is whether each defendant acted as a plan fiduciary." In re Bank of Am. Corp. Sec., Derivative, & Employee Ret. Income Sec. Act (ERISA) Litig. , 756 F.Supp.2d 330, 346 (S.D.N.Y.2010) (citing Pegram v. Herdrich , 530 U.S. 211, 226, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000) ). Fiduciaries include both "named fiduciaries" as well as "anyone else who exercises discretionary control or authority over the plan's management, administration, or assets." Mertens v. Hewitt Assocs. , 508 U.S. 248, 251, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993) (internal citations omitted). Fiduciaries of the latter type are referred to as "de facto fiduciaries." See In re AOL Time Warner, Inc. Sec. & ERISA Litig. , No. 02–cv–08853, 2005 WL 563166, at *4 n. 5 (S.D.N.Y. Mar. 10, 2005).

Plaintiffs allege that IBM was a de facto fiduciary because it had ultimate oversight and was empowered to amend the Plan. But courts routinely reject "[s]uch bare legal conclusions" as "insufficient to state a claim against a purported ERISA fiduciary."

In re JPMorgan Chase & Co. ERISA Litig. , No. 12–cv–04027 (GBD), 2016 WL 110521, at *3 (S.D.N.Y. Jan. 8, 2016) ("Plaintiffs have pleaded no facts to support the allegation that JPMorgan was a de facto Plan fiduciary. They have made only the conclusory allegation that JPMorgan was such a fiduciary because it has discretionary authority and control regarding the administration and management of the Plan [ ] and its assets."). See also In re Bank of Am. Corp. Secs., Derivative, & Employee Ret. Income Sec. Act (ERISA) Litig. , 756 F.Supp.2d 330, 346–48 (S.D.N.Y.2010) (rejecting as insufficient allegations that the defendant created the ESOP, selected its terms, executed the trust documents, exercised control over the members of the plan committee, and appointed the trustee); In re Citigroup ERISA Litig. , No. 07–cv–9790, 2009 WL 2762708, at *15 (S.D.N.Y. Aug. 31, 2009) ("[T]he allegation that [a...