well here the the next case on the calendar gender versus retirement plans  of their company i b m this case is about how to apply correctly the holding of fifth third bancorp the duden offer and that case has a very most of that case is concerned with one particular holding that has gotten lost in a lot of the jurisprudence that's come since but that holding should be central to any analysis of how to apply that case and that holding is this fiduciary is an employee stock plan are subject to the same duty of prudence as all other arista fiduciaries the only exception to that is that they don't have to diversify their investments other than that they are to be treated like any other  have reason to suspect that the investment i'm charged with monitoring has become imprudent that is artificially inflated in value then the more harm than good standard asks us to consider you know what alternative action could have taken and would have done more harm than good the distinction comes not from the distinction comes from their use of the word negative information which i think is how their own using it to fit into the larger rubric of duty  there are two examples i think that are a lot of here the retirement committee of i b m which is the east up to do share here had a fourth member who is a senior vice president of human resources that person is not a defendant in this case and here's why if you are  vice president human resources and you become aware of the possibility of negative information that might mean that i b m stock price is being traded in an artificially inflated value maybe an employee comes to you a whistleblower internally and says i think that the microelectronics business is impaired and it's not being written down and that's inflating stock prices material we need to do something about it well if you're the senior vice president and resources that does not mean that you have an obligation automatically to go and act on that in any other arista context we look at something like that we'd say well that's a red flag and in a risk of fiduciary needs to investigate a red flag to determine whether this is actually something you need to act on or not so in that case the dude hoffer asks that fiduciary to say ok i know that there might be improvements in this investment would it do more harm than good to make a disclosure right now well it might because all you have is a red flag you don't have confirmation you don't know that you have an impaired business you don't know that you have an imprudent investment you only have the possibility of one and so are you saying that there's there is a dividing line between it seen cases that allege that potential fraud should have been investigated and cases where the for do share a nice already knew or should have known about an existing fraud exactly that lower the stock price if there is really no fraud but that in an efficient market disclosure of the of the of the actual fraud would never do more harm than yeah correct that is correct your honor because as even cases cited by the a pelleas say the way the fish market works the amount that it's going to go down when you disclose the actual fraud is about always a preferred option well what would be are you saying that we are your honor because in those cases the hard work that didn't offer asks you to do of making specific allegations would have been made they would have been made in showing that there was artificial inflation and that it was known by the fiduciary that the context specific pleading that gets the plausible sheep separated from the marrow is goatse how does that comport with this context specific case by case analysis that would be exactly where the context specific analysis would occur it would occur in it when did occur and determining whether there is an allegation of a known fraud or one that merely is suspected and needs to be investigated because if you look at it through the other lens if you say that the context pacific allegations need to be made about ok now i'm in a fiduciary i know there is fraud now what do i do about it not only are you signing on to a world is are allowed to know about a fraud and indeed participate in it and perpetuate it without doing anything but you're also making it impossible to plead those claims because you'll never be able to say that a fiduciary wouldn't have to be worried about a stock price drop that's going to occur when you correct a fraud that's inherent in the nature of artificial inflation of stock there will be a stock price drop when you correct it and what the district court and the appellate are arguing for is situation where that standard means just the fear of that stock price drop even if there is a fraud going on is enough to make you say i don't have to do anything and if you as a fiduciary don't have to do anything then you're not being subject to the same duty  you have immunity and that is exactly what didn't offer said should not be the outcome let me ask you a question that is not aimed at making sure i understand your point there fiduciary in your case would know that selling the stock is going to result in a market fall right if he knows there's a fraud he's going to sell the stock because it's going to go down it's going to result in a market fall ok what he doesn't know is whether if he holds and doesn't tact now down the road when the fraud becomes known the company's position in off the runway is more advantageously so that the disclosure down the road may not result in as great a fall as it does now and so in that sense what he doesn't know is the context of now versus later and why isn't that a a reason to think that it's not necessarily doing more harm less harm than good to  disclose it immediately well your honor there are a lot of things that the fiduciary in that position wouldn't know for sure because and we it is a longstanding principle that we don't judge a receipt for do sherry's with hindsight with the benefit of hindsight we judge them based on what they knew at the time at the time what i'm saying to you now is what he doesn't know is whether down the road the disclosure may be less harmful your honor that would be an exception that would swallow the rule because if that's true fiduciary can always say i don't know for sure that the company won't be in a better situation to handle this announcement of fraud six months or a year from now then a fiduciary will always be off the hook for not doing anything because they never know what's going to happen if we assume your your fiduciary here you say was complicit in the fraud but if we assume a fiduciary who's not complicit in the fraud but learns that there may have been some cooking of the books on on something is he applied to sell the mediately is he obliged to stop buying immediately your honor we would not say that first of all that they're never obliged to sell based on that information that would be insider trading they would be obliged to make a corrective disclosure to the fiduciary who well never mind let's give your insider trading concern go ahead we would say that the fiduciary would be obliged to make a corrective disclosure as soon as the security laws permit we're not trying to set up a situation where you're making interim disclosures and you know going beyond with securities laws require that fiduciary in that situation doesn't know a lot for sure but they know two things that are almost certain one thing they know for sure is that as time passes more and more people are going to buy the inflated price more and more plan participants you don't know whether they will be a net seller or a net buyer at the end of all of this because you can't see the future but you know that every day that passes more and more  people you owe your duty to are buying at the price that's a guarantee so the longer you wait to disclose the more of that happens that harm is going up you also know based on the history of securities laws and common sense that the longer a company defrauds the public the more likely the company is going to get punished by the public when it comes crashes closure the not insider fiduciary learns that the books may have been cooked are you saying he has an obligation to make a public disclosure of that that's going to that's going to leave back the holdings of his of the beneficiaries why would he have an obligation to disclose we wouldn't say that he has to make the disclosure him self our argument for the fiduciary who is not like the fiduciary the c f o in the general counsel of the chief accounting officer we would say that in that case they should try to get the disclosure made through the mechanisms provided by the federal securities laws why not the circuit you see i'm probing these questions because it occurs to me that the problem here is these folks failure to meet their obligations under the securities laws not necessarily under rissa so a so that's why i'm asking you why a not mean side or fiduciary who learned that there was a problem with the valuation of a company would have an obligation to his beneficiaries to get that information out to the public for two reasons one because if he doesn't then more and more of the people he owes that duty to are going to be buying at those inflated prices and too because he knows a separate because one of the things you say is that they should have stopped by we don't say that are not and i'm sorry you don't take it you don't we're on a you know we are not we are not alleging that as an alternative action appeal are on appeal our only alleged alternative action is correct disclosure and the circumstances here are different than a lot of other cases because here you have the employees as the fiduciaries who are in a position to make that corrective  may be very simplistic but if your clients are holding stock valued at one hundred dollars when they take that disclosure goes out i think even you agree it's going to go down go down to seventy five how does how does it benefit the middle all to get the disclosure made well your honor if there is a corporate fraud going on it's there's no they have no evidence at that time that if they wait a year it's going to go down to ninety instead of seventy five or ninety five instead of seventy five there's in fact what the efficient markets tell us is that if the fraud all things being equal whether you disclose now or in a year from now it's going to go down about to seventy five and the question where that the problem was that the upon learning that may have an insider trading problem but not a few holes or in any of that thank you for trying to answer my question thank  offer the supreme court recognize that there is this class of cases these stock drop a list arista cases and their protests they are they create a potential for abuse that the abusive stock drop case in the securities litigation context has to go through the p s l array the private securities litigation reform act the hurdles there the p s l array does not apply to ressa claims and so what the court was reacting to was the same kind of abuses we had seen in securities clas actions being imported into a recent class actions and so the debate for years had been how does one deal with that question how does one separate the wheat and chaff the sheep in the goats in the words of the supreme court and what the supreme court did was itself tackle that question and give instruction to the lower courts on exactly what analysis to undertake to determine whether it's a sheep or a go and what the supreme court said was in the context of rejection rejecting the presumption of prudence right that's correct this spring courts where we are rejecting what what many courts had said was a rejection of prudence which i think had been a way to try to separate so this court said we're not we're not accepting of the notion that there is any presumption of prudence here that's not found in the statute but nonetheless there needs to be a way to examine cases like this to determine whether they should proceed to discovery way of whether they should survive a motion to dismiss and the supreme court it's in didn't offer and then it was reaffirmed by the supreme court in amgen a short time later what the supreme court says and it's hard to know what amgen actually says i mean it that it was a clear reversal of the ninth circuit which would have permitted the case to go forward based on the ninth circuit from then reading and i think now ring of didn't offer but the court does say that there may have been something to to plaintiff must come forward and allege an alternative course of conduct that would have been better number one and also that they must allege that the fiduciary could not have concluded  that that the course of action would not do more harm than good so a fiduciary faced with these facts has to conclude has to be alleged to have been unable to conclude that the proposed course of action would have not caused more harm than good in this case that analysis and judge pauley went through that analysis in detail that analysis i think compels a conclusion that in fact the disclosure the  standard the court i believe on its face sought to apply the do not for standard but perhaps more importantly for purposes of this appeal if you look at the allegations of the complaint and this court applies the allegations in the complaint to the didn't offer screen i think the case can't go forward and why is that your friends that the if and says here are charged not simply with the ricin violations but with basically be the actors who perpetrated the for on any there's some disquiet perhaps in thinking that you can fraudulently manipulate the stock price by overvaluing an asset and then still lacked as a fiduciary in buying and selling that stopped for employee beneficiaries what what am i missing yeah i think what that misses your honor is that there is and your hon well there is a whole library of our law a whole collection of our statutes which go to securities regulation enforcement disclosure issues all of that if there were a securities law problem here if there were a fraud if there were allegations sufficient to establish a claim on that went out on enter exactly right so right so but it's important we have a securities fraud claim companion to this the same allegations that do not survive a motion to dismiss there's no allegation of an s e c investigation there's no allegation of any sort of law enforcement investigation there's no allegation that anyone in the business press  us accused i b m of fraud so what we have here is the only person asserting that i b m committed any fraud or those individuals committed any fraud is here under the cloak of an a risk claim that's our that's a fundamental problem and i think that creates the the need to separate the sheep in the goats so when my colleague says i mean the problem is if cases like this gets dismissed for are allowed to perpetrate securities law violations are allowed to protect the fraud not at all they must act within the structures and confines of the securities laws and they are subject to the penalties of the securities laws if they do wrong that's very different than saying in a risk a plaintiff can come forward and say hi you violated the securities laws therefore you breached your duty of prudence the dude are you saying basically on this complain even though we have to read everything in the light most favorable to the plaintiff the one thing we don't read most favorably to them is the claim that your clients violated the security sloss i think you can accept as true those allegations cannot you can accept as true those allegations it's a motion to dismiss judge poly accepted those allegations as true we dispute them we don't think even what they've alleged constitutes a securities fraud  but putting aside assume for purposes of this argument there is a fraud that still leaves the court with the question of what were these fiduciary is to do when confronted with the plan they had which was filled up with i b m stock the plan they had which had far more sellers and buyers because there was a lot more selling activity than there was buying activity what was these fiduciary supposed to do when they learned of that fraud again assuming wit now if if you or i or anyone else is a fiduciary sitting in that chair and we're asked the question will our fund be better off if we make this disclosure or we don't make this disclosure i think the answer in this case on these allegations is clear the fund is better off if we don't make that disclosure why is that because the fund contains stock the value of that stock would immediately be harmed if the disclosure was made we have many of our  plan participants who are actively selling stock your people tend to spy or sell stock in these aesop's meant pending on their age and if we have an older population there's going to be more selling than buying the evidence is undisputed here that this was a population that was selling not buying that population would have been harmed by early disclosure earlier disclosure because they would have gotten less for their shares now yes are those buying shares are they paying more perhaps fiduciary you have to look at the fund as a whole you say perhaps is there any doubt well i think are we talking real world or are we talking the allegations in the complaint the allegations in the complaint is there was a fraud the fraud inflated the price of the stock and therefore there would be no doubt in anything which approximates the real world there is substantial doubt as essential doubt that any of this any of the write down of the microelectronics assets had anything to do with the drop in share price that the disclosure about the microelectronics write down was on the same day as a very poor earnings announcement plain just jump to the conclusion they assume that they allege that the drop in share price was due to the write down of the assets i don't think that is an allegation that the court could or should credit now judge pauley did for purposes of this motion but i think there is a substantial question that there was any diminishing of the share price because of the microelectronics right down the plaintiff's make  the focus of their complaint my question to you perhaps not put artfully with the disc yes that so much turns on whether there is a plausible securities pleading here because i i think an argument could be made that your client simply cannot act as a proper fiduciary in if it was buying and selling stock on behalf of beneficiaries knowing that the stock was value fraudulently i mean when you just said that the population of this plan would be selling stock your failure to disclose if you are the insider who has perpetrated the fraud is to advantage those beneficiaries over the market as a whole so you expose yourselves to claim to see securities claims on the other hand the plaintiffs charging you with other other violations in short if your client is response simple for the overvaluation how can you possibly act as a proof here the way my subsequent question to that would be why should we hear that your client is perpetrated a security when the security smart claim has been thrown out against you but but you just told me in response to my question that i could assume your client perpetrated the fraud well  as a as a pleading matter that is what they allege i think you do have to look at the underlying factual allegations and the strength of those factual allegations but even if you assume the fraud under the didn't offer standard the case must be dismissed in the case must be disclosure which is the only course of action as alleged that would have hurt the fund that would have been acting in a way that is not consistent with the duty of prudence so what pla problem student offer solve this conundrum by saying you have to look at it through the lens of the fiduciary and the you have to identify you have to allege that there was a better course of action for the fiduciary to proceed to a better course of action for fiduciary more protective of the fun and that the fiduciary could not have concluded that there would have come more harm to the fund than benefit to the fund if they did it on these facts where you have a stock plan that's filled with and i think that's a more than fair observation your honor i think what i would add to that is that damned if you do damned if you don't situation is created by the structure of the a is a statute and the fact of the iris is that you include encourages employee stock ownership plan which are sponsored by and the fiduciaries are provided by the issuer of the securities that it puts them in the position or that that's correct i think the supreme court recognized that and the supreme court jurisprudence and you  that standard that that the a for the dismissal should be affirmed i recognize that the offer were insiders but i didn't recall that they are supposed to have been the people who signed off on the fraud the way your clients are alleged to have been is that right that it's an entirely fair point your honor and just a moment on what the alleged fraud is the allege fraud is the failure or the delay in writing down the value of physical assets what physical assets fabrication plants for microchips and the valuation a korean according to the plaintiffs is that you were microelectronics business or the microelectronics assets were used to create these microchips in the microchips were then used for i b m servers so chips were produced or put in servers servers are then sold to the world that server business was immensely profitable if you look at the microelectronics manufacturing alone it's not very profitable very costly to make chips there are competitors with more modern facilities etc so you have a bunch of assets which are alone and profitable but they are within a larger universe which creates a very profitable world leading product what does the accounting literature tell you about whether a write down is necessary then the accounting literature would say you group your assets essentially by the productive business and these these microelectronics assets were grouped within s t g the group that produced the servers and i b m made a judgment that as long as we are using these fabrication facilities these physical assets they are producing chips we are using those chips we are selling them in profitable service we do not have to go asset by asset and write down the assets even if these fabrication facilities are old they're out of date they're going to be hard to say you know but let's get to the bottom line bottom line is that i b m would pay one point five billion dollars right to global foundries to take the business off of its hands that i m would be taking a two point seven billion impairment charge in the stated value of the business for tax purposes is not correct that is correct but that is in the context of a sale of the business so when you sell the business you have to do the analysis the impairment analysis to write it down i b m would say they did it at exactly the right time and those numbers that you quoted think are a little misleading your honor because that those numbers are in the context of this overall transaction with global foundries the overall transaction with global foundries required global foundries to continue to produce those chips for i b m servers for the next ten years and to use i b m technology and patents and all of that to do that so yes there was a price to be paid but there were substantial benefits for for for i b m in the transaction when the when the disclosures was made plaintiffs do allege that there was a stock drop as i mentioned before at that moment there was a very negative earnings announcement there is no one i think other than these plaintiffs and the dismissed securities plaintiffs who are saying aha it was the write down of the microelectronics assets no that caused the stock drop so we could delve into these facts i again would suggest that i don't think one needs to under the didn't offer standard but the but the facts here i think do not suggest that that the  e down itself actually caused any harm to the plans or anyone else so just this is all very helpful could under what circumstances would there are no shares in the aesop's whose value could be diminished by any disclosure anything like that that seems to me a case where a court could say there is a breach of the duty of prudence why at that moment where you opening up an aesop for your employees that is a breach of the duty of prudence you could have given them a hundred fatality fines they could have bought into but you had to give them any stop in that circumstance so that's an example your honor i think of where and offer case law would permit a claim to go forward based on any sop based on employee participation in the stop but that's one example thank you net seller of stock during the class period is something you only know with hindsight the fifth circuit just this week in martone rob held that in a case where the aesop was a net buyer that it shouldn't factor into the more harm than good analysis because it's not something you can know at the time and it is not possible for the year to have known at the time whether there were more buyers than sellers what they do know is that as time passes there will be more buyers and what they do know is that the risk of a flat stock price recovery increases the longer you perpetuate the artificial inflation point number two the example offered by counsel for appellee in response to your honor's question about what would pass the test under didn't offer was to offer a company on the brink of insolvency that creates an isa plan that is essentially a fraud on the people participating in it putting aside the fact that there are other state a claim for breach of the duty of prudence that was the whole point of invalidating the much presumption was that companies you had to plead that the company was on the brink of insolvency we can't now be in a situation where we've scrapped that presumption only to advance a different one that essentially ends up in the same place in fact we should be concerned about the fact that since amgen no case not of one has been able to survive a motion to dismiss that or pleaded even with a variety of facts being pleaded it yes it is it is possible but it is highly unlikely that every single aesop is now simply always meeting their duty of prudence and that no plaintiff can possibly put forward a colorable claim any more know are they damned if they do and are they damned if they don't that is always an issue for the wrist a fiduciary whether they're dealing with an employee stock plan or not there's always an issue with these cases that are going to be second guessing the judgments of fiduciary is the question is what did they do at the time with the information they had only in this context to even ask ourselves well ok there's an improved an investment we've established that in the complaint but maybe the imprudence might be better for the plan participants than it than than harmful to them in any other rissa context if we were looking at an imprudent investment we would say once they know that there is an imprudent investment they need to act the question in every other risk case is always did they know enough did they make the investigation it was necessary to find out if it was imprudent and was it actually imprudent if you can establish those things at the pleading stage you get to move to discovery only insofar as you plead that they not only knew that the stock was inflated that they were responsible for its inflation's that they are the securities fraud sisters is it possible for parties to have inflated a stock to the purchaser sale of that stock we would argue that that is not that that becomes in a conflict a clear conflict of interest of the extent that that is the basis for your claim how if at all to a factor in that the dismiss of the securities claim against them well they're two different legal regimes with two different rights that are being vindicated in two different legal standards that apply i understand that but my point is can we consider plausible your claim that they were securities fraud stirrers as a predicate for your rissa claim or given the dismissal of that action do we have to act as if it doesn't matter whether they did or did not indeed with my private presume that they did not engage in securities fraud and move forward from that position to take to consider your receipt claim i asked that because i do have a difficulty understanding how a party that commits security sprott with respect to the value of a stock can ever be a fiduciary in the purchase or sale of that stock well your honor we would actually say that it's closer to the latter example that you  your honor i just want to touch on that point we this is not securities law by other means the supreme court has had many an opportunity to say that you should not be allowed to plead around the p s l already by bringing a claim on behalf of employees and they've never taken that opportunity including in didn't offer no fact it is clear that congress put this in the statute for a reason it is a separate right under the law of trusts it is the highest duty known to law and that has to still mean something to those employees thank you thank you both for your arguments the court will reserve decision