MANHATTAN (CN) – Reviving securities fraud claims, the Second Circuit ruled Monday that IBM must face a suit by workers accusing the company of having mismanaged their retirement plans.
The New York class action stems from a 2014 announcement by IBM that it was selling its microelectronics business to GlobalFoundries Inc. Up until then IBM had been valuing its business at approximately $2 billion, but IBM revealed in 2014 that it would take a $4.7 billion pretax charge because it had been overvaluing the microelectronics business.
IBM’s stock price declined by more than $12 a share on the heels of the lawsuit, prompting the suit here by participants in IBM’s retirement plan.
Lead plantiffs Larry Jander and Richard Waksman contend that IBM officials were opting to invest their employees’ retirement funds in common stock while failing to disclose their knowledge that IBM’s stock price was inflated.
Though a federal judge dismissed the suit, the Second Circuit reversed Monday, concluding that the plaintiffs met the standard with their claim that IBM’s management violated its duty of prudence under the Employee Retirement Income Security Act.
“We’re gratified by the court’s decision, we wholeheartedly agree with it and we look forward to litigating the case,” Zamansky attorney Samuel Bonderoff said in a phone interview this afternoon.
In Monday’s ruling, Chief U.S. Circuit Judge Robert Katzmann called it “particularly important” that IBM is accused here of knowing “that disclosure of the truth regarding IBM’s microelectronics business was inevitable, because IBM was likely to sell the business and would be unable to hide its overvaluation from the public at that point.”
“In the normal case, when the prudent fiduciary asks whether disclosure would do more harm than good, the fiduciary is making a comparison only to the status quo of nondisclosure,” the opinion states. “In this case, however, the prudent fiduciary would have to compare the benefits and costs of earlier disclosure to those of later disclosure— nondisclosure is no longer a realistic point of comparison.”
U.S. Circuit Judges Robert Sack and Reena Raggi concurred in the ruling.
“While the Court’s ruling on this preliminary matter is disappointing, IBM will continue to vigorously defend against these claims,” IBM spokesman Doug Shelton said in an email Monday.
Lawrence Portnoy of Davis Polk, who represented the defendants, did not comment, referring Courthouse News to IBM instead.
In the underlying complaint, the plaintiffs said the plan administrators could have halted trading, disclosed the correct numbers or bought a hedging product to help with risk management. U.S. District Judge William Pauley found in dismissing the case, however, that those suggestions would have done the company more harm than good.
Judge Katzmann wrote in Monday’s reversal, on the other hand, that it plausible IBM could have foreseen that artificial inflation of stock prices would harm the company in the long term.