In re Cendant Corp. Securities Litigation

81 F.Supp.2d 550

IN RE CENDANT CORPORATION SECURITIES LITIGATION This document relates to Jan Wyatt, Randy Kupper and Maria Lourdes Rodriguez, on behalf of themselves and all others similarly situated, Plaintiffs, v. Cendant Corporation, individually and as successor to CUC International, Inc., E. Kirk Shelton, Walter A. Forbes, Cosmo Corigliano, Christopher McLeod, Anne M. Pember, Burton C. Perfit, T. Barnes Donnelley, Stephen A. Greyser, Kenneth A. Williams, Bartlett Burnap, Robert P. Rittereiser, Stanley M. Rumbaugh, Jr., and Ernst & Young, LLP, Defendants.

Civ.No. 98-1664(WHW).

United States District Court, D. New Jersey.

February 1, 2000.

COPYRIGHT MATERIAL OMITTED

Michael J. Pucillo, Colleen Bodik, West Palm Beach, FL, for Plaintiffs.

Douglas Eakeley, Peter Skolnik, Lowenstein Sandler, PC, Roseland, NJ, Alan Salpeter, Caryn Jacobs, Mayer, Brown & Platt, Chicago, IL, for Ernst & Young LLP.

Steven S. Radin, Sills Cummis Zuckerman Radin Tischman Epstein & Gross, Newark, NJ, Greg Danilow, Weil, Gotshal & Manges LLP, New York City, for CUC Directors/Walter Forbes.

Richard Schaeffer, Dornbush, Mensch, Madelstrom & Schaeffer, New York City, for E. Kirk Shelton.

Carl Greenberg, Budd, Larner, Gross, Rosenbaum, Greenberg & Sade, Short Hills, NJ, Jonathan Lerner, Samuel Kadet, Skadden, Arps, Slate Meagher & Flom, New York City, for Cendant.

OPINION

WALLS, District Judge.

Defendants, Cendant Corporation ("Cendant"), Ernst & Young LLP ("E & Y"), E. Kirk Shelton, Walter A. Forbes, and Christopher McLeod, move to dismiss the amended complaint filed against them by plaintiffs, Jan Wyatt, Randy Kupper, and Maria L. Rodriguez, on behalf of themselves and all others similarly situated. As stated in this Opinion, defendants' motions are granted.

Factual Background

Plaintiffs are present and former employees of Interval International, Inc. ("Interval"), once a subsidiary of CUC International, Inc. ("CUC"). Am Compl. ¶ 28. In 1992, CUC's board of directors adopted a stock option plan for Interval employees (the "1992 option grant"). Beginning in 1993, senior management of Interval received options to purchase CUC common stock. These were given between 1993 and February 1997. Am Compl. ¶ 27. These options had a ten year life, and were fully vested within four to five years after their grant. Id. If the employee died or was disabled, the options would immediately vest and become exercisable. Id. If the employee terminated employment with CUC for other than death or disability, the options were exercisable to the extent exercisable on the date of termination for a period of four months thereafter.

The planned merger of HFS, Inc. ("HFS") and CUC to form Cendant Corporation was announced on May 27, 1997.¹ Management of CUC and Interval anticipated that Interval would have to be divested to obtain governmental approval of the merger. Am Compl. ¶¶ 28-30. And, on July 14, 1997, the Federal Trade Commission ("FTC") advised CUC that such divestiture of Interval was recommended. Under the terms of a consent order with the FTC, divestiture was a condition of merger approval. Am Compl. ¶ 31.

Interval's management worked to prevent their options from expiring within four months of divestiture under the terms of the 1992 option grant. To this end, Craig Nash, President and Chief Executive Officer of Interval, contacted CUC's management. On August 26, 1997, Mr. Nash sent a letter to Interval optionholders offering certain incentives "to encourage our continued efforts on behalf of Interval during this time of uncertainty and possible transition." Am. Compl. Ex. B. Employees were offered a "stay bonus" of $25,000, a guaranteed bonus for fiscal year 1998, and severance payment for employees terminated within one year of the anticipated divestiture. Am. Compl. Ex. B. Another "incentive" modified CUC stock options by retaining the original vesting schedule for all employees who remained at Interval for three months following the date of divestiture. Am Compl. ¶¶ 34-36; Am. Compl. Ex. B. For those who left within three months, the proposal would have had options vest according to schedule within two years after divestiture; any options which vested after the two year period were forfeit. Am Compl. ¶ 35. No modifications to the ten year exercise period were proposed.

On October 29, 1997, a Stock Purchase Agreement ("SPA") was entered into between CUC as seller and Interval Acquisition Corporation as buyer of Interval. Am Compl. ¶ 37. Under section 5.2 of the agreement, all previously granted employee stock options were "to [immediately] vest and be exercisable for a period ending on the date which is one year from the date following the closing date." Id. No reference was made to the August letter to Interval employees which required them to remain at the company for three months after divestiture to receive the most favorable option modifications.

In reviewing the SPA, the Interval employees were concerned that a one-year option exercise period was too brief. Am Compl. ¶ 39. Craig Nash contacted CUC. The result was a December 10, 1997 letter which notified plaintiffs "of a change in terms which we have been able to secure for your outstanding CUC options:"

[P]rovided you are an employee of Interval on the Closing Date, all of your options to acquire shares of CUC common stock that you hold on the closing date which are not vested by their terms will be accelerated so that all such options will be vested as of the Closing Date. You will thereafter be permitted to exercise any of your unexercised options for a period of two years following the Closing Date.

Am. Compl. Ex. D.

On December 17, 1997, the date of the merger of HFS and CUC and divestiture of Interval, Interval Acquisition Corporation modified section 5.2 to allow for the two year exercise period. Am Compl. ¶ 41. Section 12.3 of the SPA stated that the document "contain[s] the entire agreement between the parties with respect to the subject matter hereof and [] there are no agreements, understandings, representations or warranties between the parties other than those set forth or referred to herein."

Plaintiffs, however, say that each employee also had the choice to be bound by the original 1992 option grant without the four month termination provision. See Am. Compl. Ex. D; Am Compl. ¶ 43. Thus, "[t]hose [employed by Interval on the date of divestiture] who did not modify the options to obtain immediate vesting [under section 5.2] ... were, in essence, given a waiver of the provisions of CUC's 1992 employee stock option plan which required that options be exercised within four months of termination or they would expire." Am. Compl. ¶ 43. According to plaintiffs, approximately four employees chose not to modify and the rest altered their options pursuant to section 5.2 of the SPA. The four employees are not putative class members.

On April 15, 1998, Cendant announced that it had discovered accounting irregularities in former CUC business units. See generally In re Cendant Corp. Litigation, 60 F.Supp.2d 354 (D.N.J.1999). The next day, Cendant's stock fell approximately 47%, from $35 5/8 per share to $19 1/16 per share. Plaintiffs filed their complaint, later amended, which seeks to recover for the loss in value of their CUC (which by merger became Cendant) stock options.

The defendants ask the Court to dismiss the complaint for several reasons. Defendant Cendant Corporation argues that there was no purchase or sale of securities because (a) plaintiffs' claims are foreclosed under the "no sale" doctrine recently addressed by this Court in In re Cendant Corporation Securities Litigation, 76 F.Supp.2d 539 (D.N.J.1999) ("McLaughlin") and (b) none of the modifications significantly altered the nature or risk of plaintiffs' investment. Second, the corporation argues that plaintiffs cannot allege loss causation. Defendant Ernst & Young LLP ("E & Y") also contends that (a) the option modifications were not purchases or sales of securities; (b) E & Y's March 1997 audit opinion was not made "in connection with" the option modifications and plaintiffs did not rely on the opinion; (c) plaintiffs fail to allege loss causation and (d) plead scienter with the particularity required by the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b)(2). Defendants Walter A. Forbes, Christopher K. McLeod, and E. Kirk Shelton adopt many of E & Y's arguments. These individual defendants further urge the Court to dismiss plaintiffs' Section 20(a) "control person" claims.

Plaintiffs respond by claiming to be "purchasers" under Section 10(b): They assert that the modifications were part of a bargained-for exchange negotiated on behalf of the Interval executives who remained at the company through divestiture. They argue that the executives provided consideration for the option modifications by remaining with Interval through divestiture. They further argue that two operative modifications, of August 26, 1997 and December 17, 1997, were "significant change[s] in the nature of the investment or in the investment risk" to qualify as purchases of "new investments." They assert that they have alleged loss causation because they "committed their labor in exchange for securities that were essentially worthless .... [and] ended up exchanging long term options for short term options that were largely worthless." Finally, plaintiffs aver that they have specified scienter and fraud with particularity against all defendants.

Analysis

A. Motion to Dismiss

On a motion to dismiss pursuant to Fed. R.Civ.P. 12(b)(6), the court is required to accept as true all allegations in the complaint, and all reasonable inferences that can be drawn therefrom, and to view them in the light most favorable to the nonmoving party. See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir.1994). The question is whether the claimant can prove any set of facts consistent with his or...