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holding that a plaintiff's mere “continued employment is not a cognizable contribution” sufficient to constitute a security for purposes of securities fraud
Summary of this case from In re Satyam Computer Servs. Ltd. Sec. Litig.Opinion
09 Civ. 628 (SAS).
June 8, 2009
For Plaintiff:, Eric M. Nelson, Esq., Stephen L. Sheinfeld, Esq., Lisa M. Sofio, Esq., Winston Strawn LLP, New York, NY.
For Defendant:, C. Evan Stewart, Esq., Laura E. Neish, Esq., Zuckerman Spaeder LLP, New York, NY.
Charles Matays, Esq., Matays Kretschmann, New York, NY.
OPINION AND ORDER
I. INTRODUCTION
Michael Fishoff is suing Coty Inc. — his former employer — for alleged violations of federal securities laws, common law fraud, breach of contract, promissory estoppel, and breaches of the duties of good faith and fair dealing. These claims stem from Fishoff's attempt to exercise options awarded to him in his capacity as Coty's Chief Financial Officer ("CFO"). Coty now moves to dismiss the securities fraud and common law fraud claims. For the reasons discussed below, the motion is granted.
II. BACKGROUND
The facts summarized in this section are drawn from the Complaint and are presumed to be true for the purpose of these motions.
Fishoff became Coty's CFO on July 1, 2002 and was terminated on December 11, 2008. Pursuant to his employment agreement, Fishoff was entitled to participate in Coty's Long-Term Incentive Plan ("LTIP"), which awarded some Coty employees with stock options to incentivize future performance.
See Complaint ("Compl.") ¶¶ 8, 21.
See LTIP, Ex. B to Compl. See also 6/5/02 Employment Letter from Coty to Fishoff, Ex. A to Compl.
Under the LTIP, Fishoff received several option grants. Specifically, Fishoff received 50,000 non-qualified stock options on November 4, 2002, September 15, 2003, September 30, 2004, and September 30, 2005. Those four grants — totaling 200,000 stock options — had all vested by the fall of 2008. Fishoff also took advantage of Coty's Executive Ownership Plan ("EOP") during his tenure at Coty.
See Compl. ¶ 8.
See id. ¶ 10. See also 11/4/02 LTIP Option Award, Ex. C to Compl.; 9/15/03 LTIP Option Award, Ex. D to Compl.; 9/30/04 LTIP Option Award, Ex. E to Compl.; 9/30/05 LTIP Option Award, Ex. F to Compl. Unlike incentive stock options, employees pay taxes on the exercise of a non-qualified stock option. Employers favor non-qualified options because an exercise by an employee entitles the employer to a tax deduction. See 26 U.S.C. § 83.
Fishoff also received 140,000 additional LTIP option awards, but they had not yet vested as of December 2008 and are thus irrelevant to this matter. See Compl. ¶ 11.
See id. ¶ 12. The facts surrounding the EOP are not relevant to the fraud claim, but they are relevant to certain issues discussed later in this opinion.
Because Coty is a privately owned corporation, its securities are not publicly traded. Coty uses investment banks to place a value on its stock for purposes of the option awards. Prior to December 2008, Coty had consistently used J.P. Morgan for this purpose. In September of 2008, J.P. Morgan pegged Coty's stock at $58 per share.
See id. ¶ 13.
See id.
See id.
See id.
Nonetheless, despite increasing sales and revenue figures in 2008, Fishoff contends that Coty was having financial problems. "Currency fluctuations . . . [and] dramatically worsening economic conditions" led Coty executives to conclude that "the budgetary process was getting out of alignment, cost overruns were occurring, . . . gross margins were declining, . . . [and] the current year's performance was dramatically weakening." As a result, "it was widely understood by and discussed among Coty[]'s senior executives" that when J.P. Morgan next priced Coty's stock in the first quarter of 2009, the price would be "dramatically" less than $58. On October 31, 2008, Bernard Beetz, Coty's Chief Executive Officer ("CEO"), exercised 250,000 options, grossing $10,000,000.00. Around the same time, other Coty executives exercised 119,930 options, grossing $4,295,895.00.
See id. ¶ 14.
Id.
Id. ¶ 15.
See id. ¶ 16.
See id.
Fishoff alleges that those options were exercised to take advantage of the predicted drop in Coty's stock value. For the same reason, Fishoff gave notice to Alexandra Ebrahim, Coty's Manager of Compensation, on Monday, December 1, 2008, that he was exercising all 200,000 vested options at $58 per share. The LTIP requires that notice of an option exercise must be on the last day of the month. It would not have been possible for Fishoff to give notice on the last day of November — which was a Sunday — so Coty recorded the date of exercise as November 28, 2008.
See id.
See id. ¶ 17.
See id. See also LTIP, § 6(d)(ii) (incorporating by reference § 2, which defines "Exercise Date" as occurring on the last day of any month, unless that month precedes the month with a valuation date).
See Compl. ¶¶ 17, 18 (noting that such action is pursuant to past practice at Coty). See also 12/2/08 Stock Option Election Form Confirmation, Ex. L to Compl. (acknowledging that Fishoff's exercise was marked as occurring on November 28, 2008); FY09 NQ Option Exercises as of November 28, 2008, Ex. M to Compl. (recording Fishoff's exercise as occurring on November 28, 2008 in Coty's book-keeping program).
On December 5, 2008, the Board met in New York City. Fishoff attended and presumed that it would be a normal meeting. Half-way through the meeting, the Board excused Fishoff and went into an "unscheduled 'executive session'" where it decided that the next LTIP valuation would be moved up to December 2008, that the valuation would now be made by Rothschild (rather than J.P. Morgan), and that "December 2008 [would be] a 'black-out' period — thus barring the exercise of any options in December."
See Compl. ¶ 19.
See id. See also 12/5/08 Coty Board Meeting Minutes, Ex. N to Compl.
Compl. ¶ 19.
Shortly thereafter — on December 9, 2008 — Fishoff was notified by Ebrahim that his recent exercise would be treated as a December 2008 exercise. Ebrahim acknowledged that the company "thought [they] could process your exercise on November 28 for payment in December" but instead they had to adhere to the LTIP "which states that all exercises have to be submitted prior to the last day of the month for the month during which the exercise will occur." Two days later — on December 11, 2008 — Coty's CEO terminated Fishoff without cause. Later that same day, an e-mail was sent to all LTIP "optionees" giving notice of the decisions made at the December 5, 2008 meeting. On January 19, 2009, the Board met and decided to honor Fishoff's recent exercise but also decided to revalue Fishoff's vested shares at a future date. Fishoff sued Coty on January 22, 2009.
See id. ¶ 20. See also 12/9/08 E-Mail from Ebrahim to Fishoff, Ex. O to Compl. (detailing the new accounting of his options as occurring in December of 2008).
12/9/08 E-Mail from Ebrahim to Fishoff, at 1.
See Compl. ¶¶ 21, 23.
12/11/08 E-Mail from John Annunziata to "Optionees," Ex. P to Compl., at 1. See also Compl. ¶ 21.
See Compl. ¶ 22.
III. LEGAL STANDARD
A. Motion to Dismiss
When deciding a motion to dismiss under Rule 12(b)(6), the court must "accept as true all of the factual allegations contained in the complaint" and "draw all inferences in the light most favorable to the non-moving party[]." Nevertheless, the court need not accord "[l]egal conclusions, deductions or opinions couched as factual allegations . . . a presumption of truthfulness."
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Accord In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007).
In re NYSE Specialists, 503 F.3d at 95.
Id. (quotation omitted).
In deciding a motion to dismiss, the court is not limited to the face of the complaint. The court "may [also] consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit."
ATSI Commc'ns v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).
1. Pleading Requirements
"Federal Rule of Civil Procedure 8(a)(2) requires . . . 'a short and plain statement of the claim showing that the pleader is entitled to relief.'" To survive a 12(b)(6) motion to dismiss, the allegations in the complaint must meet the standard of "plausibility." A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Plausibility is not the same as a "probability requirement," but rather it "asks for more than a sheer possibility that a defendant has acted unlawfully." Pleading a fact that is "merely consistent" with a defendant's liability does not meet the plausibility standard but rather is likely between the realm of possibility and plausibility.
Erickson v. Pardus, 551 U.S. 89, 93 (2007) (quoting Fed.R.Civ.P. 8(a)(2)).
See Twombly, 550 U.S. at 564. Accord Ashcroft v. Iqbal, ___ U.S. ___, ___ S. Ct. ___, 2009 WL 1361536, at *16 (May 18, 2009) (noting that Twombly's standard of plausibility is not limited to antitrust cases).
Iqbal, 2009 WL 1361536, at *12 (quotation omitted).
Id. (quotation omitted).
Id. (quotation omitted).
2. Securities Fraud
"Securities fraud claims are subject to heightened pleading requirements that the plaintiff must meet to survive a motion to dismiss." Those heightened pleading requirements are imposed by Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (the "PSLRA"). Private claims that do not meet the PSLRA's pleading requirements must be dismissed.
ATSI, 493 F.3d at 99.
See 15 U.S.C. § 78u-4(b).
ATSI, 493 F.3d at 99 (citing 15 U.S.C. § 78u-4(b)(3)(A)).
a. Rule 9(b)
A complaint alleging securities fraud must satisfy Rule 9(b)'s requirement that "the circumstances constituting fraud . . . be stated with particularity." "This pleading constraint serves to provide a defendant with fair notice of a plaintiff's claim, safeguard his reputation from improvident charges of wrongdoing, and protect him against strike suits." To comply with the requirements of Rule 9(b), a plaintiff must: "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." "Allegations that are conclusory or unsupported by factual assertions are insufficient."
Fed.R.Civ.P. 9(b). Accord ATSI, 493 F.3d at 99.
ATSI, 493 F.3d at 99 (citing Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004)).
Rombach, 355 F.3d at 170 (quotation omitted). Accord ATSI, 493 F.3d at 99 (citing Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000)).
ATSI, 493 F.3d at 99.
b. The PSLRA
The PSLRA requires plaintiffs to state with particularity "both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention to deceive, manipulate, or defraud." The PSLRA specifies that the plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Courts must look at the complaint as a whole and "must take into account plausible opposing inferences." "[A]n inference of scienter must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." In other words, a plaintiff must present a "strong inference" of scienter. The inference need not, however, be "irrefutable, i.e., of the 'smoking-gun' genre, or even the most plausible of competing inferences." The inquiry on a motion to dismiss is as follows: "When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?" "If the plaintiff alleges a false statement or omission, the PSLRA also requires that 'the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.'"
Tellabs, Inc. v. Makor Issues Rights, Ltd., 127 S. Ct. 2499, 2504 (2007) (quotation omitted) (citing 15 U.S.C. § 78u-4(b)(1), (2)). Accord ECA Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009).
Tellabs, 127 S. Ct. at 2504 (quoting 15 U.S.C. § 78u-4(b)(2)).
Id. at 2509. These plausible opposing inferences may be based only on the complaint and other public documents on which courts ordinarily rely in deciding a motion to dismiss, "while constantly assuming the plaintiff's allegations to be true." Id. at 2509, 2511-12.
Id. at 2504-05.
ECA Local 134 IBEW Joint Pension Trust of Chi., 533 F.3d at 196.
Tellabs, 127 S. Ct. at 2510 (citation omitted).
Id. at 2511. Accord id. at 2510 ("A complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.").
ATSI, 493 F.3d at 99 (quoting 15 U.S.C. § 78u-4(b)(1)).
B. Section 10(b) and Rule 10b-5
A Rule 10b-5 claim includes six elements: (1) a material misrepresentation or omission, (2) with scienter, (3) in connection with the purchase or sale of a security, (4) upon which the plaintiff relied, (5) economic loss and (6) loss causation (also known as proximate cause). Because only the first three elements are at issue in this motion, I do not discuss the remaining three.
See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341 (2005) (adding the element of "economic loss," which was formerly included within proximate cause). Accord Kalin v. Xanboo, Inc., No. 04 Civ. 5931, 2009 WL 928279, at *9 (S.D.N.Y. Mar. 30, 2009) (noting evolution of the six-element test).
1. Material Misstatements or Omissions
In order to establish material misstatements or omissions, the complaint must "state with particularity the specific facts in support of [plaintiff's] belief that [defendant's] statements were false when made." "Corporate officials need not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them." Mere "allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud."
Rombach, 355 F.3d at 172 (quotation omitted). Accord In re Vivendi Universal, S.A. Sec. Litig., 381 F. Supp. 2d 158, 182 (S.D.N.Y. 2003) (holding that statements that a company was "financially solid" were actionable where defendants did not have a reasonable basis for them); In re Oxford Health, 187 F.R.D. 133, 140 (S.D.N.Y. 1999) (holding that statements downplaying internal control problems were actionable because they misled investors into believing the problems were not as serious or extensive as they were).
Novak, 216 F.3d at 309 (citation omitted).
Id. Accord Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000) ("The fact that management's optimism about a prosperous future turned out to be unwarranted is not circumstantial evidence of conscious fraudulent behavior or recklessness: People in charge of an enterprise . . . can be expected to be confident about their stewardship and the prospects of the business that they manage.") (quotations omitted).
2. Scienter
"The requisite state of mind in a Rule 10b-5 action is an intent to deceive, manipulate or defraud." Scienter can be pled by "alleging facts (1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness." "Sufficient motive allegations entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged." "[A]dmissions of misrepresentations, coupled with defendants' continuous intimate knowledge of company affairs is enough to adequately infer scienter." Moreover, "[m]otives that are generally possessed by most corporate directors and officers do not suffice; instead, plaintiffs must assert a concrete and personal benefit to the individual defendants resulting from the fraud." "To prove liability against a corporation . . . a plaintiff must prove that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation."
Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). Accord Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir. 2000). See also Tellabs, 127 S. Ct. at 2501 (holding that plaintiff needs to state with particularity facts evidencing the defendant's intention "to deceive, manipulate, or defraud").
ATSI, 493 F.3d at 99 (citing Ganino, 228 F.3d at 168-69). Accord In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d 370, 398 (S.D.N.Y. 2007) (holding that plaintiffs adequately pleaded scienter because the allegations supported the inference that the company and the officers were at least reckless in not knowing that the financial statements were false and in failing to disclose internal control weaknesses); In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266, 292 (S.D.N.Y. 2006) (holding that plaintiffs must "specifically allege defendants' knowledge of facts or access to information contradicting their public statements").
Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001) (describing "[i]nsufficient motives" as including "(1) the desire for the corporation to appear profitable and (2) the desire to keep stock prices high to increase officer compensation") (quotations omitted).
Stevelman v. Alias Res. Inc., 174 F.3d 79, 84-85 (2d Cir. 1999).
Kalnit, 264 F.3d at 139. Accord In re Openwave Sys. Sec. Litig., 528 F. Supp. 236, 250 (S.D.N.Y. 2007) (holding that defendants' stock options "are 'concrete and personal' because they represent a species of compensation different from the one ordinarily accumulated by corporate officers and directors"); Chemical Bank v. Arthur Andersen Co., 726 F.2d 930, 939 (2d Cir. 1984) (holding that "a pledge is a sale and purchase of a security under § 10(b)").
Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir. 2008).
"Where motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater." Under this theory of scienter, a plaintiff must show that the defendant's conduct is "at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." "Under certain circumstances, [courts] have found allegations of recklessness to be sufficient where plaintiffs alleged facts demonstrating that defendants failed to review or check information that they had a duty to monitor, or ignored obvious signs of fraud." Recklessness can be shown by "defendants' knowledge of facts or access to information contradicting their public statements.
Kalnit, 264 F.3d at 142 (quotation omitted).
Id. (quotation omitted).
Novak, 216 F.3d at 308. Accord In re Veeco Instruments, Inc., Sec. Litig., 235 F.R.D. 220, 232 (S.D.N.Y. 2006) (holding that the scienter requirement was satisfied by identification of specific facts constituting strong circumstantial evidence of recklessness and allegations that defendants knew of or recklessly ignored a series of accounting improprieties).
Under such circumstances, defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation."
Novak, 216 F.3d at 308.
3. In Connection with the Sale or Purchase of Securities
The Exchange Act defines a security as "any note, stock, treasury stock, bond, debenture . . . investment contract . . . put, call, straddle, option, or privilege on any security . . . [or] instrument commonly known as a 'security' [or a] right to subscribe to or purchase, any of the foregoing." "Stock is the paradigm of a security as defined in the Securities Acts."
Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 558 (2d Cir. 1985) (quotations omitted).
The test for whether a contract is an investment contract — and by extension a security — asks "whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." Noncontributory pension plans — for example — are not securities because only "voluntary, contributory plans ha[ve] investment characteristics that rendered them 'securities' under the [Securities] Acts." The plan must require the employee "to give up a specific consideration in return for a separable financial interest with the characteristics of a security."
International Bhd. of Teamsters v. Daniel, 439 U.S. 551, 551-52 (1979) (quotations omitted).
Id. at 556 (emphasis added). Accord id. (holding that the "Securities Act and the Securities Exchange Act do not apply to a noncontributory, compulsory pension plan").
Id. at 559. Although many early cases applying this rule involved pension plans, Daniel applies to investment contracts generally. See, e.g., Dubin v. E.F. Hutton Group, Inc., 695 F. Supp. 138, 143 (S.D.N.Y. 1988) (applying the holding in Daniel to an employee equity ownership plan).
Even if the underlying dispute involves a security, "only an actual purchaser or seller of securities has standing to assert claims under § 10(b) and Rule 10b-5." "The holders of puts, calls, options, and other contractual rights or duties to purchase or sell securities have been recognized as 'purchasers' or 'sellers' of securities for purposes of Rule 10b-5 . . . because the definitional provisions of the 1934 Act themselves grant them such a status." There is no purchase or sale of securities "when an employee does not give anything of value for stock other than the continuation of employment nor independently bargains for such stock." For instance, the employee is not a purchaser if the employee "earned [the securities] as a part of his compensation." C. Common Law Fraud
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749 (1975).
Id. at 751.
In re Cendant Corp. Sec. Litig., 81 F. Supp. 2d 550, 556 (D.N.J. 2000) (citation omitted). Accord Fraser v. Fiduciary Trust Co. Int'l, 417 F. Supp. 2d 310, 318 (S.D.N.Y. 2006) (citing Cendant with approval).
Fraser, 417 F. Supp. 2d at 318.
The LTIP explicitly requires the application of New York law to any disputes arising under the Plan. See LTIP, § 10(k).
A plaintiff pleading fraud under New York law must demonstrate:
(1) a misrepresentation or omission of material fact; (2) which the defendant knew to be false; (3) which the defendant made with the intention of inducing reliance; (4) upon which the plaintiff reasonably relied; (5) which caused injury to the plaintiff.
Wynn v. AC Rochester, 273 F.3d 153, 156 (2d Cir. 2001).
"The elements of common law fraud under New York law 'are substantially identical to those governing Section 10(b)' and an 'identical analysis applies.'" However, "there is no requirement that the fraud be 'in connection with the purchase or sale of securities.'" "In other words, a claim for common law fraud is available to investors who retain their securities in reliance on a defendant's misrepresentations." "As with Rule 10b-5, knowledge or recklessness is sufficient to satisfy the scienter element for common law fraud." "Common law fraud, in addition, must be proved by clear and convincing evidence."
Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Secs., LLC, 592 F. Supp. 2d 608, 639 (S.D.N.Y. 2009) (citing AIG Global Secs. Lending Corp. v. Banc of Am. Secs., LLC, No. 01 Civ. 11448, 2005 WL 2385854, at *16 (S.D.N.Y. Sept. 26, 2005)).
Bui v. Industrial Enter. of Am., Inc., 594 F. Supp. 2d 364, 373 (S.D.N.Y. 2009).
Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt. LLC., 376 F. Supp. 2d 385, 407 (S.D.N.Y. 2005).
Id.
Manela v. Garantia Banking Ltd., 5 F. Supp. 2d 165, 179 (S.D.N.Y. 1998).
IV. DISCUSSION
A. Section 10(b) and Rule 10b-5
Coty argues that the LTIP is not a security because it is compulsory and because it is not contributory. It further contends that Fishoff's allegation that he would not have participated in the LTIP if he had foreseen the instant dispute does not make the plan voluntary. Finally, Coty asserts that the LTIP is a cash bonus plan, making it similar to a phantom stock bonus program because employees are never actually issued any stock but rather receive cash when they exercise the options. Fishoff responds that the LTIP itself is a security, or — at the very least — that the options are securities.
The only statutory definition of a security into which the LTIP might arguably fall is an "investment contract." Fishoff claims that he "became entitled to receive prospectively large grants . . . under the corporation's [LTIP]." His employment letter indicates that he is eligible — but not required — to participate in the LTIP. The LTIP terms indicate that the plan is solely for key employees or executives, not for all employees of the company. All of these factors demonstrate that participation in the LTIP is voluntary.
Compl. ¶ 8.
See 6/5/02 Employment Letter from Coty to Fishoff, Ex. A to Compl.
See LTIP, Ex. B to Compl.
However, the plan is not contributory; nor does Fishoff so allege. Fishoff's continued employment is not a cognizable contribution. This is reinforced by comparison to Coty's EOP, which did require an employee contribution. As a result, the LTIP is not an investment contract and cannot be deemed a security. Thus, Fishoff has failed to allege fraud in connection with the purchase or sale of a security.
See Fraser, 417 F. Supp. 2d at 318 (finding that continuation of employment does not lead to a purchase or sale of securities).
See Compl. ¶ 12. See also EOP, Ex. I to Compl.
Nonetheless, Fishoff argues that the fraud surrounds the exercise of the options. Options are indeed a cognizable security under the Securities Acts. But even if the options are viewed as the security, there was never a purchase or sale of contracts. The alleged fraud is not about the issuance of those options but rather about the change of price of those options based on an interpretation of the LTIP. Finally, Fishoff does not allege with particularity any statements or other promises made when the options themselves were granted that raise a strong inference of scienter. His pleadings therefore do not meet the heightened pleading standards of the PSLRA and Rule 9(b). Accordingly, Coty's motion to dismiss Fishoff's Rule 10b-5 claim is granted.
Fishoff cites a host of cases for the proposition that a purchase or sale of securities occurs any time there is an award of stock options or when there is participation in a stock incentive plan. See, e.g., Dubin, 695 F. Supp. at 146 (holding that an employer committed fraud when changing the terms of options that had already vested pursuant to an options plan that was deemed a security); Tafuri v. Air Prods. and Chems., Inc., No. Civ. A. 97-3413, 1997 WL 643598, at *2 (E.D. Pa. Oct. 8, 1997) (allowing a Rule 10b-5 claim to withstand a motion to dismiss because the plan in question could be deemed a security); Campbell v. National Media Corp., No. Civ. A. 94-4590, 1994 WL 612807, at *3 (E.D. Pa. Nov. 3, 1994) (refusing to determine — on a motion to dismiss — that plaintiff's employment agreement — which mandated option grants — could not meet the "purchase or sale of a security" requirement). Aside from the fact that most of these decisions are not binding, they are also distinguishable. In some, the employee was given options in return for past performance. Also, the question of whether the plan at issue was a security was either never raised (as in Campbell) or the plan was deemed a security because it was contributory (as in Dubin). Here, the LTIP is not contributory and so — as in Daniel itself — it cannot be deemed a security.
The Second Circuit is reluctant to "transform what are in essence breach of contract claims only tangentially involving securities into securities claims." Anation v. Coutts Bank (Switz.), Ltd., 193 F. 3d 85, 88 (2d Cir. 1999) (citation omitted) (affirming the dismissal of a Rule 10b-5 claim surrounding the change of loan terms because the claim was more appropriately a breach of contract claim).
B. Common Law Fraud
Fishoff has also failed to adequately plead a claim of common law fraud. Fishoff has not contended that Coty induced him to sign the LTIP with the intention of reneging on its promises. The only statement he points to that would sustain a fraud claim is his employment letter, but he does not allege any scienter or intentional misrepresentation with respect to that letter. It would be implausible to infer solely from the letter that Coty intended to defraud Fishoff when it issued the letter in 2002. Fishoff's contentions are couched in an ex post breach of contract claim, not in an ex ante fraud claim.
Fishoff again contends that the fraud revolves around the options themselves. However, the options were issued pursuant to a contract, and Fishoff has essentially challenged Coty's interpretation of that contract. Fishoff has not alleged that Coty made any misrepresentations to Fishoff at the time the options were issued — from the time of the original option grant in 2002 to the most recent issuance in 2008. Accordingly, the common law fraud claim must also be dismissed.
V. CONCLUSION
Coty's motion to dismiss the securities laws and common law fraud claims is granted. The Clerk of the Court is directed to close this motion (Docket # 5). A conference is scheduled for June 18 at 5:00 p.m.
SO ORDERED: