LEWIS A. KAPLAN, District Judge.
Plaintiffs Pasternack, Boudinot, and Kocourek are former officers of defendant Booz Allen Hamilton Inc. ("BAH"). They sue against BAH, its former chief executive officer Shrader, and a number of other former BAH officers
At the heart of the consolidated complaint is the allegation that the BAH Defendants orchestrated a secret plan to force certain BAH officers, including plaintiffs, to retire and sell their shares under BAH's officers' stock rights (or option) plan ("SRP") and/or redeem their rights under its shadow stock plan ("SSP") before BAH's government sector was sold to the Carlyle Group in 2008 ("Carlyle Transaction").
The matter is now before the Court on defendants' motions to dismiss the consolidated complaint.
Although these motions address the face of the pleading, the defendants have submitted several additional documents. Two of them — the SRP and the Swenson Memorandum
Plaintiffs Pasternack, Boudinot, and Kocourek began working at BAH in 1976, 1991, and 1987, respectively.
BAH sponsored two "stock" plans, the SRP and the SSP. Pasternack and Boudinot participated in the SRP, and Kocourek participated in both.
The SRP governed the issuance of BAH stock options to officers and the subsequent repurchase of BAH shares in connection with their retirements.
The SSP provided BAH officers based outside the United States with post-retirement payments that were designed to be equivalent to the proceeds they would have received had they participated in the SRP.
Pasternack, Boudinot, and Kocourek retired in 2004, 2005, and 2007, respectively. Roughly two years after Pasternack and Boudinot retired, BAH purchased their SRP shares for book value.
Plaintiffs allege that Shrader and other Individual BAH Defendants — without plaintiffs' knowledge and before they retired — devised a scheme to split the commercial and government sectors of BAH and to effect a management-led leveraged buy-out ("LBO") of the government sector.
The specific allegations of the three plaintiffs vary in detail, but the overall picture is similar. Pasternack alleges that Individual BAH Defendant Lewis falsely told him in 2004 that the Partners Compensation Committee ("PCC") had decided that Pasternack would be terminated for cause unless he resigned immediately.
In May 2008 — roughly a year after Boudinot and Pasternack sold their SRP shares and Kocourek surrendered his SSP rights — BAH approved a spin-off of its commercial sector
The profits that BAH officers received from the Carlyle Transaction allegedly were significant. Plaintiffs assert that the consideration they received for their SRP shares and SSP rights was less than a fifth of what they would have received had they been able to sell their SRP shares and surrender their SSP rights as part of or after the Carlyle Transaction.
Litigation involving this alleged scheme and the Carlyle Transaction has been addressed previously by this and other courts.
First, Kocourek sued BAH in New York state court alleging breach of contract, unjust enrichment, and fraud claims related to the redemption of his SSP rights.
Second, other former BAH officers made similar claims based on their retirements and the Carlyle Transaction in Delaware state court. The Delaware courts, however, rejected the claims and held that no duty had been breached because those plaintiffs received exactly the benefits they bargained for under the SRP.
Plaintiffs collectively allege seventeen purported causes of action in their 122-page consolidated complaint, including a securities fraud claim (Count 7), RICO claims (Counts 1-3), ERISA claims (Counts 4-5, 9, 12, and 14), various common law fraud claims (Counts 6 and 8), and an aiding and abetting claim under state law (Count 13).
The BAH and Carlyle Defendants maintain that the pleadings fail to state any claim upon which relief may be granted. They assert also that many claims are barred by the applicable statutes of limitations, claim preclusion, or the Private Securities Litigation Reform Act ("PSLRA").
Plaintiffs Boudinot and Pasternack allege that they were defrauded in violation of the federal securities laws (Count 7). The essence of their claims is that the Individual BAH Defendants formed a secret plan to split BAH and sell the government sector so that individuals holding BAH shares at the time of the anticipated sale would receive large profits. Boudinot and Pasternack assert that the existence of this plan was material information that should have been, but was not, disclosed to them before they retired. They contend that they would not have retired if the plan had been disclosed, that they would have kept their BAH shares, and that they would have profited greatly from the Carlyle Transaction.
The operative statute is Section 1658(b) of the Judicial Code,
In this case, the alleged fraud consisted of the failure to disclose the existence of the alleged scheme to sell BAH's government sector at the time that Boudinot and Pasternack were induced to retire, thus triggering their obligations under the SRP to sell their shares to BAH. In reliance on the allegedly fraudulent non-disclosure, Pasternack resigned some time in spring 2004, effective November 30, 2004,
Boudinot and Pasternack nevertheless assert that their securities claims are timely because the five-year period did not start running until they sold their BAH shares in 2007 and suffered their alleged injury. In other words, Boudinot and Pasternack assert that Section 1658(b)(2) operates as a statute of limitations, with their claims accruing when they suffered injury. Defendants, on the other hand, contend that the five-year period in the statute is a statute of repose and that the period runs from the date of the alleged securities law violation.
Courts in this district have treated Section 1658(b)(2) as a statute of repose and consistently stated that the five-year period begins to run from the time that the allegedly fraudulent representations were made.
This Court agrees. It therefore concludes that the five-year period began to run in spring 2004 for Pasternack and in September 2004 for Boudinot because those times are when the alleged misstatements, omissions, and threats were made.
Plaintiffs seek damages under the RICO statute against the BAH and Carlyle Defendants (Counts 1-3), claiming that these defendants conducted and conspired to conduct the affairs of the alleged enterprise through a pattern of racketeering activity.
Section 1961(1) of RICO defines "racketeering activity" by reference to particular acts and offenses that constitute acts of racketeering, or predicate acts.
Courts determine whether the PSLRA applies by focusing on whether the fraudulent conduct underlying RICO claims is "in connection with the purchase or sale of any security."
Here, plaintiffs' RICO claims are based on defendants' alleged fraudulent acts and misrepresentations that forced or induced them to retire and sell their SRP shares and surrender their SSP rights before the Carlyle Transaction occurred.
The plaintiffs allege several ERISA claims against the BAH Defendants in relation to the SRP. The BAH Defendants argue that these claims are insufficient because the SRP was not a qualified ERISA plan.
A plan is subject to ERISA if the "plan, fund, or program . . . (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. . . ."
To determine whether a specific arrangement qualifies as an ERISA plan, courts generally analyze several factors, including: (1) its express purpose, (2) whether the employer maintains discretion over awarding benefits, (3) whether the payments are given on the basis of work performed, (4) whether the payments systematically are deferred until the end of employment, (5) the manner in which the company promoted the plan, and (6) whether penalties were imposed to deter redemption until an employee retired.
In this case, the express purpose of the SRP was "to enable Officers . . . of the Company to purchase shares of the Company's stock and to provide incentives for such Officers to continue to serve as employees of the Company and its subsidiaries."
Second, the SRP provided BAH's board with sole discretion to decide when and to whom to grant stock options under the SRP.
Third, although the SRP did not state clearly that stock options were granted on the basis of work performed, its structure so suggests because stock options were distributed incrementally, subject to exercise over 10-year periods.
Fourth, plaintiffs argue that SRP benefits were "systematically deferred" until retirement because BAH estimated that the book value of its SRP shares would increase 10 percent annually
Fifth, BAH did not represent that the SRP was an ERISA plan or a plan designed to provide retirement income. As noted elsewhere, the express purpose of the SRP was "to provide incentives for . . . Officers to continue to serve as employees of the Company. . . ."
Sixth, plaintiffs argue that penalties were imposed on officers if they attempted to sell their shares before retirement in that those who sold stock before retirement forfeited "all rights to exercise all options under all grants that had not been exercised at the time of [the] sale of stock."
Taking all of these factors together, this Court concludes that the SRP was not an ERISA plan. Its purpose was to provide BAH officers with compensation and a wealth creation vehicle and to promote extended employment among certain top-level executives. It was not designed to be, and did not operate as, a retirement plan. Accordingly, all ERISA claims brought pursuant to the SRP must be dismissed.
The ERISA claims based on the SSP are brought only by Kocourek because he is the only plaintiff that participated in it. He asserts six claims for relief under the statute: (1) a claim under Section 502(a)(1)(B) to enforce his alleged rights under the SSP (Count 4),
The BAH Defendants rejoin that: (1) the SSP was not an ERISA plan, (2) even if it was, it was a "top-hat" plan and thus exempt from certain fiduciary duties, and (3) Kocourek is precluded from bringing these claims because he previously brought claims in New York state court based on the same factual allegations.
The SSP granted certain BAH officers rights to post-retirement payments that were designed to be equivalent to the proceeds they would have received had they participated in the SRP. There were, however, a few differences between the plans.
First, under the SSP, officers earned "shadow stock" — contractual rights that were equivalent, more or less, to stock options received under the SRP because the "book value" of the shadow stock followed BAH's book value.
Second, unlike the SRP, no documentation about the SSP's terms has been provided beyond the details listed above and those alleged in the consolidated complaint.
As no further documentation regarding the SSP is before the Court, it is impossible to determine on this motion the stated purpose of the SSP, whether the benefits were discretionary, how the SSP was marketed to shareholders, or the specific structure of the plan.
Assuming arguendo that the SSP was covered by ERISA, the BAH Defendants assert that it must have been a top-hat ERISA plan.
A top-hat plan is "`a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.'"
As no additional documentation regarding the SSP is before the Court, it cannot conclude at this stage that the SSP was a top-hat plan, assuming it was an ERISA plan at all. Count 12 therefore survives the motion to dismiss.
The BAH Defendants assert that many of Kocourek's ERISA claims are barred because he brought a previous action in New York state court alleging breach of contract, unjust enrichment, and fraud claims against BAH related to the redemption of his SSP rights.
The central basis of Kocourek's state court complaint was that BAH wrongfully forced him to surrender his SSP rights immediately upon retirement instead of allowing him to redeem those rights two years later and thus after the Carlyle Transaction.
As the preclusive effect of a state court judgment is governed by the law of the state in which the judgment was rendered, this Court applies New York law to this claim preclusion analysis.
First, there was a "final judgment on the merits" in the prior state court action.
Second, under Section 502(e)(1) of ERISA, "the district courts of the United States. . . have exclusive jurisdiction of civil actions" brought under ERISA, except that "[s]tate courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under paragraphs (1)(B) and (7) of subsection (a) of . . . section [502].
Third, in his prior action, Kocourek brought claims against BAH and Booz & Co., Inc.
Fourth, even though Kocourek did not allege ERISA claims in his state court action, his state court claims relied on and involved the same factual circumstances. Indeed, the state court judgment noted that Kocourek asserted that: (1) BAH breached the terms of the SSP by requiring him to sell his shares at retirement, and (2) he did not receive the benefits he deserved under the plan by virtue of the Carlyle Transaction.
Accordingly, Kocourek's claims in Counts 4 and 9 are precluded by the judgment in his prior state court action. Kocourek's other claims, based on Sections 510 (Count 5), 502(c)(1) (Count 11), 406 (Count 12), and 502(a)(3) (Count 14) of ERISA, survive the BAH Defendants' motion to dismiss to the extent that they are based on the SSP.
All plaintiffs claim that the BAH Defendants breached their implied covenant of good faith and fair dealing.
First, Kocourek's common law breach of good faith and fair dealing claim, which overlaps substantially with his claims under Section 502(a)(1)(B) of ERISA, is precluded because it could have been alleged in his prior state court proceedings.
Second, Pasternack's and Boudinot's breach of good faith and fair dealing claims lack merit. Indeed, comparable claims brought by different individuals were rejected by the Delaware Supreme Court in a previous case.
In Count 8, Kocourek raises a second common law claim based on alleged misrepresentations made by Individual BAH Defendant Shrader about the lack of a "strategic transaction" in BAH's near future.
Like Kocourek's other common law claim, this one is precluded because the claims Kocourek alleged in his prior state court action involved the same set of facts.
Finally, Kocourek, as purported representative of the SRP and SSP, alleges a state law aiding and abetting claim against the Carlyle Defendants (Count 13).
As noted above, the Carlyle Defendants' preemption argument is unpersuasive.
The Carlyle Defendants argue, inter alia, that Kocourek fails to allege that they had any "knowing participation in the breach"
More could be said on the deficiencies of this claim, but the foregoing suffices. Count 13 is dismissed.
The consolidated complaint contains four causes of action against defendants (Counts 10, 15, 16, and 17), which, in fact, do nothing more than seek particular remedies for claims alleged elsewhere. Count 10 seeks attorney's fees; Count 15 an injunction to compel enforcement; Count 16 disgorgement, recision, and restitution; and Count 17 the appointment of an equitable receiver. As all substantive claims are dismissed against the Carlyle Defendants, all claims for relief alleged against them (Counts 15 and 16) are dismissed as well. Furthermore, to the extent that various claims for relief are brought pursuant to the SRP (Counts 10 and 15), they are dismissed. Finally, Count 15 is dismissed in its entirety because plaintiffs allege no irreparable harm that would justify injunctive relief.
For the foregoing reasons:
1.) The Carlyle Defendants' motion to dismiss [DI 20] is granted and the action dismissed as to them.
2.) The motion of the BAH Defendants to dismiss [DI 21] is granted to the following extent:
It is denied in all other respects.
SO ORDERED.
As SRP shares were not traded on a public market, the roughly 280 shareholders in the SRP could sell their shares only to BAH. Under the SSP, instead of earning "shares," officers earned "shadow stock" — contractual rights that were equivalent, more or less, to stock options received under the SRP because the "book value" of the "shadow stock" followed BAH's book value. Id. ¶¶ 147-49.
For convenience, benefits earned under each plan are referred to as "SRP shares" and "SSP rights." This opinion will refer also to "selling SRP shares" and "redeeming SSP rights."
Kocourek purports to sue both individually and as a purported representative of the SRP and SSP and alleges that the plans themselves lost billions of dollars as well. Id. ¶ 9.
Although BAH went public in 1970, the firm repurchased all non-employee owned shares in 1975. Id. ¶¶ 44-45.
BAH had the right, but not the obligation, to purchase an officer's SRP shares two years after the retirement date. Although BAH usually purchased SRP shares from retired officers at or near the two-year mark, there occasionally were slight delays. BAH did not purchase Pasternack's SRP shares until early 2007 although he retired in late 2004.
As Kocourek retired in 2007, he was able to sell his SRP shares after the Carlyle Transaction. His SRP shares therefore are not relevant for the purposes of these motions to dismiss.
Boudinot argues also that the alleged violations did not occur until he retired on March 31, 2005 while the BAH Defendants assert that they occurred at or before the date in September 2004 when he tendered his resignation. Boudinot's argument is not persuasive.
"[T]he time of a `purchase or sale' of securities within the meaning of Rule 10b-5 is to be determined as of the time when the parties to the transaction are committed to each other." Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972). Accord, Vacold LLC v. Cerami, 545 F.3d 114, 116, 121-22 (2d Cir. 2008). This rule governs for limitations as well as any other purposes. Grondahl v. Merritt & Harris, Inc., 964 F.2d 1290, 1294 (2d Cir. 1992). And it applies even where the later consummation of the transaction "is continent upon the occurrence of future events, such as satisfaction of a financing condition, at least when the contingency is not so unlikely that it renders the stock transaction extremely speculative." Vacold LLC, 545 F.3d at 122.
Boudinot tendered his resignation in September 2004, effective March 31, 2005. Accepting the truth of his allegation that he could have rescinded his resignation at any time prior to the latter date (Cpt. ¶ 141), the question becomes whether he has alleged facts demonstrating that withdrawal of his resignation during that time period was sufficiently likely as to have rendered his September 2004 commitment to retire speculative. Not only has he failed to allege such facts, but the allegations of the complaint make clear that there was no meaningful likelihood of withdrawal. It alleges that Boudinot tendered his resignation "[o]ut of fear of the economic consequences" of refusing to have done so, including termination for cause and the resulting forfeiture of valuable benefits. Id. ¶¶ 136-40. The chance that he would have changed his mind was de minimis. He therefore became committed, for all meaningful purposes, to retirement in September 2004, and the five-year period of repose commenced at that time.
Plaintiffs did not address the PSLRA bar specifically in their opposition to the motions to dismiss except to assert that their RICO claims are pled adequately.
As this Court holds that all claims brought pursuant to the SRP must be dismissed, there is no need to address the BAH Defendants' other arguments in support of dismissing the ERISA claims based on the SRP.
Generally, claim preclusion is an affirmative defense that is included in a defendant's answer. When court records, however, show the relevant facts at issue, a court may take judicial notice of the prior court records, and the claim preclusion defense may be upheld on a Rule 12 motion. See Day v. Moscow, 955 F.2d 807, 811 (2d Cir. 1992).
Even though Kocourek asserts that an appeal of the state court judgment is pending in the Appellate Division, the existence of a pending appeal does not alter the claim preclusion analysis. See Chariot Plastics, Inc. v. United States, 28 F.Supp.2d 874, 881 (S.D.N.Y. 1998) (claim preclusion applies "once final judgment is entered in a case, even while an appeal from that judgment is pending") (citing Petrella v. Siegel, 843 F.2d 87, 90 (2d Cir. 1988)).
To the extent that Count 13 is raised pursuant to ERISA, however, it must be dismissed because courts have held that there is no cause of action under ERISA for participation by a non-fiduciary in an alleged fiduciary breach. See Mertens v. Hewitt Assocs., 508 U.S. 248 (1993) (expressing reservations as to whether such a cause of action could exist when there is a lack of any reference to relief against non-fiduciaries in the remedial sections of the statute); Reich v. Continental Cas. Co., 33 F.3d 754, 757 (7th Cir. 1994), cert. denied, 513 U.S. 1152 (1995); Reich v. Rowe, 20 F.3d 25, 31 (1st Cir. 1994); see also Strom v. Goldman, Sachs & Co., 202 F.3d 138, 148 (2d Cir. 1999) (ERISA "appears to reflect a deliberate decision not to create remedies against nonfiduciaries").
