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In re Cendant Corp. Securities Litigation

November 1, 1999

IN RE CENDANT CORPORATION SECURITIES LITIGATION


The opinion of the court was delivered by: William H. Walls, U.S.D.J.

FOR PUBLICATION

OPINION

This document relates to STEWART v. CENDANT CORPORATION

Walls, District Judge

Defendant Cendant Corporation moves to dismiss the complaint of Gregory Stewart. Having heard oral argument, the Court grants Cendant's motion.

Factual Background

From October 1985 until December 1997, plaintiff Gregory Stewart was employed by HFS, Inc. ("HFS") as Executive Vice President. In December 1997, HFS merged with CUC, Inc. to form Cendant Corporation ("Cendant"). As a result of the merger, Stewart's HFS stock options, acquired as an HFS employee, were converted into 48,062 Cendant stock options with a strike price of $23.88 per share. Stewart had up to one year after the end of his employment to exercise these options. In February 1998, Cendant informed Stewart that his employment would be terminated as of April 1998.

April 1998 was a busy month for both Cendant and Mr. Stewart. After the close of trading on April 15th, Cendant announced that it had discovered "potential accounting irregularities" in some of its former CUC units. The company disclosed that it expected to restate its financial statements for 1997 and possibly for earlier periods as well. The next day, Stewart received a letter, addressed to all employees, from Cendant's Chief Executive Officer ("April 16 letter") which stated that the "potential accounting irregularities" have "no material effect upon the performance of our businesses." Stewart also participated in a telephone conference call on the same day, the purpose of which was to inform senior management about the accounting problems ("April 16 call"). During the call, Richard Smith, president of Cendant's Real Estate Division, stated that the problems would be resolved without significant long-term effects. Cendant's stock price closed at $19 1/16 per share on April 16, approximately $4.00 below the strike price of Mr. Stewart's stock options.

The following day, April 17, 1998, with regard to his termination, plaintiff signed an Agreement and General Release ("Release"). Greenberg Aff. Ex. 2. The Release contains a Connecticut choice-of-law clause. Cendant agreed to pay Stewart a lump sum severance payment of $185,000. In exchange for the severance payment, Stewart agreed to release Cendant from:

any and all actions or causes of action, suits, claims, charges, complaints, promises and contracts (whether oral or written, express or implied from any source), whatsoever, in law or equity, which Recipient may now have or hereafter can, shall or may have against the Company, including all unknown, undisclosed and unanticipated losses, wrongs, injuries, debts, claims or damages to Recipient, for, upon, or by reason of any matter, cause or thing whatsoever including, but not limited to, any and all matters arising out of his employment by the Company and the cessation of said employment and including, but not limited to, any claims for salary, bonuses, severance pay, or vacation pay . . . Release ¶ 5. Further, in the Release, Stewart acknowledged (in large print):

THAT HE IS NOT RELYING ON ANY OTHER REPRESENTATIONS, WRITTEN OR ORAL, NOT SET FORTH IN THIS DOCUMENT, HAVING ELECTED TO EXECUTE THIS AGREEMENT AND GENERAL RELEASE TO FULFILL THE PROMISES SET FORTH HEREIN, AND TO RECEIVE THEREBY THE SUMS AND BENEFITS SET FORTH ABOVE. Release ¶ 15.

Stewart had the option to revoke the Release within seven days after it was signed. April 28, 1998 was the last day to reconsider his release. He did not revoke the Release.

Three months after Stewart's employment termination, on July 14, 1998, Cendant made a second public disclosure about the accounting irregularities. This announcement stated that the irregularities were "widespread and systemic and affect[ed] the accounting records of all the major business units of CUC." The company announced that it would restate CUC's annual and quarterly statements for 1995 and 1996 as well as 1997. Following this, Cendant's stock price dropped to $15 11/16 per share. And, in August 1998, Cendant announced that the 1995-1997 financial statements of income would be restated by approximately a $500 million shortfall. In September 1998, Cendant repriced options held by its then employees to approximately $9.00 per share. Stewart's options were not repriced.

Stewart filed his initial complaint in the Connecticut state superior court for damages from Cendant's alleged breach of the stock option agreement and reformation of that agreement. On April 14, 1999, that court issued a temporary injunction restraining Cendant from terminating Stewart's rights under the stock option agreement. On April 29, 1999, plaintiff filed an amended complaint. Cendant then removed the case to the United States District Court, District of ...


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