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December 7, 1999


The opinion of the court was delivered by: Walls, District Judge.


This matter is before the Court on the motions of individual defendants Walter A. Forbes, Anthony G. Petrello, Robert T. Tucker, Henry R. Silverman, Leonard S. Coleman, Brian Mulroney, Leonard Schutzman, and Robert F. Smith to dissmiss plaintiff Eileen McLaughlin's complaint. Plaintiff has filed a cross-motion for leave to amend the complaint in the event any portion of her complaint is determined defective. The Court grants defendants' motions. Plaintiffs cross-motion for leave to amend is denied.

Factual Background*fn1

Cendant Corporation ("Cendant") was formed by the merger of CUC International, Inc. ("CUC") and HFS Incorporated ("HFS") on December 17, 1997. In the merger, holders of HFS common stock were issued shares of CUC common stock pursuant to a Registration Statement dated August 28, 1997 and a Joint Prospectus. Because CUC was the surviving corporation, CUC shareholders did not exchange their stock as part of the merger. CUC was renamed "Cendant" after the merger.

Plaintiff is a former CUC and Cendant employee, who worked from November 8, 1989 until March 20, 1998. Between February 1, 1990 and February 21, 1997, plaintiff received 66,863 CUC employee stock options under her employee stock option plan.*fn2 She also asserts that she purchased 7,777 options on April 21, 1997. She resigned from Cendant on March 20, 1998. Under the terms of the employee stock option plan, she had to exercise her options within four months of her departure from the company.

On April 15, 1998, Cendant announced that it had discovered accounting irregularities in certain former CUC business units. The next day, Cendant's stock fell 47%, from $35 5/8 to $19 1/16 per share. On April 17th, Cendant restricted exercise of all employee stock options. This restriction continued until October 16, 1998. During this period, Cendant set January 4, 1999 as the date by which plaintiff had to exercise her options. On December 15, 1998, plaintiff exercised options and purchased 10,000 shares and on December 23, 1998, plaintiff exercised options for an additional 44,387 shares. She still owns 7,777 options.

On December 14, 1998, and July 14, 1999, plaintiff filed her complaint and amended complaint respectively. She asserts securities fraud claims and "control person" claims with common law fraud and misrepresentation against defendants Walter Forbes and Henry Silverman. Plaintiff, in her brief in opposition to the motions to dismiss, does not oppose Silverman's motion "based on defendant Silverman's showing that he was not involved in the activities of CUC until after the plaintiffs last purchase of options." Pl. Brf. at 2 n. 1. Her complaint also contains a claim for breach of fiduciary duty in the administration of the option plan against Anthony Petrello, Robert Tucker, Leonard Coleman, Brian Mulroney, Leonard Schutzman and Robert Smith.

Defendant Walter A. Forbes, the former Chairman of Cendant, moves to dismiss plaintiffs claim of securities fraud. First, he asserts that plaintiffs acquisitions of stock options do not qualify as a "purchase or sale" of securities. Consequently, she has no standing under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Second, Forbes maintains that the complaint fails to plead the requisite level of scienter. He also moves to dismiss plaintiffs "control person" claim because she cannot demonstrate a primary violation of Section 10(b) and fails to allege that he was a "culpable participant" in the alleged fraud perpetrated by Cendant.

Defendants Petrello and Tucker, two former non-management directors and members of Cendant's compensation committee, who move to dismiss plaintiff's claim for breach of fiduciary duty, argue that: (1) directors and officers do not owe fiduciary duties to holders of stock options; (2) plaintiff cannot hold these defendants liable for the decisions of the Compensation Committee which occurred after their resignations; and (3) the breach of fiduciary duty claim is barred by Cendant's articles of incorporation. The former HFS directors, Leonard S. Coleman, Brian Mulroney, Leonard Schutzman, and Robert F. Smith, also move to dismiss plaintiff's claim because it "is a pure duty of care claim . . . barred by Cendant's Certificate of Incorporation." Brf. at 15.


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/her allegations that will entitle him/her to relief, not whether that person will ultimately prevail. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984). While a court will accept well-plead allegations as true for the purposes of the motion, it will not accept legal or unsupported conclusions, unwarranted inferences, or sweeping legal conclusions cast in the form of factual allegations. See Miree v. DeKalb County, Ga., 433 U.S. 25, 27 n. 2, 97 S.Ct. 2490, 2492 n. 2, 53 L.Ed.2d 557 (1977). Moreover, the claimant must set forth sufficient information to outline the elements of his claims or to permit inferences to be drawn that these elements exist. See Fed.R.Civ.P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957). The Court may consider the allegations of the complaint, as well as documents attached to or specifically referenced in the complaint, and matters of public record. See Pittsburgh v. West Penn Power Co., 147 F.3d 256, 259 (3d Cir. 1998); see also 5A Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 1357 at 299 (2d ed. 1990).

B. Section 10(b) and Rule 10b-5

As the Court has written, see In re Cendant Corp. Litig., 60 F. Supp.2d 354 (D.N.J. 1999); Kennilworth Partners L.P. v. Cendant Corp., 59 F. Supp.2d 417 (D.N.J. 1999); P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F. Supp.2d 546, 552 (D.N.J. 1999), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), prohibits the use of fraudulent schemes or devices in connection with the purchase or sale of securities. Under Section 10(b), it is unlawful to "employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention" of any rule promulgated by the SEC designed to protect the investing public. 15 U.S.C. § 78j(b). To implement the statute, the SEC enacted Rule 10b-5, violation of which gives rise to a private cause of action. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); see also In re Cendant Corp. Litig., 60 F. Supp.2d at 367-68. That Rule makes it unlawful: (1) "[t]o employ any device, scheme, or artifice to defraud," (2) "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading," or (3) "[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5. The Supreme Court has held that standing to bring a private cause of action under Rule 10b-5 is limited to actual purchasers or sellers of securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975).

The plaintiff must prove knowledge the defendant, an intent to defraud, misrepresentation or failure to disclose, materiality of the information, and injurious reliance by the plaintiff. Thomas v. Duralite Co., 524 F.2d 577 (3d Cir. 1975); Rochez Bros., Inc. v. Rhoades, 491 F.2d 402 (3d Cir. 1973). More precisely, these elements create the following test: To form a 10b-5 claim, a plaintiff must allege that the defendant made (1) a misstatement or an omission (2) of a material fact (3) with scienter (knowledge) (4) in connection with the purchase or sale of a security (5) upon which plaintiff reasonably relied, and (6) that reliance proximately caused injury to the plaintiff. Kline v. First Western Government Sec., Inc., 24 F.3d 480, 487 (3d Cir.), cert. denied sub nom., Arvey, Hodes, Costello & Burman v. Kline, 513 U.S. 1032, 115 S.Ct. 613, 130 L.Ed.2d 522 (1994); In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1244 (3d Cir. 1989) (citing Angelastro v. Prudential—Bache Sec., Inc., 764 F.2d 939, 942-43 (3d Cir.), cert. denied, 474 U.S. 935, 106 S.Ct. 267, 88 L.Ed.2d 274 (1985)); see also In re Cendant Corp. Litig., 60 F. Supp.2d at 368-69.

At the outset, defendant Walter Forbes argues that plaintiff has no standing under Rule 10b-5 or Section 10(b) of the Exchange Act because the grant of plaintiff's options pursuant to an employee stock option plan does not qualify as a "purchase or sale."

1. Standing

As said, only a seller or purchaser of a security may bring an action under either Section 10(b) of the Securities Exchange Act of 1934 or Rule 10W-5. Blue Chip Stamps, 421 U.S. at 723, 95 S.Ct. 1917. Defendant Forbes maintains that plaintiff's acquisitions of options between 1990 and 1997 were not purchases or sales as defined by the federal securities laws because (1) the plan was non-contributory—plaintiff made no direct contributions to the plan—and (2) participation in the plan was compulsory in the sense that plaintiff's only decision was to accept or reject the benefits. Forbes Brf. at 5-6. Plaintiff counters that she has standing under Section 10(b) for the 7,777 options she purchased in April 1997 because they were acquired "in lieu of accepting cash compensation." Am. Compl. ΒΆ 55; Pl. Brf. at 16. With regard to her other options, she argues that because they were provided as "an incentive to key employees of ...

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